# Table of Contents - [Point and Figure Charts | ChartSchool | StockCharts.com](#point-and-figure-charts-chartschool-stockcharts-com) - [Market Indicators | ChartSchool | StockCharts.com](#market-indicators-chartschool-stockcharts-com) - [Market Analysis | ChartSchool | StockCharts.com](#market-analysis-chartschool-stockcharts-com) - [Trading Strategies & Models | ChartSchool | StockCharts.com](#trading-strategies-models-chartschool-stockcharts-com) - [Index & Market Indicator Catalog | ChartSchool | StockCharts.com](#index-market-indicator-catalog-chartschool-stockcharts-com) - [Glossary | ChartSchool | StockCharts.com](#glossary-chartschool-stockcharts-com) - [Why Analyze Securities? | ChartSchool | StockCharts.com](#why-analyze-securities-chartschool-stockcharts-com) - [Fundamental Analysis | ChartSchool | StockCharts.com](#fundamental-analysis-chartschool-stockcharts-com) - [Technical Analysis | ChartSchool | StockCharts.com](#technical-analysis-chartschool-stockcharts-com) - [Options Trading | ChartSchool | StockCharts.com](#options-trading-chartschool-stockcharts-com) - [Random Walk vs. Non-Random Walk | ChartSchool | StockCharts.com](#random-walk-vs-non-random-walk-chartschool-stockcharts-com) - [Asset Allocation and Diversification | ChartSchool | StockCharts.com](#asset-allocation-and-diversification-chartschool-stockcharts-com) - [Options Pricing and Options Chains | ChartSchool | StockCharts.com](#options-pricing-and-options-chains-chartschool-stockcharts-com) - [Introduction to Options | ChartSchool | StockCharts.com](#introduction-to-options-chartschool-stockcharts-com) - [Options Trading Strategies | ChartSchool | StockCharts.com](#options-trading-strategies-chartschool-stockcharts-com) - [ChartSchool | ChartSchool | StockCharts.com](#chartschool-chartschool-stockcharts-com) - [Overview | ChartSchool | StockCharts.com](#overview-chartschool-stockcharts-com) - [John Murphy's 10 Laws of Technical Trading | ChartSchool | StockCharts.com](#john-murphy-s-10-laws-of-technical-trading-chartschool-stockcharts-com) - [John Murphy's "Charting Made Easy" eBook | ChartSchool | StockCharts.com](#john-murphy-s-charting-made-easy-ebook-chartschool-stockcharts-com) - [Technical Analysis 101 | ChartSchool | StockCharts.com](#technical-analysis-101-chartschool-stockcharts-com) - [TA 101 – Part 1 | ChartSchool | StockCharts.com](#ta-101-part-1-chartschool-stockcharts-com) - [TA 101 – Part 4 | ChartSchool | StockCharts.com](#ta-101-part-4-chartschool-stockcharts-com) - [TA 101 – Part 2 | ChartSchool | StockCharts.com](#ta-101-part-2-chartschool-stockcharts-com) - [TA 101 – Part 3 | ChartSchool | StockCharts.com](#ta-101-part-3-chartschool-stockcharts-com) - [TA 101 – Part 5 | ChartSchool | StockCharts.com](#ta-101-part-5-chartschool-stockcharts-com) - [Arthur Hill on Goals, Style and Strategy | ChartSchool | StockCharts.com](#arthur-hill-on-goals-style-and-strategy-chartschool-stockcharts-com) - [TA 101 – Part 8 | ChartSchool | StockCharts.com](#ta-101-part-8-chartschool-stockcharts-com) - [TA 101 – Part 12 | ChartSchool | StockCharts.com](#ta-101-part-12-chartschool-stockcharts-com) - [TA 101 – Part 7 | ChartSchool | StockCharts.com](#ta-101-part-7-chartschool-stockcharts-com) - [TA 101 – Part 6 | ChartSchool | StockCharts.com](#ta-101-part-6-chartschool-stockcharts-com) - [TA 101 – Part 10 | ChartSchool | StockCharts.com](#ta-101-part-10-chartschool-stockcharts-com) - [Irrational Exuberance | ChartSchool | StockCharts.com](#irrational-exuberance-chartschool-stockcharts-com) - [Cognitive Biases | ChartSchool | StockCharts.com](#cognitive-biases-chartschool-stockcharts-com) - [TA 101 – Part 15 | ChartSchool | StockCharts.com](#ta-101-part-15-chartschool-stockcharts-com) - [TA 101 – Part 9 | ChartSchool | StockCharts.com](#ta-101-part-9-chartschool-stockcharts-com) - [Stage 2: Business of Investing | ChartSchool | StockCharts.com](#stage-2-business-of-investing-chartschool-stockcharts-com) - [Arthur Hill on Moving Average Crossovers | ChartSchool | StockCharts.com](#arthur-hill-on-moving-average-crossovers-chartschool-stockcharts-com) - [TA 101 – Part 11 | ChartSchool | StockCharts.com](#ta-101-part-11-chartschool-stockcharts-com) - [Stage 1: Money Management | ChartSchool | StockCharts.com](#stage-1-money-management-chartschool-stockcharts-com) - [Additional Reading | ChartSchool | StockCharts.com](#additional-reading-chartschool-stockcharts-com) - ["The Trader's Journal" by Gatis Roze | ChartSchool | StockCharts.com](#-the-trader-s-journal-by-gatis-roze-chartschool-stockcharts-com) - [TA 101 – Part 14 | ChartSchool | StockCharts.com](#ta-101-part-14-chartschool-stockcharts-com) - [TA 101 – Part 13 | ChartSchool | StockCharts.com](#ta-101-part-13-chartschool-stockcharts-com) - [Stage 6: Stalking Your Trade | ChartSchool | StockCharts.com](#stage-6-stalking-your-trade-chartschool-stockcharts-com) - [Multicollinearity | ChartSchool | StockCharts.com](#multicollinearity-chartschool-stockcharts-com) - [TA 101 – Part 16 | ChartSchool | StockCharts.com](#ta-101-part-16-chartschool-stockcharts-com) - [Stage 9: Selling | ChartSchool | StockCharts.com](#stage-9-selling-chartschool-stockcharts-com) - [Point and Figure Basics | ChartSchool | StockCharts.com](#point-and-figure-basics-chartschool-stockcharts-com) - [Stage 5: Routines | ChartSchool | StockCharts.com](#stage-5-routines-chartschool-stockcharts-com) - [TA 101 – Part 17 | ChartSchool | StockCharts.com](#ta-101-part-17-chartschool-stockcharts-com) - [Stage 4: Market Analysis | ChartSchool | StockCharts.com](#stage-4-market-analysis-chartschool-stockcharts-com) - [Stage 7: Buying | ChartSchool | StockCharts.com](#stage-7-buying-chartschool-stockcharts-com) - [Stage 8: Monitoring Your Investments | ChartSchool | StockCharts.com](#stage-8-monitoring-your-investments-chartschool-stockcharts-com) - [Stage 10: Re-Examine, Refine, Re-Enhance | ChartSchool | StockCharts.com](#stage-10-re-examine-refine-re-enhance-chartschool-stockcharts-com) - [Why and How To Use Correlation | ChartSchool | StockCharts.com](#why-and-how-to-use-correlation-chartschool-stockcharts-com) - [Richard Rhodes' Trading Rules | ChartSchool | StockCharts.com](#richard-rhodes-trading-rules-chartschool-stockcharts-com) - [Introduction to Chart Patterns | ChartSchool | StockCharts.com](#introduction-to-chart-patterns-chartschool-stockcharts-com) - [Rising Wedge | ChartSchool | StockCharts.com](#rising-wedge-chartschool-stockcharts-com) - [Double Bottom Reversal | ChartSchool | StockCharts.com](#double-bottom-reversal-chartschool-stockcharts-com) - [Rounding Bottom | ChartSchool | StockCharts.com](#rounding-bottom-chartschool-stockcharts-com) - [Candlestick Charts | ChartSchool | StockCharts.com](#candlestick-charts-chartschool-stockcharts-com) - [Moving Average Trading Strategies | ChartSchool | StockCharts.com](#moving-average-trading-strategies-chartschool-stockcharts-com) - [Six-Month Cycle MACD | ChartSchool | StockCharts.com](#six-month-cycle-macd-chartschool-stockcharts-com) - [Swing Charting | ChartSchool | StockCharts.com](#swing-charting-chartschool-stockcharts-com) - [Percent B Money Flow | ChartSchool | StockCharts.com](#percent-b-money-flow-chartschool-stockcharts-com) - [The Pre-Holiday Effect | ChartSchool | StockCharts.com](#the-pre-holiday-effect-chartschool-stockcharts-com) - [Slope Performance Trend | ChartSchool | StockCharts.com](#slope-performance-trend-chartschool-stockcharts-com) - [Percent Above 50-day SMA | ChartSchool | StockCharts.com](#percent-above-50-day-sma-chartschool-stockcharts-com) - [Moving Momentum | ChartSchool | StockCharts.com](#moving-momentum-chartschool-stockcharts-com) - [Trading Using the Golden Cross | ChartSchool | StockCharts.com](#trading-using-the-golden-cross-chartschool-stockcharts-com) - [Narrow Range Day NR7 | ChartSchool | StockCharts.com](#narrow-range-day-nr7-chartschool-stockcharts-com) - [RSI(2) | ChartSchool | StockCharts.com](#rsi-2-chartschool-stockcharts-com) - [Trading the Death Cross | ChartSchool | StockCharts.com](#trading-the-death-cross-chartschool-stockcharts-com) - [Stochastic Pop and Drop | ChartSchool | StockCharts.com](#stochastic-pop-and-drop-chartschool-stockcharts-com) - [Trend Quantification and Asset Allocation | ChartSchool | StockCharts.com](#trend-quantification-and-asset-allocation-chartschool-stockcharts-com) - [Sector Rotation Analysis | ChartSchool | StockCharts.com](#sector-rotation-analysis-chartschool-stockcharts-com) - [Intermarket Analysis | ChartSchool | StockCharts.com](#intermarket-analysis-chartschool-stockcharts-com) - [The DecisionPoint Chart Gallery | ChartSchool | StockCharts.com](#the-decisionpoint-chart-gallery-chartschool-stockcharts-com) - [Elliott Wave Analysis Articles | ChartSchool | StockCharts.com](#elliott-wave-analysis-articles-chartschool-stockcharts-com) - [Wyckoff Analysis Articles | ChartSchool | StockCharts.com](#wyckoff-analysis-articles-chartschool-stockcharts-com) - [Introduction to Elliott Wave Theory | ChartSchool | StockCharts.com](#introduction-to-elliott-wave-theory-chartschool-stockcharts-com) - [Guidelines for Applying Elliott Wave Theory | ChartSchool | StockCharts.com](#guidelines-for-applying-elliott-wave-theory-chartschool-stockcharts-com) - [Wyckoff Market Analysis | ChartSchool | StockCharts.com](#wyckoff-market-analysis-chartschool-stockcharts-com) - [Identifying Elliott Wave Patterns | ChartSchool | StockCharts.com](#identifying-elliott-wave-patterns-chartschool-stockcharts-com) - [Wyckoff Stock Analysis | ChartSchool | StockCharts.com](#wyckoff-stock-analysis-chartschool-stockcharts-com) - [The Wyckoff Method: A Tutorial | ChartSchool | StockCharts.com](#the-wyckoff-method-a-tutorial-chartschool-stockcharts-com) --- # Point and Figure Charts | ChartSchool | StockCharts.com Are you waiting for a stock to break out to the upside so you can add it to your portfolio? Point & Figure (P&F) charts make it easier to visualize breakouts and give you more confidence in making investment or trading decisions. [hashtag](https://chartschool.stockcharts.com/table-of-contents/chart-analysis/point-and-figure-charts#p-and-f-charts-in-a-nutshell) P&F Charts In a Nutshell ------------------------------------------------------------------------------------------------------------------------------------------------------------------ If you're accustomed to using bar or candlestick charts, P&F charts may look unusual with their X and O columns. However, once you understand them, they can be used as a confirming or complementary chart type. One of the first aspects you’ll notice about P&F charts—besides the X and O columns—is that there’s no time on the x-axis, unlike the traditional bar or candlestick charts. But as you become more familiar with P&F charts, you’ll get a feel for how the charts can be more precise than other chart types. P&F charts are especially helpful in identifying support and resistance levels and recognizing breakouts and trend signals. [hashtag](https://chartschool.stockcharts.com/table-of-contents/chart-analysis/point-and-figure-charts#using-p-and-f-charts-to-identify-breakouts) Using P&F Charts To Identify Breakouts ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- The P&F chart below is overlaid with trendlines. This makes it easy to identify where price broke out of a downward-sloping trendline. After the breakout, there was a long X-column, indicating price continued increasing. That would have been an ideal time to enter a long position. Missed that opportunity? There could be another one if there's an upside breakout in the prevailing X column. ![P&F chart from StockCharts.com showing a trendline breakout](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252F7YWnUhTje1NWIw98Hyrl%252FPnf-intro.png%3Falt%3Dmedia%26token%3Df576839f-ee23-4731-9abf-551ef1cd21d5&width=768&dpr=4&quality=100&sign=1b8c0859&sv=2) P&F chart showing a trendline breakout. P&F charts are also flexible because you can change box values and the number of boxes required for a reversal. This can be changed depending on the security you’re analyzing. Make them more sensitive or less sensitive, depending on the security you’re analyzing or the time frame you’re using. Like other chart types, there are many ways to apply P&F charts to your analysis. A good starting place is to understand the basics. [PreviousCandlestick Pattern Dictionarychevron-left](https://chartschool.stockcharts.com/table-of-contents/chart-analysis/candlestick-charts/candlestick-pattern-dictionary) [NextPoint and Figure Basicschevron-right](https://chartschool.stockcharts.com/table-of-contents/chart-analysis/point-and-figure-charts/point-and-figure-basics) Last updated 1 year ago Was this helpful? * [P&F Charts In a Nutshell](https://chartschool.stockcharts.com/table-of-contents/chart-analysis/point-and-figure-charts#p-and-f-charts-in-a-nutshell) * [Using P&F Charts To Identify Breakouts](https://chartschool.stockcharts.com/table-of-contents/chart-analysis/point-and-figure-charts#using-p-and-f-charts-to-identify-breakouts) Was this helpful? sun-brightdesktopmoon sun-brightdesktopmoon --- # Market Indicators | ChartSchool | StockCharts.com ![Page cover](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FAw2M25DEtKRfxkNOZjij%252FChartSchoolHeader-Option4.png%3Falt%3Dmedia%26token%3Da3c617b6-878d-4dbc-9074-98aa974bcfee&width=1248&dpr=4&quality=100&sign=ce5abd40&sv=2) **Market Indicators** are datasets that contain metadata about the health of various markets or groups of related stocks. Examples include “Advancers,” “Decliners” and the “McClellan Summation Index.” A list of our essential market indicators appears below. If you are new to market indicators, the following articles will help you get going: [**Introduction to Market Indicators**](https://chartschool.stockcharts.com/table-of-contents/market-indicators/introduction-to-market-indicators) An in-depth introduction to popular market indicators found on StockCharts.com. [**Market Indicator Dictionary**](https://chartschool.stockcharts.com/table-of-contents/market-indicators/introduction-to-market-indicators/market-indicator-dictionary) A list of ticker symbols for some of the more common market breadth indicators that we track on StockCharts.com. * * * [hashtag](https://chartschool.stockcharts.com/table-of-contents/market-indicators#market_indicators1) Market Indicators ---------------------------------------------------------------------------------------------------------------------------- ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/market-indicators#a-d) A-D [**Advance-Decline Line**](https://chartschool.stockcharts.com/table-of-contents/market-indicators/advance-decline-line) A cumulative breadth indicator derived from Net Advances. [**Advance-Decline Percent**](https://chartschool.stockcharts.com/table-of-contents/market-indicators/advance-decline-percent) A breadth indicator that measures the percentage of net advances within a particular group, such as a SPDR or index ETF. [**Advance-Decline Volume Line**](https://chartschool.stockcharts.com/table-of-contents/market-indicators/advance-decline-volume-line) A cumulative breadth indicator derived from Net Advancing Volume. [**Advance-Decline Volume Percent**](https://chartschool.stockcharts.com/table-of-contents/market-indicators/advance-decline-volume-percent) A breadth indicator that measures the percentage of net advancing within a particular group, such as a SPDR or index ETF. [**Arms Index (TRIN)**](https://chartschool.stockcharts.com/table-of-contents/market-indicators/arms-index-trin) A breadth indicator derived from the AD Ratio and AD Volume Ratio. [**Bullish Percent Index (BPI)**](https://chartschool.stockcharts.com/table-of-contents/market-indicators/bullish-percent-index-bpi) A breadth indicator derived from the percentage of stocks on P&F Buy signals. [**DecisionPoint Intermediate-Term Breadth Momentum Oscillator (ITBM)**](https://chartschool.stockcharts.com/table-of-contents/market-indicators/decisionpoint-intermediate-term-breadth-momentum-oscillator-itbm) The ITBM gives a different perspective of breadth than the shorter-term McClellan Oscillator. [**DecisionPoint Intermediate-Term Volume Momentum Oscillator (ITVM)**](https://chartschool.stockcharts.com/table-of-contents/market-indicators/decisionpoint-intermediate-term-volume-momentum-oscillator-itvm) The ITVM gives a different perspective of volume than the shorter-term McClellan Volume Oscillator. [**DecisionPoint Rydex Ratio**](https://chartschool.stockcharts.com/table-of-contents/market-analysis/decisionpoint-rydex-asset-analysis) Measures sentiment using the ratio of Rydex bullish/bearish funds. [**DecisionPoint Swenlin Trading Oscillator (STO)**](https://chartschool.stockcharts.com/table-of-contents/market-indicators/decisionpoint-swenlin-trading-oscillator-sto) Overbought/oversold indicator that can assist in identifying short-term tops and bottoms. ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/market-indicators#e-n) E-N [**High-Low Index**](https://chartschool.stockcharts.com/table-of-contents/market-indicators/high-low-index) The 10-day moving average of the Record High Percent Index, which is a breadth indicator (see below). [**High-Low Percent**](https://chartschool.stockcharts.com/table-of-contents/market-indicators/high-low-percent) A breadth indicator that measures the percentage of net new highs within a particular group, such as a SPDR or index ETF. [**McClellan Oscillator**](https://chartschool.stockcharts.com/table-of-contents/market-indicators/mcclellan-oscillator) A MACD type oscillator of Net Advances. [**McClellan Summation Index**](https://chartschool.stockcharts.com/table-of-contents/market-indicators/mcclellan-summation-index) A cumulative indicator based on the McClellan Oscillator. [**Net New 52-Week Highs**](https://chartschool.stockcharts.com/table-of-contents/market-indicators/net-new-52-week-highs) A breadth indicator showing the difference between new highs and new lows. Percentage, cumulative and smoothed versions can be used. ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/market-indicators#id-0-z) 0-Z [**Percent Above Moving Average**](https://chartschool.stockcharts.com/table-of-contents/market-indicators/percent-above-moving-average) A breadth oscillator that measures the percentage of stocks above a specific moving average. [**Pring's Bottom Fisher**](https://chartschool.stockcharts.com/table-of-contents/market-indicators/prings-bottom-fisher) A market momentum indicator designed to help identify market bottoms. [**Pring's Diffusion Indicators**](https://chartschool.stockcharts.com/table-of-contents/market-indicators/prings-diffusion-indicators) A family of breadth oscillators for various collections of securities including major indexes, commodities and currencies. [**Pring's Inflation and Deflation Indexes**](https://chartschool.stockcharts.com/table-of-contents/market-indicators/prings-inflation-and-deflation-indexes) Two oscillators that show the overall health of inflation and deflation sensitive stock groups. [**Pring's Net New High Indicators**](https://chartschool.stockcharts.com/table-of-contents/market-indicators/prings-net-new-high-indicators) Two oscillators that measure the current strength of the overall commodities market. [**Put/Call Ratio**](https://chartschool.stockcharts.com/table-of-contents/market-indicators/put-call-ratio) A sentiment indicator found by dividing put volume by call volume. [**Record High Percent**](https://chartschool.stockcharts.com/table-of-contents/market-indicators/record-high-percent) A breadth indicator that shows new highs as a percentage of new highs plus new lows. [**Volatility Indices**](https://chartschool.stockcharts.com/table-of-contents/market-indicators/volatility-indices) Indicators of implied volatility designed to measure fear and complacency for a range of indices and ETFs. circle-exclamation **Note:** We also have a vast collection of documented [Technical Indicators](https://chartschool.stockcharts.com/table-of-contents/technical-indicators-and-overlays/technical-indicators) and [Technical Overlays](https://chartschool.stockcharts.com/table-of-contents/technical-indicators-and-overlays/technical-overlays) . [PreviousZigZagchevron-left](https://chartschool.stockcharts.com/table-of-contents/technical-indicators-and-overlays/technical-overlays/zigzag) [NextIntroduction to Market Indicatorschevron-right](https://chartschool.stockcharts.com/table-of-contents/market-indicators/introduction-to-market-indicators) Last updated 18 days ago Was this helpful? * [Market Indicators](https://chartschool.stockcharts.com/table-of-contents/market-indicators#market_indicators1) * [A-D](https://chartschool.stockcharts.com/table-of-contents/market-indicators#a-d) * [E-N](https://chartschool.stockcharts.com/table-of-contents/market-indicators#e-n) * [0-Z](https://chartschool.stockcharts.com/table-of-contents/market-indicators#id-0-z) Was this helpful? sun-brightdesktopmoon sun-brightdesktopmoon --- # Market Analysis | ChartSchool | StockCharts.com ![Page cover](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FAw2M25DEtKRfxkNOZjij%252FChartSchoolHeader-Option4.png%3Falt%3Dmedia%26token%3Da3c617b6-878d-4dbc-9074-98aa974bcfee&width=1248&dpr=4&quality=100&sign=ce5abd40&sv=2) ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/market-analysis#dow_theory_articles) Dow Theory Articles [**Dow Theory**](https://chartschool.stockcharts.com/table-of-contents/market-analysis/dow-theory) **.** Describes Charles Dow's famous theory of market movements in detail. In particular, this article discusses the three stages of bull and bear markets. Readers will also learn how to identify Dow Theory buy signals, sell signals, confirmations and non-confirmations. ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/market-analysis#market_timing) Market Timing [**Sector Rotation Analysis**](https://chartschool.stockcharts.com/table-of-contents/market-analysis/sector-rotation-analysis) **.** A performance-based approach that relates the economic cycle to the relative strength of stocks in different sectors and industries. ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/market-analysis#intermarket_analysis) Intermarket Analysis [**Intermarket Analysis**](https://chartschool.stockcharts.com/table-of-contents/market-analysis/intermarket-analysis) **.** A top-down approach to understanding the stock market through its relationships with bonds, currencies and commodities. ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/market-analysis#fundamentals) Fundamentals [**Yield Curve**](https://chartschool.stockcharts.com/table-of-contents/chart-analysis/chart-types/yield-curve) **.** A visualization tool that compares bond yields of different maturities in order to determine our current position in the economic cycle. ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/market-analysis#decisionpoint_market_analysis) DecisionPoint Market Analysis [**The DecisionPoint Chart Gallery**](https://chartschool.stockcharts.com/table-of-contents/market-analysis/the-decisionpoint-chart-gallery) **.** A collection of market analysis indicators created by DecisionPoint for help with understanding the market's current trend. [**DecisionPoint Rydex Asset Analysis**](https://chartschool.stockcharts.com/table-of-contents/market-analysis/decisionpoint-rydex-asset-analysis) **.** The DecisionPoint approach to using Rydex Asset ratios to analyze market sentiment. ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/market-analysis#wyckoff_analysis_articles) Wyckoff Analysis Articles [**Wyckoff Market Analysis**](https://chartschool.stockcharts.com/table-of-contents/market-analysis/wyckoff-analysis-articles/wyckoff-market-analysis) **.** Describes how Richard D. Wyckoff approached broad market analysis. Learn how to define the broad market trend, identify major tops and bottoms, project prices and determine price position within a move. [**Wyckoff Stock Analysis**](https://chartschool.stockcharts.com/table-of-contents/market-analysis/wyckoff-analysis-articles/wyckoff-stock-analysis) **.** Describes how Richard D. Wyckoff picked individual stocks. Learn how to isolate the strongest groups, cherry-pick stocks within these groups and manage the trade once it is underway. [**The Wyckoff Method: A Tutorial**](https://chartschool.stockcharts.com/table-of-contents/market-analysis/wyckoff-analysis-articles/the-wyckoff-method-a-tutorial) **.** An alternate explanation of the Wyckoff analysis method with sections on Wyckoff's Five-Step Approach to the Market, his Price Cycle, his Supply/Demand analysis, his Buying and Selling tests and his P&F counting guide. ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/market-analysis#elliott_wave_analysis_articles) Elliott Wave Analysis Articles **Part 1:** [**Introduction to Elliott Wave Theory**](https://chartschool.stockcharts.com/table-of-contents/market-analysis/elliott-wave-analysis-articles/introduction-to-elliott-wave-theory) **.** The terminology, waves, rules and basic concepts that define Elliott Wave Theory. **Part 2:** [**Identifying Elliott Wave Patterns**](https://chartschool.stockcharts.com/table-of-contents/market-analysis/elliott-wave-analysis-articles/identifying-elliott-wave-patterns) **.** An overview of Elliott Wave types and their identification criteria. **Part 3:** [**Guidelines for Applying Elliott Wave Theory**](https://chartschool.stockcharts.com/table-of-contents/market-analysis/elliott-wave-analysis-articles/guidelines-for-applying-elliott-wave-theory) **.** Six guidelines for how to apply Elliott Wave analysis, as well as personality observations and how to mark Elliott Waves on SharpCharts. [PreviousVolatility Indiceschevron-left](https://chartschool.stockcharts.com/table-of-contents/market-indicators/volatility-indices) [NextDow Theorychevron-right](https://chartschool.stockcharts.com/table-of-contents/market-analysis/dow-theory) Last updated 1 year ago Was this helpful? * [Dow Theory Articles](https://chartschool.stockcharts.com/table-of-contents/market-analysis#dow_theory_articles) * [Market Timing](https://chartschool.stockcharts.com/table-of-contents/market-analysis#market_timing) * [Intermarket Analysis](https://chartschool.stockcharts.com/table-of-contents/market-analysis#intermarket_analysis) * [Fundamentals](https://chartschool.stockcharts.com/table-of-contents/market-analysis#fundamentals) * [DecisionPoint Market Analysis](https://chartschool.stockcharts.com/table-of-contents/market-analysis#decisionpoint_market_analysis) * [Wyckoff Analysis Articles](https://chartschool.stockcharts.com/table-of-contents/market-analysis#wyckoff_analysis_articles) * [Elliott Wave Analysis Articles](https://chartschool.stockcharts.com/table-of-contents/market-analysis#elliott_wave_analysis_articles) Was this helpful? sun-brightdesktopmoon sun-brightdesktopmoon --- # Trading Strategies & Models | ChartSchool | StockCharts.com ![Page cover](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FAw2M25DEtKRfxkNOZjij%252FChartSchoolHeader-Option4.png%3Falt%3Dmedia%26token%3Da3c617b6-878d-4dbc-9074-98aa974bcfee&width=1248&dpr=4&quality=100&sign=ce5abd40&sv=2) [hashtag](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models#trading_models) Trading Models --------------------------------------------------------------------------------------------------------------------------------- [**DecisionPoint Trend Model**](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/decisionpoint-trend-model) DecisionPoint's mechanical trend-based approach to trading. [hashtag](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models#trading_strategies) Trading Strategies ----------------------------------------------------------------------------------------------------------------------------------------- [**Bollinger Band Squeeze**](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/bollinger-band-squeeze) This strategy uses Bollinger Bands to identify volatility contraction that may foreshadow a significant advance or decline. [**CCI Correction**](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/cci-correction) A strategy that uses weekly CCI to dictate a trading bias and daily CCI to generate trading signals. [**CVR3 VIX Market Timing**](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/cvr3-vix-market-timing) Developed by Larry Connors and Dave Landry, this strategy uses overextended readings in the Cboe Volatility Index ($VIX) to generate buy and sell signals for the S&P 500. [**Faber's Sector Rotation Trading Strategy**](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/fabers-sector-rotation-trading-strategy) Based on research from Mebane Faber, this sector rotation strategy buys the top-performing sectors and re-balances once per month. [**Gap Trading Strategies**](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/gap-trading-strategies) Various strategies for trading that are based on opening price gaps. [**Harmonic Patterns**](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/harmonic-patterns) An in-depth examination of harmonic chart patterns, their advantages and disadvantages, and strategies for trading them. [**Hindenburg Omen**](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/hindenburg-omen) An analysis of a technical market pattern that indicates a potential risk of a stock market downturn and how you can read its signals to strategize your trades. [**Ichimoku Cloud**](https://chartschool.stockcharts.com/table-of-contents/technical-indicators-and-overlays/technical-overlays/ichimoku-cloud) A strategy that uses the Ichimoku Cloud to set the trading bias, identify corrections, and signal short-term turning points. [**The 'Last' Stochastic Technique**](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/the-last-stochastic-technique) This strategy uses the Slow Stochastic Oscillator to reduce whipsaws and provide more accurate buy and sell signals. [**MACD Zero-Line Crosses With Swing Points**](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/macd-zero-line-crosses-with-swing-points) A strategy that applies the MACD zero line cross to swing points. [**Moving Average Trading Strategies**](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/moving-average-trading-strategies) Helpful trading strategies include moving average crossovers, moving averages as support and resistance, and Moving Average Ribbons to identify trend direction, strength, and trend reversals. [**Moving Momentum**](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/moving-momentum) A strategy that uses a three-step process to identify the trend, wait for corrections within that trend, and then identify reversals that signal an end to the correction. [**Narrow Range Day NR7**](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/narrow-range-day-nr7) Developed by Tony Crabel, the narrow range day strategy looks for range contractions to predict range expansions. Advanced scan code included that tweaks this strategy by adding Aroon and CCI qualifiers. [**Percent Above 50-day SMA**](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/percent-above-50-day-sma) A strategy that uses the breadth indicator, percent above the 50-day moving average, to define the tone for the broad market and identify corrections. [**Percent B Money Flow**](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/percent-b-money-flow) In this strategy, the %B indicator and the Money Flow Index are used to identify the start of a new trend when both reach a bullish or bearish threshold. [**The Pre-Holiday Effect**](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/the-pre-holiday-effect) How the market has performed before major US holidays and how that can affect trading decisions. [**RSI(2)**](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/rsi-2) An overview of Larry Connors' mean reversion strategy using 2-period RSI. [**Six-Month Cycle MACD**](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/six-month-cycle-macd) Developed by Sy Harding, this strategy combines the six-month bull-bear cycle with MACD signals for timing. [**Slope Performance Trend**](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/slope-performance-trend) Using the slope indicator to quantify the long-term trend and measure relative performance for a trading strategy with the nine sector SPDRs. [**Stochastic Pop and Drop**](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/stochastic-pop-and-drop) Developed by Jake Berstein and modified by David Steckler, this strategy uses the Average Directional Index (ADX) and Stochastic Oscillator to identify price pops and breakouts. [**Swing Charting**](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/swing-charting) An overview of swing trading and how it can be used to profit under certain market conditions. [**Trend Quantification and Asset Allocation**](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/trend-quantification-and-asset-allocation) This article shows chartists how to define long-term trend reversals by smoothing the price data with four different Percentage Price Oscillators. Chartists can also use this technique to quantify trend strength and determine asset allocation. [PreviousGuidelines for Applying Elliott Wave Theorychevron-left](https://chartschool.stockcharts.com/table-of-contents/market-analysis/elliott-wave-analysis-articles/guidelines-for-applying-elliott-wave-theory) [NextDecisionPoint Trend Modelchevron-right](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/decisionpoint-trend-model) Last updated 1 year ago Was this helpful? * [Trading Models](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models#trading_models) * [Trading Strategies](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models#trading_strategies) Was this helpful? sun-brightdesktopmoon sun-brightdesktopmoon --- # Index & Market Indicator Catalog | ChartSchool | StockCharts.com ![Page cover](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FAw2M25DEtKRfxkNOZjij%252FChartSchoolHeader-Option4.png%3Falt%3Dmedia%26token%3Da3c617b6-878d-4dbc-9074-98aa974bcfee&width=1248&dpr=4&quality=100&sign=ce5abd40&sv=2) There are many indicator and index groups in the symbol catalog. You can easily distinguish these because their symbols begin with either a **Dollar Sign ($)** or an **Exclamation Point (!)**. The articles below highlight the different groups so StockCharts users can make the most of our website. Each article explains the grouping, shows an example chart and provides symbol examples. The articles also contain links that chartists can use to see a current list in our symbol catalog. When looking at the data sets, note that StockCharts uses a three-step process to calculate breadth indicators based on stock indices or ETFs. First, StockCharts maintains component lists for these indices. Second, our scan-engine uses these component lists to run scans based on the price data for the individual stocks. Third, the data is then updated and published to our website. Note that there are sometimes multiple sources for the same data series, such as new 52-week highs on the NYSE. The data at StockCharts may differ from other sources for two primary reasons. First, there may be differences in the index components. Index components change and require updates on a regular basis. Second, there may be differences in the open, high, low, close and volume data for an individual stock. StockCharts uses dividend-adjusted data for its calculations, while other sources may use non-adjusted data. circle-check **Cool Tip:** If you're looking for more detailed information about specific indexes and market indicators we offer, visit our [Index Catalogarrow-up-right](https://stockcharts.knackhq.com/symbolcatalog) . [hashtag](https://chartschool.stockcharts.com/table-of-contents/index-and-market-indicator-catalog#symbol_groupings) Symbol Groupings ------------------------------------------------------------------------------------------------------------------------------------------ [**Advance-Decline Indicators**](https://chartschool.stockcharts.com/table-of-contents/index-and-market-indicator-catalog/advance-decline-indicators) **.** An indicator group that covers advances, declines, net advances, advancing volume, declining volume and net advancing volume for five major stock exchanges (AMEX, CDNX, Nasdaq, NYSE, and TSE). Examples: NYSE Advance-Decline Issues ($NYAD), $Nasdaq Advance-Decline Volume ($NAUD). [**Cboe Indices and Indicators**](https://chartschool.stockcharts.com/table-of-contents/index-and-market-indicator-catalog/cboe-indices-and-indicators) **.** A group of index symbols based on options. These include buywrite indices, volatility indices, and put-call ratios. Examples: DJIA Buywrite Index ($BXD), Crude Oil Volatility Index ($OVX), Nasdaq 100 Volatility Index ($VXN). [**CME Futures and Spot Prices**](https://chartschool.stockcharts.com/table-of-contents/index-and-market-indicator-catalog/cme-futures-and-spot-prices) **.** Spot prices for select futures contracts traded through the CME Group, including commodities. Examples: Copper - Spot Price ($COPPER), Gold - Spot Price ($GOLD), CBOE E-Mini S&P 500 Sep 2025 (^ESU25). [**DecisionPoint Sentiment Indicators**](https://chartschool.stockcharts.com/table-of-contents/index-and-market-indicator-catalog/decisionpoint-sentiment-indicators) **.** Sentiment indicators from AAII, the CBOE, NAAIM and Wall Street Sentiment. Examples: AAII Bulls (!AAIIBULL), AAII Bears (!AAIIBEAR). [**Dow Jones Breadth Indicators**](https://chartschool.stockcharts.com/table-of-contents/index-and-market-indicator-catalog/dow-jones-breadth-indicators) **.** New highs, new lows, net new highs and the high/low ratio for the AMEX, Nasdaq and NYSE. Examples: NYSE New High/Low Ratio ($NYHLRDJ), Nasdaq New 52-week Highs ($NAHGHDJ), AMEX New 52-Week Lows ($AMLOWDJ). [**Dow Jones Global Indices**](https://chartschool.stockcharts.com/table-of-contents/index-and-market-indicator-catalog/dow-jones-global-indices) **.** An index series that features world stock indices, geographic regions, country indices, global sectors and more. Examples: DJ Germany Stock Index ($DEDOW), DJ Chile Stock Index ($CLDOW), DJ Global Index ($DJW). [**Dow Jones Select Indices**](https://chartschool.stockcharts.com/table-of-contents/index-and-market-indicator-catalog/dow-jones-select-indices) **.** An index series that limits the weightings of its components to ensure diversity. Examples: DJ Canada Select Value Index ($DJCASV), DJ US Select Micro-Cap Index ($DJSM). [**Dow Jones Titans Indices**](https://chartschool.stockcharts.com/table-of-contents/index-and-market-indicator-catalog/dow-jones-titans-indices) **.** An index series that measures the performance of the largest components within a group. Examples: DJ Sector Titans 30 Index - Banks ($DJTBAK), DJ Global Titans Index ($DJGT). [**Dow Jones US Indices**](https://chartschool.stockcharts.com/table-of-contents/index-and-market-indicator-catalog/dow-jones-us-indices) **.** An index series that breaks the market down into broad stock indices, style indices, industry indices and sector indices. Examples: DJ US Internet Index ($DJUSNS), DJ US Retail Index ($DJUSRT). [**Economic Indicators**](https://chartschool.stockcharts.com/table-of-contents/index-and-market-indicator-catalog/economic-indicators) **.** A selection of economic indicators with weekly or monthly data. Examples: Initial Jobless Claims ($$UNEMPCIN), Industrial Production ($$IPI). [**ICE Futures and Spot Prices**](https://chartschool.stockcharts.com/table-of-contents/index-and-market-indicator-catalog/ice-futures-and-spot-prices) **.** Spot prices for select futures contracts traded through the Intercontinental Exchange, including commodities. Examples: Brent Crude Oil - Spot Price ($BRENT), Coffee - Spot Price ($COFFEE). [**Intellidex Indices**](https://chartschool.stockcharts.com/table-of-contents/index-and-market-indicator-catalog/intellidex-indices) **.** A group of NYSE Euronext indices that employs a quantitative model to find stocks with best prospects for capital appreciation. Examples: Dynamic Oil Service Intellidex Index ($DWO), Dynamic Software Intellidex Index ($DZC). [**MSCI Indices**](https://chartschool.stockcharts.com/table-of-contents/index-and-market-indicator-catalog/msci-indices) **.** An index series that covers developed and emerging markets outside the US. Many MSCI indices are used as benchmarks for fund managers and ETFs. Examples: MSCI Emerging Markets Index ($MSEMF), MSCI Mexico Index ($INW). [**New 52-week Highs and Lows for Exchanges**](https://chartschool.stockcharts.com/table-of-contents/index-and-market-indicator-catalog/new-52-week-highs-and-lows-for-exchanges) **.** An indicator group that covers new 52-week highs, lows and net new highs for five major exchanges (AMEX, CDNX, Nasdaq, NYSE, and TSE). This article defines the various sources and explains the different methodologies. Examples: NYSE New 52-week Highs from StockCharts ($NYHGH), NYSE New 52-week Highs from Dow Jones ($NYHGHDJ) and new highs from the scan engine. [**NYSE Arca Equity Indices**](https://chartschool.stockcharts.com/table-of-contents/index-and-market-indicator-catalog/nyse-arca-equity-indices) **.** A group of industry and sector indices that were formerly published by the American Stock Exchange (AMEX), which is now part of NYSE Euronext. Examples: Disk Drive Index ($DDX), Gold Miners Index ($GDM), Airline Index ($XAL). [**NYSE Equity Indices**](https://chartschool.stockcharts.com/table-of-contents/index-and-market-indicator-catalog/nyse-equity-indices) **.** A group of indices based on stocks within the NYSE. Examples: NYSE Composite ($NYA), NYSE TMT Index ($NYY), NYSE Financial Index ($NYK). [**Philadelphia Indices**](https://chartschool.stockcharts.com/table-of-contents/index-and-market-indicator-catalog/philadelphia-indices) **.** An index series that covers select industry groups and currency crosses, such as the Gold/Silver Index and the Euro Index. Examples: PHLX Semiconductor Index ($SOX), PHLX Gold and Silver Index ($XAU). [**S&P 500 Sector and Industry Groups**](https://chartschool.stockcharts.com/table-of-contents/index-and-market-indicator-catalog/s-and-p-500-sector-and-industry-groups) **.** A group of index symbols that covers the sectors and key industry groups in the S&P 500. Examples: S&P 500 Energy Sector Index ($SPEN), S&P 500 Media Industry Group ($GSPME). [**S&P GSCI Indices**](https://chartschool.stockcharts.com/table-of-contents/index-and-market-indicator-catalog/s-and-p-gsci-indices) **.** A group of commodity-based indices covering the major commodity groups. These include energy, agriculture, precious metals, livestock and industrial metals. Examples: S&P GSCI Precious Metals Index ($GPX), S&P GSCI Livestock Index ($GVX). [**StockCharts AD Percent**](https://chartschool.stockcharts.com/table-of-contents/index-and-market-indicator-catalog/stockcharts-ad-percent) **.** A breadth indicator based on advances and declines. StockCharts calculates this indicator for over a dozen indices and ETFs, including the S&P 500, S&P 400, S&P 600 and all eleven sector SPDRs. Examples: Gold Miners Advance-Decline Percent ($GDXADP), Technology SPDR Advance-Decline Percent ($XLKADP). [**StockCharts AD Volume Percent**](https://chartschool.stockcharts.com/table-of-contents/index-and-market-indicator-catalog/stockcharts-ad-volume-percent) **.** A breadth indicator based on advancing volume and declining volume. StockCharts calculates this indicator for over a dozen indices and ETFs, including the S&P 500, S&P 400, S&P 600 and all eleven sector SPDRs. Examples: S&P 500 Advance-Decline Volume Percent ($SPXUDP), S&P 600 Advance-Decline Volume Percent ($SMLUDP). [**StockCharts Bullish Percent Index**](https://chartschool.stockcharts.com/table-of-contents/index-and-market-indicator-catalog/stockcharts-bullish-percent-index) **.** An indicator based on the percentage of stocks with P&F buy signals. StockCharts calculates this indicator for over a dozen indices, including the S&P 500, Dow Industrials and Technology Sector. Examples: Energy BPI ($BPENER), Consumer Discretionary BPI ($BPDISC). [**StockCharts High-Low Index**](https://chartschool.stockcharts.com/table-of-contents/index-and-market-indicator-catalog/stockcharts-high-low-index) **.** A 10-day moving average of Record High Percent, which is based on new highs and new lows. This breadth indicator is calculated for the Dow Industrials, S&P 500, Nasdaq and several other indices. Examples: DJIA High-Low Index ($DOWHILO), Nasdaq 100 High-Low Index ($NDXHILO). [**StockCharts High-Low Percent**](https://chartschool.stockcharts.com/table-of-contents/index-and-market-indicator-catalog/stockcharts-high-low-percent) **.** A breadth indicator based on 52-week highs and lows. StockCharts calculates this breadth indicator for over a dozen indices and ETFs, including the S&P 500, S&P 400, S&P 600 and all eleven sector SPDRs. Examples: S&P 1500 High-Low Percent ($SUPHLP), Dow Transports High-Low Percent ($DJTHLP). [**StockCharts Percent Above Moving Average**](https://chartschool.stockcharts.com/table-of-contents/index-and-market-indicator-catalog/stockcharts-percent-above-moving-average) **.** A breadth indicator that measures the percentage of stocks above a specific moving average, such as the 50-day, 150-day or 200-day. StockCharts calculates this breadth indicator for the Dow Industrials, S&P 500, the nine S&P sectors and several other indices. Examples: S&P 500 Percent Above 200-day SMA ($SPXA200R), Nasdaq 100 Percent Above 50-day SMA ($NDXA50R). [**StockCharts Pseudo Symbols**](https://chartschool.stockcharts.com/table-of-contents/index-and-market-indicator-catalog/stockcharts-pseudo-symbols) **.** A group of symbols that automatically change when the symbol in the main charting window changes. Examples: $INDUSTRY, $ONE, $SECTOR and $SYMBOL. [**StockCharts Record High Percent**](https://chartschool.stockcharts.com/table-of-contents/index-and-market-indicator-catalog/stockcharts-record-high-percent) **.** A breadth indicator that shows high highs as a percentage of new highs plus new lows. This indicator is calculated for the Dow Industrials, S&P 500, Nasdaq and several other indices. Examples: NYSE Record High Percent ($RHNYA), S&P/TSX Record High Percent ($RHTSX). [**StockCharts Theoretical Indices**](https://chartschool.stockcharts.com/table-of-contents/index-and-market-indicator-catalog/stockcharts-theoretical-indices) **.** A group of indices that show simulated price movements. These include an Elliott Wave sequence, head-and-shoulders patterns, sine waves and a sawtooth pattern. Examples: Elliott Wave Pattern ($THEW), Head and Shoulders Pattern ($THHS). [**US Treasury Yields**](https://chartschool.stockcharts.com/table-of-contents/index-and-market-indicator-catalog/us-treasury-yields) **.** A group of indices that cover Treasury yields across the yield curve. These start with Treasury Bills (1-, 3- and 6-month), and end with long-term Treasury Bonds (10-, 20- and 30-year). Examples: 1-month US Treasury Yield ($UST1M), 5-year US Treasury Yield ($UST5Y). [PreviousTrend Quantification and Asset Allocationchevron-left](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/trend-quantification-and-asset-allocation) [NextAdvance-Decline Indicatorschevron-right](https://chartschool.stockcharts.com/table-of-contents/index-and-market-indicator-catalog/advance-decline-indicators) Last updated 4 months ago Was this helpful? Was this helpful? sun-brightdesktopmoon sun-brightdesktopmoon --- # Glossary | ChartSchool | StockCharts.com ![Page cover](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FyfwEW0v1wbvtlEYsoivr%252FGlossaryImage-2.jpg%3Falt%3Dmedia%26token%3D6fecd531-7f8d-4a18-a7e2-77302414e7e6&width=1248&dpr=4&quality=100&sign=ef9a26e6&sv=2) [**A**](https://chartschool.stockcharts.com/table-of-contents/glossary/glossary-a) [**F**](https://chartschool.stockcharts.com/table-of-contents/glossary/glossary-f) [**K**](https://chartschool.stockcharts.com/table-of-contents/glossary/glossary-k) [**P**](https://chartschool.stockcharts.com/table-of-contents/glossary/glossary-p) [**U**](https://chartschool.stockcharts.com/table-of-contents/glossary/glossary-u) [**Z**](https://chartschool.stockcharts.com/table-of-contents/glossary/glossary-x-y-z) [**B**](https://chartschool.stockcharts.com/table-of-contents/glossary/glossary-b) [**G**](https://chartschool.stockcharts.com/table-of-contents/glossary/glossary-g) [**L**](https://chartschool.stockcharts.com/table-of-contents/glossary/glossary-l) [**Q**](https://chartschool.stockcharts.com/table-of-contents/glossary/glossary-q) [**V**](https://chartschool.stockcharts.com/table-of-contents/glossary/glossary-v) [**C**](https://chartschool.stockcharts.com/table-of-contents/glossary/glossary-c) [**H**](https://chartschool.stockcharts.com/table-of-contents/glossary/glossary-h) [**M**](https://chartschool.stockcharts.com/table-of-contents/glossary/glossary-m) [**R**](https://chartschool.stockcharts.com/table-of-contents/glossary/glossary-r) [**W**](https://chartschool.stockcharts.com/table-of-contents/glossary/glossary-w) [**D**](https://chartschool.stockcharts.com/table-of-contents/glossary/glossary-d) [**I**](https://chartschool.stockcharts.com/table-of-contents/glossary/glossary-i) [**N**](https://chartschool.stockcharts.com/table-of-contents/glossary/glossary-n) [**S**](https://chartschool.stockcharts.com/table-of-contents/glossary/glossary-s) [**X**](https://chartschool.stockcharts.com/table-of-contents/glossary/glossary-x-y-z) [**E**](https://chartschool.stockcharts.com/table-of-contents/glossary/glossary-e) [**J**](https://chartschool.stockcharts.com/table-of-contents/glossary/glossary-j) [**O**](https://chartschool.stockcharts.com/table-of-contents/glossary/glossary-o) [**T**](https://chartschool.stockcharts.com/table-of-contents/glossary/glossary-t) [**Y**](https://chartschool.stockcharts.com/table-of-contents/glossary/glossary-x-y-z) [PreviousUS Treasury Yieldschevron-left](https://chartschool.stockcharts.com/table-of-contents/index-and-market-indicator-catalog/us-treasury-yields) [NextGlossary - Achevron-right](https://chartschool.stockcharts.com/table-of-contents/glossary/glossary-a) Last updated 1 year ago Was this helpful? Was this helpful? sun-brightdesktopmoon sun-brightdesktopmoon --- # Why Analyze Securities? | ChartSchool | StockCharts.com [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/why-analyze-securities#security_analysisdoes_it_matter) Security Analysis: Does it Matter? ------------------------------------------------------------------------------------------------------------------------------------------------------------------------ Wall Street has tons of analysts, strategists, and portfolio managers hired to do one thing: beat the market. Analysts are hired to find undervalued stocks. Strategists are hired to predict the direction of the market and various sectors. Portfolio managers are hired to put it all together and outperform their benchmark, usually the S&P 500 index. Granted, there are many studies and disputes raging on the performance of equity mutual funds, but it's safe to assume that about 75% of equity mutual funds underperform the S&P 500. With these kinds of stats, wouldn't individual investors be better off simply investing in an index fund rather than attempting to beat the market? There are different ways to analyze the market. The added value of analysis is in the eye of the beholder: * A [**fundamental analyst**](https://chartschool.stockcharts.com/table-of-contents/overview/fundamental-analysis) believes that analyzing strategy, management, product, financial statistics, and many other readily and not-so-readily quantifiable numbers will help choose stocks that will outperform the market. They are also likely to believe that there's little-to-no value in analyzing past prices and that technical analysts would be better off stargazing. * The [**technical analyst**](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis) believes that the chart, volume, momentum, and an array of mathematical indicators hold the keys to superior performance. Technicians are just as likely to believe that fundamental data is complete hogwash. * And then there are the [**Random Walkers**](https://chartschool.stockcharts.com/table-of-contents/overview/random-walk-vs.-non-random-walk) who believe that any attempt to try and outwit the market is futile. So whom do you believe? Is fundamental analysis worth the time and effort? Are technicians a bunch of quacks? Or is it all a lesson in random futility? We can begin to answer these questions by looking at the efficient market hypothesis and seeing where the fundamentalists, technicians, and random walkers stand regarding market efficiency. After we have explored this area, we will then take a closer look at the random walk theory, fundamental analysis, and technical analysis. [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/why-analyze-securities#are_markets_efficient) Are Markets Efficient? -------------------------------------------------------------------------------------------------------------------------------------------------- The debate concerning the value of analysis begins with the question of market efficiency. What does the price of a stock or security represent? Is a security's current price an accurate reflection of its fair value? Do anomalies exist that allow traders and investors the opportunity to beat the market by finding undervalued or overvalued securities? ![Candlestick chart from StockCharts.com showing whether a candlestick bar provides information on price action](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FiXDT4jWNsBbQZTE6vzKA%252Fwhy_analyze_securities-effmarket-1.jpg%3Falt%3Dmedia%26token%3Dbc1b8d7e-c116-42ba-8fef-b5733415a846&width=768&dpr=4&quality=100&sign=d225cc04&sv=2) Is there information in stock prices? There are different definitions of an efficient market. Aswath Damodaran, of the Stern Business School at New York University defines an efficient market as one in which the market price is an unbiased estimate of the true value of the investment. That's true, but it's also an oversimplification. In an efficient market, the current security price fully reflects all available information and is the fair value. In this ideal scenario, the price is the sum value of all views (bullish, bearish, or otherwise) held by market participants. As new information becomes available, the market assimilates the information by adjusting the security's price up (buying) and down (selling). So, the price is the fair value because the market agreed on a price to buy and sell the security. In an efficient market, deviations above and below fair value are possible, but these deviations are considered to be random. Over the long run, the price should accurately reflect fair value. The hypothesis also asserts that if markets are efficient, then it should be virtually impossible to outperform the market on a sustained basis. Even though deviations will occur and there will be periods when securities are overvalued or undervalued, these anomalies will disappear as quickly as they appeared, thus making it almost impossible to profit from them. From experience, most investors would agree that the market isn't perfectly efficient: anomalies exist, and some investors and traders outperform the market. There are varying degrees of market efficiency which have been broken down into three levels. These three levels also happen to correspond to the beliefs of fundamentalists, technicians, and random walkers. [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/why-analyze-securities#strong_formtechnicians) Strong Form: Technicians ----------------------------------------------------------------------------------------------------------------------------------------------------- The Strong Form of market efficiency theorizes that the current price reflects all information available. It doesn't matter if this information is available to the public or privy to top management; if it exists, it's reflected in the current price. Because all possible information is already reflected in the price, investors and traders will not be able to find or exploit inefficiencies based on fundamental information. **Generally, pure technical analysts believe that the markets are Strong Form efficient and all information is reflected in the price.** [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/why-analyze-securities#semi-strong_formrandom_walkers) Semi-Strong Form: Random Walkers --------------------------------------------------------------------------------------------------------------------------------------------------------------------- The Semi-Strong form of market efficiency theorizes that the current price reflects all readily available information. This information will likely include annual reports, SEC filings, earnings reports, announcements, and other relevant information that can be readily gathered. Yet, all information isn't readily available to the public which means that all information isn't fully reflected in the price. This could be information held by insiders, competitors, contractors, suppliers, or regulators, among others. Anomalies exist when information is withheld from the public, and the only way to profit is by using information not yet known to the public. This is sometimes called insider trading. Once this information becomes public knowledge, prices adjust instantaneously, making it virtually impossible to profit from such news. The Random Walk theory is an example of the Semi-Strong Form of market efficiency. [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/why-analyze-securities#weak_formfundamentalists) Weak Form: Fundamentalists --------------------------------------------------------------------------------------------------------------------------------------------------------- The Weak Form of market efficiency theorizes that the current price doesn't reflect the fair value and is only a reflection of past prices. In addition, the future price can't be determined using past or current prices (sorry technical analysts). Fundamental analysts are champions of Weak Form market efficiency and believe that the true value of a security can be ascertained through financial models using information readily available. The current price will not always reflect fair value; these models will help identify anomalies. [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/why-analyze-securities#which_form_exists_in_the_market_today) Which Form Exists in the Market Today? ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Many in academia believe that security prices are semi-strong efficient. Recall that "semi-strong efficient" implies that all public knowledge is reflected in the price, and it's virtually impossible to exploit deviations from the true value based on public information. Only new information will affect the price. Judging from the reaction of many stocks to news events, there seems to be evidence to support this case. The flow of information has become faster and new developments are factored in instantly. A surprise, positive or negative, can violently move the price of a security. A few examples include: ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/why-analyze-securities#after-reporting-earnings-below-expectations) **After Reporting Earnings Below Expectations** After announcing weak guidance during its earnings call on February 9, 2023 (after the close), Lyft shares fell from $16.22 to close at $10.31 the following trading day. ![Candlestick chart from StockCharts.com showing prices falling after weak guidance from an earnings call](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FvZP8TiZk9idgFzI1hAFe%252Fwhy_analyze_securities-whyanalyze-lyft.jpg%3Falt%3Dmedia%26token%3D4327fd38-6a09-4f6c-984d-b3d51d070ad9&width=768&dpr=4&quality=100&sign=807b2c6c&sv=2) Price action after weak guidance from an earnings release. ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/why-analyze-securities#after-positive-guidance) **After Positive Guidance** Even though NVDA reported slightly higher revenue and net income in their Q4 earnings report on February 22, 2023, strong guidance saw NVDA stock gap up from $207.50 to close at $236.60 the following trading day. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252F2z9wNEXg5LTUnAUelcxt%252Fwhy_analyze_securities-whyanalyze-nvda-.jpg%3Falt%3Dmedia%26token%3Dbdf05465-5134-48f1-9bea-51eba09dc70b&width=768&dpr=4&quality=100&sign=e3792b4d&sv=2) NVDA's stock price rose after strong guidance during an earnings call. These are just a few examples but they demonstrate how new information can move the price of a security in non-random ways. [PreviousOverviewchevron-left](https://chartschool.stockcharts.com/table-of-contents/overview) [NextTechnical Analysischevron-right](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis) Last updated 1 year ago Was this helpful? * [Security Analysis: Does it Matter?](https://chartschool.stockcharts.com/table-of-contents/overview/why-analyze-securities#security_analysisdoes_it_matter) * [Are Markets Efficient?](https://chartschool.stockcharts.com/table-of-contents/overview/why-analyze-securities#are_markets_efficient) * [Strong Form: Technicians](https://chartschool.stockcharts.com/table-of-contents/overview/why-analyze-securities#strong_formtechnicians) * [Semi-Strong Form: Random Walkers](https://chartschool.stockcharts.com/table-of-contents/overview/why-analyze-securities#semi-strong_formrandom_walkers) * [Weak Form: Fundamentalists](https://chartschool.stockcharts.com/table-of-contents/overview/why-analyze-securities#weak_formfundamentalists) * [Which Form Exists in the Market Today?](https://chartschool.stockcharts.com/table-of-contents/overview/why-analyze-securities#which_form_exists_in_the_market_today) * [After Reporting Earnings Below Expectations](https://chartschool.stockcharts.com/table-of-contents/overview/why-analyze-securities#after-reporting-earnings-below-expectations) * [After Positive Guidance](https://chartschool.stockcharts.com/table-of-contents/overview/why-analyze-securities#after-positive-guidance) Was this helpful? sun-brightdesktopmoon sun-brightdesktopmoon --- # Fundamental Analysis | ChartSchool | StockCharts.com [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/fundamental-analysis#what_is_fundamental_analysis) What is Fundamental Analysis? -------------------------------------------------------------------------------------------------------------------------------------------------------------- Fundamental analysis examines the underlying forces that affect the well being of the economy, industry groups, and companies. As with most analysis, the goal is to derive a forecast and profit from future price movements. At the company level, fundamental analysis may involve examination of financial data, management, business concept and competition. At the industry level, there might be an examination of supply and demand forces for the products offered. For the national economy, fundamental analysis might focus on economic data to assess the present and future growth of the economy. To forecast future stock prices, fundamental analysis combines economic, industry, and company analysis to derive a stock's current fair value and forecast future value. If fair value is not equal to the current stock price, fundamental analysts believe that the stock is either overvalued or undervalued and the market price will ultimately gravitate towards fair value. Fundamentalists do not heed the advice of the random walkers and believe that markets are weak-form efficient. By believing that prices do not accurately reflect all available information, fundamental analysts look to capitalize on perceived price discrepancies. [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/fundamental-analysis#general_steps_to_fundamental_evaluation) General Steps to Fundamental Evaluation ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Even though there is no clear-cut method, a breakdown is presented below in the order an investor might proceed. This method employs a top-down approach that starts with the overall economy and works down from industry groups to specific companies. As part of the analyzing process, it is important to remember that all information is relative. Industry groups are compared against other industry groups and companies against other companies. Usually, companies are compared with others in the same group. For example, a telecom operator such as Verizon Communications (VZ) would be compared to another telecom operator such as AT&T, Inc. (T), not to an oil company like Chevron Corp. (CVX). ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/fundamental-analysis#economic_forecast) Economic Forecast The first step in a top-down investment approach would be an overall evaluation of the general economy. Think of the economy as the tide and the various industry groups and individual companies as boats. When the economy expands, most industry groups and companies benefit and grow. When the economy contracts, most sectors and companies usually suffer. Many economists link economic expansion and contraction to the level of interest rates. Interest rates are seen as a leading indicator for the stock market. Below is a chart of the S&P 500 ($SPX) and the yield on the 10-year note over the last 30 years. Although not exact, there's a correlation between stock prices and interest rates. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FNNA7D3HXccutNRL4HwAP%252Fspx-rates.png%3Falt%3Dmedia%26token%3Dc31adda1-681b-41c5-a31a-3853884bcde1&width=768&dpr=4&quality=100&sign=3fd26b52&sv=2) Fundamental Analysis example chart from StockCharts.com When you have identified whether the overall economy is expanding or contracting, the next step would be to break down the economy into its various industry groups. ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/fundamental-analysis#group_selection) Group Selection If the prognosis is for an expanding economy, then certain groups are likely to benefit more than others. An investor can narrow the field to those groups best suited to benefit from the current or future economic environment. If most companies are expected to benefit from an expansion, then risk in equities would be relatively low and an aggressive growth-oriented strategy might be advisable. A growth strategy might involve the purchase of technology, biotech, semiconductor, and cyclical stocks. If the economy is forecast to contract, an investor may opt for a more conservative strategy and seek out stable income-oriented companies. A defensive strategy might involve the purchase of consumer staples, utilities, and energy-related stocks. To assess an industry group's potential, an investor would want to consider the overall growth rate, market size, and importance to the economy. While the individual company is still important, its industry group is likely to exert just as much, or more, influence on the stock price. When stocks move, they usually move as groups; there are very few lone guns out there. Many times it is more important to be in the right industry than in the right stock! The chart below shows that relative performance of five sectors over a seven-month timeframe. As the chart illustrates, being in the right sector can make all the difference. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FYUBp149Kz9bceGAGM1LN%252Fsectorselection.png%3Falt%3Dmedia%26token%3Dfd154fac-f26f-4691-8cd7-baf6ce22decc&width=768&dpr=4&quality=100&sign=59d9677a&sv=2) Sector Selection example chart from StockCharts.com ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/fundamental-analysis#narrow_within_the_group) Narrow Within the Group Once the industry group is chosen, an investor would need to narrow the list of companies before proceeding to a more detailed analysis. Investors are usually interested in finding the leaders and the innovators within a group. The first task is to identify the current business and competitive environment within a group and future trends. How do the companies rank according to market share, product position, and competitive advantage? Who is the current leader, and how will changes within the sector affect the current balance of power? What are the barriers to entry? **Success depends on having an edge, be it marketing, technology, market share, or innovation.** A comparative analysis of the competition within a sector will help identify those companies with an edge and those most likely to keep it. ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/fundamental-analysis#company_analysis) Company Analysis With a shortlist of companies, an investor might analyze the resources and capabilities within each company to identify companies capable of creating and maintaining a competitive advantage. The analysis could focus on selecting companies with a sensible business plan, solid management, and sound financials. ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/fundamental-analysis#business-plan) **Business Plan** The business plan, model, or concept forms the bedrock upon which all else is built. If the plan, model, or concepts are subpar, a business lacks hope. For a new business, you may want to look for answers to questions like: Does its business make sense? Is it feasible? Is there a market? Can a profit be made? For an established business, the questions may be: Is the company's direction clearly defined? Is the company a leader in the market? Can the company maintain leadership? ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/fundamental-analysis#management) **Management** To execute a business plan, a company requires top-quality management. Investors might look at management to assess their capabilities, strengths, and weaknesses. Even the best-laid plans in the most dynamic industries can go to waste with bad management. Alternatively, even in a mature industry, strong management can make for increased success. Some of the questions to ask might include: How talented is the management team? Do they have a track record? How long have they worked together? Can management deliver on its promises? If management is a problem, it is sometimes best to move on. ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/fundamental-analysis#financial-analysis) **Financial Analysis** The final step in this analysis process would be to take apart the financial statements and devise a valuation method. Below is a list of potential inputs into a financial analysis. Accounts Payable Accounts Receivable Acid Ratio Amortization Assets - Current Assets - Fixed Book Value Brand Business Cycle Business Idea Business Model Business Plan Capital Expenses Cash Flow Cash on hand Current Ratio Customer Relationships Days Payable Days Receivable Debt Debt Structure Debt:Equity Ratio Depreciation Derivatives-Hedging Discounted Cash Flow Dividend Dividend Cover Earnings EBITDA Economic Growth Equity Equity Risk Premium Expenses Good Will Gross Profit Margin Growth Industry Interest Cover International Investment Liabilities - Current Liabilities - Long-term Management Market Growth Market Share Net Profit Margin Pageview Growth Pageviews Patents Price/Book Value Price/Earnings PEG Price/Sales Product Product Placement Regulations R & D Revenues Sector Stock Options Strategy Subscriber Growth Subscribers Supplier Relationships Taxes Trademarks Weighted Average Cost of Capital The list can seem quite long and intimidating. However, an investor will learn what works best after a while and develop a set of preferred analysis techniques. There are many valuation metrics, and much depends on the industry and stage of the economic cycle. A complete financial model can be built to forecast future revenues, expenses, and profits, or an investor can rely on the forecast of other analysts and apply various multiples to arrive at a valuation. Some of the more popular ratios are found by dividing the stock price by a key value driver. Ratio Company Type Price/Book Value Oil Price/Earnings Retail Price/Earnings/Growth Networking Price/Sales B2B Price/Subscribers ISP or Cable Company Price/Lines Telecom Price/Page Views Website Price/Promises Biotech This methodology assumes a company will sell at a specific multiple of its earnings, revenues, or growth. An investor may rank companies based on these valuation ratios. Those at the high end may be considered overvalued, while those at the low end may constitute relatively good value. ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/fundamental-analysis#putting_it_all_together) Putting it All Together After all is said and done, an investor will be left with a handful of companies that stand out from the pack. Over the course of the analysis process, an understanding will develop of which companies stand out as potential leaders and innovators. In addition, other companies would be considered laggards and unpredictable. The final step of the fundamental analysis process is to synthesize all data, analysis, and understanding into selecting individual stock or securities. [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/fundamental-analysis#strengths_of_fundamental_analysis) Strengths of Fundamental Analysis ----------------------------------------------------------------------------------------------------------------------------------------------------------------------- ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/fundamental-analysis#long-term_trends) Long-term Trends Fundamental analysis is good for long-term investments based on very long-term trends. The ability to identify and predict long-term economic, demographic, technological or consumer trends can benefit patient investors who pick the right industry groups or companies. ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/fundamental-analysis#value_spotting) Value Spotting Sound fundamental analysis will help identify companies that represent a good value. Some of the most legendary investors think long-term and value. Graham and Dodd, Warren Buffett, and John Neff are considered champions of value investing. Fundamental analysis can help uncover companies with valuable assets, a strong balance sheet, stable earnings, and staying power. ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/fundamental-analysis#business_acumen) Business Acumen One of the most obvious, but less tangible, rewards of fundamental analysis is the development of a thorough understanding of the business. After such painstaking research and analysis, an investor will be familiar with the key revenue and profit drivers behind a company. Earnings and earnings expectations can be potent drivers of equity prices. Even some technical analysts will agree to that. A good understanding can help investors avoid companies that are prone to shortfalls and identify those that continue to deliver. In addition to understanding the business, fundamental analysis allows investors to develop an understanding of the key value drivers and companies within an industry. A stock's price is heavily influenced by its industry group. By studying these groups, investors can better position themselves to identify opportunities that are high-risk (tech), low-risk (utilities), growth-oriented (computer), value-driven (oil), non-cyclical (consumer staples), cyclical (transportation) or income-oriented (high yield). ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/fundamental-analysis#knowing_who_s_who) Knowing Who's Who Stocks move as a group. By understanding a company's business, investors can better position themselves to categorize stocks within their relevant industry group. Business can change rapidly and with it the revenue mix of a company. This happened to many of the pure Internet retailers, which were not really Internet companies, but plain retailers. Knowing a company's business and being able to place it in a group can make a huge difference in relative valuations. [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/fundamental-analysis#weaknesses_of_fundamental_analysis) Weaknesses of Fundamental Analysis ------------------------------------------------------------------------------------------------------------------------------------------------------------------------- ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/fundamental-analysis#time_constraints) Time Constraints Fundamental analysis may offer excellent insights, but it can be extraordinarily time-consuming. Time-consuming models often produce valuations that are contradictory to the current price prevailing on Wall Street. When this happens, the analyst basically claims that the whole street has got it wrong. This is not to say that there are not misunderstood companies out there, but it seems quite brash to imply that the market price, and hence Wall Street, is wrong. ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/fundamental-analysis#industry_company_specific) Industry/Company Specific Valuation techniques vary depending on the industry group and specifics of each company. For this reason, a different technique and model is required for different industries and different companies. This can get quite time-consuming, which can limit the amount of research that can be performed. A subscription-based model may work great for an Internet Service Provider (ISP), but is not likely to be the best model to value an oil company. ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/fundamental-analysis#subjectivity) Subjectivity Fair value is based on assumptions. Any changes to growth or multiplier assumptions can greatly alter the ultimate valuation. Fundamental analysts are generally aware of this and use sensitivity analysis to present a base-case valuation, an average-case valuation, and a worst-case valuation. However, even on a worst-case valuation, most models are almost always bullish, the only question is how much so. The chart below shows how stubbornly bullish many fundamental analysts can be. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252F3bRNjhbrrbxICMrdzg8s%252Famznannotated.png%3Falt%3Dmedia%26token%3D29691b58-303d-4ef3-a665-9a7ab9d4840f&width=768&dpr=4&quality=100&sign=38322922&sv=2) Amazon.com, Inc. (AMZN) Fundamental Analysis example chart from StockCharts.com ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/fundamental-analysis#analyst_bias) Analyst Bias Most of the information in the analysis comes from the company itself. Companies employ investor relations managers specifically to handle the analyst community and release information. As Mark Twain said, “There are lies, damn lies, and statistics.” When it comes to massaging the data or spinning the announcement, CFOs and investor relations managers are professionals. Only buy-side analysts tend to venture past the company statistics. Buy-side analysts work for mutual funds and money managers. They read the reports written by the sell-side analysts who work for the big brokers. These brokers are also involved in underwriting and investment banking for the companies. Even though there are restrictions to prevent a conflict of interest, brokers have an ongoing relationship with the company under analysis. When reading these reports, it is important to consider any biases a sell-side analyst may have. On the other hand, the buy-side analyst analyzes the company purely from an investment standpoint for a portfolio manager. If there is a relationship with the company, it is usually on different terms. In some cases, this may be as a large shareholder. ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/fundamental-analysis#definition_of_fair_value) Definition of Fair Value When market valuations extend beyond historical norms, there is pressure to adjust growth and multiplier assumptions to compensate. If Wall Street values a stock at 50 times earnings and the current assumption is 30 times, the analyst would be pressured to revise this assumption higher. There is an old Wall Street adage: the value of any asset (stock) is only what someone is willing to pay for it (current price). Just as stock prices fluctuate, so too do growth and multiplier assumptions. Are we to believe Wall Street and the stock price or the analyst and market assumptions? It used to be that free cash flow or earnings were used with a multiplier to arrive at a fair value. In 1999, the S&P 500 typically sold for 28 times free cash flow. However, because so many companies were and are losing money, it has become popular to value a business as a multiple of its revenues. This would seem to be OK, except that the multiple was higher than the PE of many stocks! Some companies were considered bargains at 30 times revenues. [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/fundamental-analysis#conclusion) The Takeaway --------------------------------------------------------------------------------------------------------------------------- Fundamental analysis can be valuable, but it should be approached with caution. If you are reading research written by a sell-side analyst, it is important to be familiar with the analyst behind the report. We all have personal biases, and every analyst has some sort of bias. There is nothing wrong with this, and the research can still be of great value. Learn what the ratings mean and the track record of an analyst before jumping off the deep end. Corporate statements and press releases offer good information, but they should be read with a healthy degree of skepticism to separate the facts from the spin. Press releases don't happen by accident; they are an important PR tool for companies. **Investors should become skilled readers to weed out the important information and ignore the hype.** [PreviousTechnical Analysischevron-left](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis) [NextRandom Walk vs. Non-Random Walkchevron-right](https://chartschool.stockcharts.com/table-of-contents/overview/random-walk-vs.-non-random-walk) Last updated 1 year ago Was this helpful? * [What is Fundamental Analysis?](https://chartschool.stockcharts.com/table-of-contents/overview/fundamental-analysis#what_is_fundamental_analysis) * [General Steps to Fundamental Evaluation](https://chartschool.stockcharts.com/table-of-contents/overview/fundamental-analysis#general_steps_to_fundamental_evaluation) * [Economic Forecast](https://chartschool.stockcharts.com/table-of-contents/overview/fundamental-analysis#economic_forecast) * [Group Selection](https://chartschool.stockcharts.com/table-of-contents/overview/fundamental-analysis#group_selection) * [Narrow Within the Group](https://chartschool.stockcharts.com/table-of-contents/overview/fundamental-analysis#narrow_within_the_group) * [Company Analysis](https://chartschool.stockcharts.com/table-of-contents/overview/fundamental-analysis#company_analysis) * [Business Plan](https://chartschool.stockcharts.com/table-of-contents/overview/fundamental-analysis#business-plan) * [Management](https://chartschool.stockcharts.com/table-of-contents/overview/fundamental-analysis#management) * [Financial Analysis](https://chartschool.stockcharts.com/table-of-contents/overview/fundamental-analysis#financial-analysis) * [Putting it All Together](https://chartschool.stockcharts.com/table-of-contents/overview/fundamental-analysis#putting_it_all_together) * [Strengths of Fundamental Analysis](https://chartschool.stockcharts.com/table-of-contents/overview/fundamental-analysis#strengths_of_fundamental_analysis) * [Long-term Trends](https://chartschool.stockcharts.com/table-of-contents/overview/fundamental-analysis#long-term_trends) * [Value Spotting](https://chartschool.stockcharts.com/table-of-contents/overview/fundamental-analysis#value_spotting) * [Business Acumen](https://chartschool.stockcharts.com/table-of-contents/overview/fundamental-analysis#business_acumen) * [Knowing Who's Who](https://chartschool.stockcharts.com/table-of-contents/overview/fundamental-analysis#knowing_who_s_who) * [Weaknesses of Fundamental Analysis](https://chartschool.stockcharts.com/table-of-contents/overview/fundamental-analysis#weaknesses_of_fundamental_analysis) * [Time Constraints](https://chartschool.stockcharts.com/table-of-contents/overview/fundamental-analysis#time_constraints) * [Industry/Company Specific](https://chartschool.stockcharts.com/table-of-contents/overview/fundamental-analysis#industry_company_specific) * [Subjectivity](https://chartschool.stockcharts.com/table-of-contents/overview/fundamental-analysis#subjectivity) * [Analyst Bias](https://chartschool.stockcharts.com/table-of-contents/overview/fundamental-analysis#analyst_bias) * [Definition of Fair Value](https://chartschool.stockcharts.com/table-of-contents/overview/fundamental-analysis#definition_of_fair_value) * [The Takeaway](https://chartschool.stockcharts.com/table-of-contents/overview/fundamental-analysis#conclusion) Was this helpful? sun-brightdesktopmoon sun-brightdesktopmoon --- # Technical Analysis | ChartSchool | StockCharts.com [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis#what_is_technical_analysis) What is Technical Analysis? -------------------------------------------------------------------------------------------------------------------------------------------------------- Technical analysis has to do with forecasting future financial price movements based on past price movements. Think of technical analysis like weather forecasting—it doesn't result in absolute predictions. Instead, technical analysis can help investors anticipate what is “likely” to happen to prices over time. ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis#applying_technical_analysis) Applying Technical Analysis Technical analysis can be applied to stocks, indexes, commodities, futures, or any tradable instrument where the price is influenced by supply and demand. Price data (or, as John Murphy calls it, “market action”) refers to any combination of the open, high, low, close, volume, or open interest for a given security over a specific timeframe. The timeframe can be based on intraday (1-minute, 5-minutes, 10-minutes, 15-minutes, 30-minutes, or hourly), daily, weekly, or monthly price data, lasting a few hours or many years. Technical analysis can be applied to charts that show price action over time. The chart below shows a weekly chart of Alphabet Inc. (GOOGL). A weekly chart provides a long-term view of price movement. In the chart of GOOGL, you can see an uptrend and downtrend. ![Weekly chart of GOOGL from StockCharts.com showing a long term uptrend and downtrend.](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FlPXUy7qZBNiS47P5nORw%252Foverview-technical_analysis-ta1-googllongterm.jpg%3Falt%3Dmedia%26token%3D8b9eb8e6-bcda-4abe-a084-24de0404293a&width=768&dpr=4&quality=100&sign=6d28fd7b&sv=2) The weekly chart of Alphabet Inc. (GOOGL) shows a long-term uptrend and downtrend. Below is a daily chart of GOOGL, which shows a shorter-term view of the stock's price action. ![Daily chart of GOOGL from StockCharts.com showing a short-term view of stock price action](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FA9zRgUsOAOEtpOYLm1My%252Foverview-technical_analysis-ta1-googlshortterm.jpg%3Falt%3Dmedia%26token%3Dee3a9c2c-dd72-4f21-8ca3-0e240b7d9c8a&width=768&dpr=4&quality=100&sign=f2872af&sv=2) Daily chart of Alphabet Inc. (GOOGL) shows a short-term view of the stock's price action. ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis#key_assumptions_of_technical_analysis) Key Assumptions of Technical Analysis Technical analysis can be applied to securities where the price is influenced by the forces of supply and demand. When other forces influence the price of a security, technical analysis may not work well. To be successful, technical analysis makes three key assumptions about the securities that are being analyzed: * **Liquidity.** Heavily-traded stocks allow investors to trade quickly because there are many buyers and sellers. Thinly-traded stocks are more difficult to trade because there are few buyers or sellers. So, if you're trying to trade a thinly traded stock, you may have to change your entry or exit price considerably to make a trade. In addition, low-liquidity stocks often trade at a low price (sometimes less than a penny per share), which means that their prices are easier to manipulate. These outside forces acting on thinly-traded stocks make them unsuitable for technical analysis. * **No Artificial Price Changes.** Splits, dividends, and distributions are the most common “culprits” for artificial price changes. Though there's no difference in the value of the investment, artificial price changes can dramatically affect the price chart and make technical analysis difficult to apply. This kind of price influence from outside sources can be easily addressed by adjusting the historical data before the price change. * **No Extreme News.** Technical analysis cannot predict extreme events, such as a change in management, regulatory changes, and geopolitical events. When the forces of “extreme news” influence price, technicians have to wait patiently until the chart settles down and starts to reflect the “new normal” that results from such news. It's important to determine whether or not a security meets these three requirements before applying technical analysis. That's not to say that analysis of any stock whose price is influenced by one of these outside forces is useless, but it will affect the accuracy of that analysis. [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis#the_basis_of_technical_analysis) The Basis of Technical Analysis ----------------------------------------------------------------------------------------------------------------------------------------------------------------- At the turn of the century, the [Dow Theory](https://chartschool.stockcharts.com/table-of-contents/market-analysis/dow-theory) laid the foundations for what would later become modern technical analysis. Dow Theory wasn't presented as one complete amalgamation but rather pieced together from the writings of Charles Dow over several years. Of the many theorems put forth by Dow, three stand out: * Price discounts everything * Price movements are not random * “What” is more important than “Why.” Let's look at each of these. ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis#price-discounts-everything) **Price Discounts Everything** This theorem is similar to the strong and semi-strong forms of market efficiency. Technical analysts believe that the current price fully reflects all information. Because all information is already reflected in the price, it represents the fair value and should form the basis for analysis. After all, the market price reflects the sum knowledge of all participants—investors, portfolio managers, buy-side analysts, sell-side analysts, market strategists, technical analysts, fundamental analysts, and many others. It would be folly to disagree with the price set by such an impressive array of people with impeccable credentials. **Technical analysis utilizes the information captured by the price to interpret what the market is saying with the purpose of forming a view of the future.** ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis#price-movements-are-not-totally-random) **Price Movements Are Not Totally Random** Most technicians agree that prices trend. Yet, most technicians also acknowledge that there are times when prices don't trend. If prices were always random, it would be difficult to make money using technical analysis. In his book, _Schwager on Futures: Technical Analysis_, Jack Schwager states: _“One way of viewing the situation is that markets may witness extended periods of random fluctuation, interspersed with shorter periods of nonrandom behavior… The goal of the chart analyst is to identify those periods (i.e. major trends).”_ (p. 12) ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FgznmPHHmvUhvGvPcGrLO%252Foverview_technical_analysis_ta1_orcl-trendingtrading.png%3Falt%3Dmedia%26token%3Dc5fe3fae-f306-4fd2-a468-b5f3618a6676&width=768&dpr=4&quality=100&sign=6f2fb6bb&sv=2) Trending and trading ranges in Oracle (ORCL) example chart from StockCharts.com A technical analyst believes that it's possible to identify a trend, invest, or trade based on the trend and make money as the trend unfolds. Because technical analysis can be applied to different timeframes, it's possible to spot short- and long-term trends. The chart of ORCL illustrates Schwager's view on the nature of the trend. The broad trend is up, but it's also interspersed with trading ranges. In between the trading ranges are smaller uptrends within the larger uptrend. When the stock price breaks above the trading range, the uptrend is renewed. When the stock price breaks below the low of the trading range, a downtrend begins. In the chart above, price broke below the trading range, but it was a short-lived downtrend. The uptrend resumed until the next trading range. ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis#what-is-more-important-than-why) **"What" Is More Important Than "Why"** In his book, [_The Psychology of Technical Analysis_arrow-up-right](http://www.amazon.com/The-Psychology-Technical-Analysis-Profiting/dp/1557385432) , Tony Plummer paraphrases Oscar Wilde by stating, “A technical analyst knows the price of everything, but the value of nothing”. Technicians, as technical analysts are called, are only concerned with two things: 1. **What is the current price?** 2. **What is the history of the price movement?** The price of a security is the end result of the battle between the forces of supply and demand. The objective of the analysis is to forecast the direction of the future price. By focusing on price, technical analysis represents a direct approach. Fundamentalists are concerned with why the price is what it is. For technicians, the why portion of the equation is too broad and many times the fundamental reasons given are highly suspect. Technicians believe it's best to concentrate on what and never mind why. Why did the price go up? There were simply more buyers (demand) than sellers (supply). After all, the value of any asset is only what someone is willing to pay for it. Who needs to know why? [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis#technical_analysisgeneral_steps) Technical Analysis: General Steps ------------------------------------------------------------------------------------------------------------------------------------------------------------------- Many technicians apply a top-down approach that begins with broad-based market analysis, then narrows down to specific sectors/industries, and ultimately analyzes individual stocks. The beauty of technical analysis lies in its versatility. Because the principles of technical analysis are universally applicable, each of these levels of analysis can be performed using the same theoretical background. You don't need an economics degree to analyze a market index chart. You don't need to be a CPA to analyze a stock chart. Charts are charts. It doesn't matter if the timeframe is two days or two years. It doesn't matter whether you're looking at a stock, market index, or commodity. The technical principles of support, resistance, trend, trading range, and other aspects can be applied to any chart. As simple as this may sound, technical analysis is far from easy. Success requires serious study, dedication, and an open mind. ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis#chart_analysis_basics) Chart Analysis Basics Technical analysis can be complex or straightforward. It depends on how you use it. The example below shows some basic principles of chart analysis. Since you're probably interested in buying stocks, the focus will be on spotting bullish situations in this chart. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FAFCOjPjyvtGf3fWw9UQW%252Fta1-intu-overall.png%3Falt%3Dmedia%26token%3D1688c949-3edb-4767-909d-cba0d6943f84&width=768&dpr=4&quality=100&sign=ef834736&sv=2) **Overall Trend.** The first step is to identify the overall trend. You can do this with trend lines, [moving averages](https://chartschool.stockcharts.com/table-of-contents/glossary/glossary-m#moving_average_ma) , or peak/trough analysis. For example, as long as price remains above its upward-sloping trend line or specific moving averages, the trend is up. Similarly, the trend is up as long as higher lows form on pullbacks and higher highs form on advances. [**Support**](https://chartschool.stockcharts.com/table-of-contents/glossary/glossary-s#support) **.** Congestion areas and previous lows below the current price mark the support levels. A break below support would be considered bearish and detrimental to the overall trend. [**Resistance**](https://chartschool.stockcharts.com/table-of-contents/glossary/glossary-r#resistance) **.** Congestion areas and previous highs above the current price mark resistance levels. A break above resistance would be considered bullish and positive for the overall trend. [**Momentum**](https://chartschool.stockcharts.com/table-of-contents/glossary/glossary-m#momentum) **.** Momentum is usually measured with an oscillator such as [MACD](https://chartschool.stockcharts.com/table-of-contents/technical-indicators-and-overlays/technical-indicators/macd-moving-average-convergence-divergence-oscillator) . If MACD is above its 9-day EMA ([exponential moving average](https://chartschool.stockcharts.com/table-of-contents/technical-indicators-and-overlays/technical-overlays/moving-averages-simple-and-exponential#exponential_moving_average_formulas) ) or positive, momentum will be considered bullish or at least improving. **Buying/Selling Pressure.** For stocks and indices with volume figures available, an indicator that uses volume is used to measure buying or selling pressure. When the [Chaikin Money Flow](https://chartschool.stockcharts.com/table-of-contents/technical-indicators-and-overlays/technical-indicators/chaikin-money-flow-cmf) is above zero, buying pressure is dominant. Selling pressure is dominant when it is below zero. **Relative Strength.** The [price relative](https://chartschool.stockcharts.com/table-of-contents/technical-indicators-and-overlays/technical-indicators/price-relative-relative-strength) is plotted as a line that divides the security by a benchmark. For stocks, the price is usually divided by the S&P 500. The relative strength plot indicates if the stock is outperforming (rising) or underperforming (falling) the major index. The final step is to synthesize the above analysis to ascertain the following: * Strength of the current trend. * Maturity or stage of the current trend. * Reward-to-risk ratio of a new position. * Potential entry levels for a new long position. The example above analyzed the chart for an individual stock, but these techniques can be applied to sectors or broad market indexes. ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis#top-down_technical_analysis) Top-Down Technical Analysis Many technicians employ a top-down approach to technical analysis, starting with broad-based macro analysis and ending with a more focused/micro perspective: 1. **Broad market analysis** using major indices such as the S&P 500, Dow Industrials, NASDAQ and NYSE Composite. 2. **Sector analysis** to identify the strongest and weakest groups within the broader market. 3. **Individual stock analysis** to identify the strongest and weakest stocks within select groups. For each segment (market, sector, and stock), an investor would analyze long-term and short-term charts to find those that meet specific criteria. Analysis will first consider the market in general, perhaps the S&P 500. If the broader market were considered to be in bullish mode, analysis would proceed to a selection of sector charts. Those sectors that show the most promise would be singled out for individual stock analysis. Once the sector list is narrowed to 3-4 industry groups, individual stock selection can begin. With a selection of 10-20 stock charts from each industry, a selection of 3-4 of the most promising stocks in each group can be made. How many stocks or industry groups make the final cut will depend on the strictness of the criteria set forth. Under this scenario, we would be left with 9-12 stocks from which to choose. These stocks could even be broken down further to find the 3-4 that are the strongest of the strong. [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis#strengths_of_technical_analysis) Strengths of Technical Analysis ----------------------------------------------------------------------------------------------------------------------------------------------------------------- ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis#focus_on_price) Focus on Price If the objective is to predict the future price, then it makes sense to focus on price movements. Price movements usually precede fundamental developments. By focusing on price action, technicians are automatically focusing on the future. The market is considered a leading indicator and generally leads the economy by six to nine months. It makes sense to look directly at the price movements to keep pace with the market. More often than not, change is a subtle beast. Even though the market is prone to sudden knee-jerk reactions, hints usually develop before significant moves. A technician will refer to periods of [accumulation](https://chartschool.stockcharts.com/table-of-contents/glossary/glossary-a#accumulation) as evidence of an impending advance and periods of [distribution](https://chartschool.stockcharts.com/table-of-contents/glossary/glossary-d#distribution) as evidence of an impending decline. ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis#supply_demand_and_price_action) Supply, Demand, and Price Action Many technicians use the open, high, low and close when analyzing the price action of a security. There is information to be gleaned from each bit of information. Separately, these will not be able to tell much. However, taken together, the open, high, low, and close reflect forces of supply and demand. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252F9N0zm62YIndgaLPHnveS%252Fta1-ba-candlesticks.png%3Falt%3Dmedia%26token%3D0058459d-4361-4f83-91a4-8960918d5cef&width=768&dpr=4&quality=100&sign=2d937cbf&sv=2) Boeing Co. (BA) Technical Analysis example chart from StockCharts.com The annotated example above shows a stock that opened with a gap up. Before the open, the number of buy orders exceeded the number of sell orders and the price was raised to attract more sellers. Demand was brisk from the start. The intraday high reflects the strength of demand (buyers). The intraday low reflects the availability of supply (sellers). The close represents the final price the buyers and sellers agreed upon. In this case, the close is well below the high and much closer to the low. This tells us that even though demand (buyers) was strong during the day, supply (sellers) ultimately prevailed, forcing the price back down. Even after this selling pressure, the close remained above the open. Looking at price action over an extended period, you can see the battle between supply and demand unfold. **In its most basic form, higher prices reflect increased demand, and lower prices reflect increased supply.** ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis#support_resistance) Support/Resistance Simple chart analysis can help identify support and resistance levels. These are usually marked by periods of congestion (trading range) where the prices move within a confined range for an extended period, telling us that the forces of supply and demand are deadlocked. When prices move out of the trading range, it signals that either supply or demand has started to get the upper hand. **If prices move above the upper band of the trading range, then demand is winning.** **If prices move below the lower band, then supply is winning.** ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis#pictorial_price_history) Pictorial Price History Even if you are a tried and true fundamental analyst, a price chart can offer plenty of valuable information. The price chart is an easy-to-read historical account of a security's price movement over a period of time. Charts are much easier to read than a table of numbers. On most stock charts, volume bars are displayed at the bottom. With this historical picture, it is easy to identify the following: * Reactions prior to and after important events. * Past and present volatility. * Historical volume or trading levels. * Relative strength of a stock versus the overall market. ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis#assist_with_entry_point) Assist with Entry Point Technical analysis can help with timing a proper entry point. Some analysts use fundamental analysis to decide what to buy and technical analysis to decide when to buy. It is no secret that timing can play an important role in performance. Technical analysis can help spot demand (support) and supply (resistance) levels as well as breakouts. Simply waiting for a breakout above resistance or buying near support levels can improve returns. It is also important to know a stock's price history. If a stock you thought was great for the last 2 years has traded flat for those two years, it would appear that Wall Street has a different opinion. If a stock has already advanced significantly, it may be prudent to wait for a pullback. Or, if the stock is trending lower, it might pay to wait for buying interest and a trend reversal. [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis#weaknesses_of_technical_analysis) Weaknesses of Technical Analysis ------------------------------------------------------------------------------------------------------------------------------------------------------------------- ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis#analyst_bias) Analyst Bias Just as with fundamental analysis, technical analysis is subjective and our personal biases can be reflected in the analysis. It is important to be aware of these biases when analyzing a chart. If the analyst is a perpetual bull, then a bullish bias will overshadow the analysis. On the other hand, if the analyst is a disgruntled perma-bear, then the analysis will probably have a bearish tilt. ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis#open_to_interpretation) Open to Interpretation Furthering the bias argument is the fact that technical analysis is open to interpretation. Even though there are standards, many times two technicians will look at the same chart and paint two different scenarios or see different patterns. Both will be able to come up with logical support and resistance levels as well as key breaks to justify their position. While this can be frustrating, it should be pointed out that technical analysis is more like an art than a science, akin to economics. Is the cup half-empty or half-full? It is all in the eye of the beholder. ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis#too_late) Too Late Technical analysis has been criticized for being too late. By the time the trend is identified, a substantial portion of the move has already taken place. After such a large move, the reward to risk ratio is not great. Lateness is a particular criticism of [Dow Theory](https://chartschool.stockcharts.com/table-of-contents/glossary/glossary-d#dow_theory) . ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis#always_another_level) Always Another Level Even after a new trend has been identified, there is always another “important” level close at hand. Technicians have been accused of sitting on the fence and never taking an unqualified stance. Even if they are bullish, there is always some indicator or some level that will qualify their opinion. ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis#trader_s_remorse) Trader's Remorse Not all technical signals and patterns work. When you begin to study technical analysis, you will come across an array of patterns and indicators with rules to match. For instance: A sell signal is given when the neckline of a head and shoulders pattern is broken. Even though this is a rule, it is not steadfast and can be subject to other factors such as volume and momentum. In that same vein, what works for one particular stock may not work for another. A 50-day moving average may work great to identify support and resistance for IBM, but a 70-day moving average may work better for Yahoo. Even though many principles of technical analysis are universal, each security will have its own idiosyncrasies. [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis#final_thoughts) Final Thoughts ------------------------------------------------------------------------------------------------------------------------------- Technical analysts consider the market to be 80% psychological and 20% logical. Fundamental analysts consider the market to be 20% psychological and 80% logical. Psychological or logical may be open for debate, but when it comes to the price of a security, there's nothing to question. It's available for all to see. Nobody doubts its legitimacy. The price set by the market reflects the sum knowledge of all participants. We're not dealing with lightweights here. These participants have considered (discounted) everything under the sun and settled on a price to buy or sell. These are the forces of supply and demand at work. By examining price action to determine which force is prevailing, technical analysis focuses directly on the bottom line: **What is the price? Where has it been? Where is it going?** Even though there are some universal principles and rules that can be applied, remember that technical analysis is more of an art form than a science. As an art form, it's subject to interpretation. However, it's also flexible in its approach, and each investor should use only that which suits his or her style. Developing a style takes time, effort, and dedication, but the rewards can be significant. [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis#technical_analysis_faqs) FAQs Technical Analysis ------------------------------------------------------------------------------------------------------------------------------------------------- chevron-rightWhat is technical analysis?[hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis#what-is-technical-analysis) Technical analysis helps investors and traders anticipate what will happen to prices. It has to do with forecasting future financial price movements based on past price movements. Technical analysis can be applied to stocks, indexes, commodities, futures, currencies, or any tradable asset where price is influenced by supply and demand. chevron-rightHow can I learn technical analysis?[hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis#how-can-i-learn-technical-analysis) Technical analysis is versatile. You can make it as simple or as complex as you want. But there are some basics any trader or investor should learn. They involve the following: 1. **Identify the overall trend.** Is price trending up, down, or moving sideways? You can use trendlines, [moving averages](https://chartschool.stockcharts.com/table-of-contents/technical-indicators-and-overlays/technical-overlays/moving-averages-simple-and-exponential) , or other tools and indicators to help determine how prices move. 2. **Identify support and resistance levels.** Congestion areas and previous lows below the prevailing price are support levels, whereas congestion areas and previous highs above the prevailing price are resistance levels. A break below support or above resistance can indicate a trend's direction. 3. **Identify momentum, buying/selling pressure, and relative strength.** Use indicators such as the [MACD](https://chartschool.stockcharts.com/table-of-contents/technical-indicators-and-overlays/technical-indicators/macd-moving-average-convergence-divergence-oscillator) , [Chaikin Money Flow](https://chartschool.stockcharts.com/table-of-contents/technical-indicators-and-overlays/technical-indicators/chaikin-money-flow-cmf) , and [relative strength](https://chartschool.stockcharts.com/table-of-contents/technical-indicators-and-overlays/technical-indicators/price-relative-relative-strength) to identify these characteristics. 4. **Synthesize all the information.** Once you have the pieces of the puzzle figured out, put them together and ascertain the following: * Strength of the trend * Maturity or stage of the trend * Reward-to-risk ratio of a position * Potential entry levels for a position chevron-rightWhat are the foundations of technical analysis?[hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis#what-are-the-foundations-of-technical-analysis) * Price discounts everything * Price movements are not random * “What” is more important than “Why” [PreviousWhy Analyze Securities?chevron-left](https://chartschool.stockcharts.com/table-of-contents/overview/why-analyze-securities) [NextFundamental Analysischevron-right](https://chartschool.stockcharts.com/table-of-contents/overview/fundamental-analysis) Last updated 1 year ago Was this helpful? * [What is Technical Analysis?](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis#what_is_technical_analysis) * [Applying Technical Analysis](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis#applying_technical_analysis) * [Key Assumptions of Technical Analysis](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis#key_assumptions_of_technical_analysis) * [The Basis of Technical Analysis](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis#the_basis_of_technical_analysis) * [Price Discounts Everything](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis#price-discounts-everything) * [Price Movements Are Not Totally Random](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis#price-movements-are-not-totally-random) * ["What" Is More Important Than "Why"](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis#what-is-more-important-than-why) * [Technical Analysis: General Steps](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis#technical_analysisgeneral_steps) * [Chart Analysis Basics](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis#chart_analysis_basics) * [Top-Down Technical Analysis](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis#top-down_technical_analysis) * [Strengths of Technical Analysis](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis#strengths_of_technical_analysis) * [Focus on Price](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis#focus_on_price) * [Supply, Demand, and Price Action](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis#supply_demand_and_price_action) * [Support/Resistance](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis#support_resistance) * [Pictorial Price History](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis#pictorial_price_history) * [Assist with Entry Point](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis#assist_with_entry_point) * [Weaknesses of Technical Analysis](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis#weaknesses_of_technical_analysis) * [Analyst Bias](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis#analyst_bias) * [Open to Interpretation](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis#open_to_interpretation) * [Too Late](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis#too_late) * [Always Another Level](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis#always_another_level) * [Trader's Remorse](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis#trader_s_remorse) * [Final Thoughts](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis#final_thoughts) * [FAQs Technical Analysis](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis#technical_analysis_faqs) Was this helpful? sun-brightdesktopmoon sun-brightdesktopmoon --- # Options Trading | ChartSchool | StockCharts.com The following articles provide a high-level overview of options trading. [**Introduction to Options**](https://chartschool.stockcharts.com/table-of-contents/overview/options-trading/introduction-to-options) Learn the basics of options trading, including the difference between calls and puts, and how to buy or sell both types of options. [**Options Pricing and Options Chains**](https://chartschool.stockcharts.com/table-of-contents/overview/options-trading/options-pricing-and-options-chains) Discover the factors that go into the price (premium) for an options contract, and how to read an options chain when choosing options contracts to trade. [**Options Trading Strategies**](https://chartschool.stockcharts.com/table-of-contents/overview/options-trading/options-trading-strategies) An introduction to several popular options trading strategies that can be suitable for beginners. [PreviousAsset Allocation and Diversificationchevron-left](https://chartschool.stockcharts.com/table-of-contents/overview/asset-allocation-and-diversification) [NextIntroduction to Optionschevron-right](https://chartschool.stockcharts.com/table-of-contents/overview/options-trading/introduction-to-options) Last updated 5 months ago Was this helpful? Was this helpful? sun-brightdesktopmoon sun-brightdesktopmoon --- # Random Walk vs. Non-Random Walk | ChartSchool | StockCharts.com ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/random-walk-vs.-non-random-walk#introduction) Introduction The great debate continues to rage between random walkers and non-random walkers. Two competing books best represent these theories. Originally written by Burton Malkiel in 1973, _**A Random Walk Down Wall Street**_ has become a classic in investment literature. Malkiel, a Princeton Economist, argues that price movements are largely random and investors cannot outperform the major indices. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FjJrqrUNZ5dswJzFVfVgy%252Frw-1-rwvsnonrw.png%3Falt%3Dmedia%26token%3D8cd46622-66d9-4678-85cc-6fa0ce71e252&width=768&dpr=4&quality=100&sign=4fd9c3ad&sv=2) Random Walk vs Non-Random Walk Written by Andrew W. Lo and A. Craig MacKinlay in 2001, the appropriately entitled [_**A Non-Random Walk Down Wall Street**_ arrow-up-right](https://a.co/d/hhVrK67) provides the counter-argument. Lo, an MIT Finance professor and MacKinlay, a Wharton Finance professor, argue that price movements are not all that random and that predictable components do indeed exist. Let the battle begin! ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/random-walk-vs.-non-random-walk#random_walk_theory) Random Walk Theory With “random walk”, Malkiel asserts that price movements in securities are unpredictable. Because of this random walk, investors cannot consistently outperform the market as a whole. Applying fundamental analysis or technical analysis to time the market is a waste of time that will simply lead to underperformance. Investors would be better off buying and holding an index fund. Malkiel offers two popular investment theories that correspond to fundamental analysis and technical analysis. On the fundamental side, the “Firm-Foundation Theory” argues that stocks have an intrinsic value that can be ascertained by discounting future cash flows (earnings). Investors can also use valuation techniques to ascertain the true value of a security or market. Investors decide when to buy or sell based on these valuations. On the technical side, the “Castle-in-the-Air Theory” assumes that successful investing depends on behavioral finance. Investors must determine the mood of the market - bull or bear. Valuations are not important because a security is only worth what someone is willing to pay for it. Random walk theory jibes with the semi-strong efficient hypothesis in its assertion that it is impossible to outperform the market on a consistent basis. This theory argues that stock prices are efficient because they reflect all known information (earnings, expectations, dividends). Prices quickly adjust to new information and it is virtually impossible to act on this information. Furthermore, price moves only with the advent of new information and this information is random and unpredictable. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252F9p1eRwEYcLSt6jQ3ZIeB%252Frw-2-awr-random.png%3Falt%3Dmedia%26token%3Da46e8eae-c044-40d1-baee-125c70802cfc&width=768&dpr=4&quality=100&sign=ab9991bc&sv=2) Random Prices Example on American States Water Co. Chart In short, Malkiel attributes any outperformance success to lady luck. If enough people try, some are bound to outperform the market, but most are still likely to underperform. ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/random-walk-vs.-non-random-walk#non-random_walk_theory) Non-Random Walk Theory A Non-Random Walk Down Wall Street is a collection of essays offering empirical evidence that valuable information can be extracted from security prices. Lo and MacKinlay used powerful computers and advanced econometric analysis to test the randomness of security prices. Although this book is a heavy read, the findings should be of interest to technical analysts and chartists. In short, this book documents the presence of predictable components in stock prices. Just prior to this book, Andrew Lo wrote a paper for the Journal of Finance in 2000: _Foundations of Technical Analysis: Computational Algorithms, Statistical Inference, and Empirical Implementation_. Harry Mamaysky and Jiang Wang also contributed. The paper's opening remarks say it all: _“Technical analysis, also known as charting, has been part of financial practice for many decades, but this discipline has not received the same level of academic scrutiny and acceptance as more traditional approaches such as fundamental analysis. One of the main obstacles is the highly subjective nature of technical analysis. The presence of geometric shapes in historical price charts is often in the eyes of the beholder. In this paper, we propose a systematic and automatic approach to technical pattern recognition using nonparametric kernel regression and apply this method to a large number of U.S. stocks from 1962 to 1996 to evaluate the effectiveness of technical analysis. By comparing the unconditional empirical distribution of daily stock returns to the conditional distribution conditioned on specific technical indicators, such as head-and-shoulders or double-bottoms, we find that over the 31-year sample period, several technical indicators do provide incremental information and may have some practical value.”_ This paper can be found at [www.nber.orgarrow-up-right](http://www.nber.org/) ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FMEthNBhVJrmp3oB2eIOp%252Frw-3-aapl-hs.png%3Falt%3Dmedia%26token%3D41df10d3-b7e8-45c6-955f-6c5486e6f905&width=768&dpr=4&quality=100&sign=4873749c&sv=2) Example of Head and Shoulders Pattern on Apple Chart ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/random-walk-vs.-non-random-walk#dow_theory) Dow Theory There is also proof that one of the oldest systems around can outperform the market and reduce risk. [Dow Theory](https://chartschool.stockcharts.com/table-of-contents/market-analysis/dow-theory) seeks to buy when both the Dow Transports and the Dow Industrials record new reaction highs and sell or move into treasuries when both record new reaction lows. The move out of stocks and into treasuries greatly reduces risk because one is not exposed to riskier stocks. There have been a few big bad bear markets over the years and preserving capital is one of the keys to investment success. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FAYvAnW3bXH56npilI4cD%252Frw-4-dowtheory.png%3Falt%3Dmedia%26token%3D4aa7c813-5f39-4f4b-93bb-1636a493e493&width=768&dpr=4&quality=100&sign=4692d515&sv=2) Dow Theory Example on Dow Jones Industrial Average Chart Stephen Brown of New York University, William Goetzmann of Yale, and Alok Kumar of the University of Notre Dame published a study on Dow Theory in the [_Journal of Finance_arrow-up-right](http://www.afajof.org/) . The Dow theory system was tested against buy-and-hold for the period from 1929 to 1998. Over the 70-year period, the Dow theory system outperformed a buy-and-hold strategy by about 2% per year. In addition, the portfolio carried significantly less risk. If compared using risk-adjusted returns, the margin of outperformance would be even greater. Over the 18 years from 1980 to 1998, the Dow theory system has underperformed the market by about 2.6% per year. However, when adjusted for risk, the Dow theory system significantly outperformed buy-and-hold over this timeframe. Keep in mind that 18 years is not a long time in the history of the market and this period was during one of the greatest bull markets in history (1982 to 2000). ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/random-walk-vs.-non-random-walk#fat_tails_and_trends) Fat Tails and Trends Historic stock returns are not normally distributed. What does this mean? If one were to measure the height of 1000 people and plot the distribution, this distribution would form the classic bell curve. The most recurring height (value) would be in the middle and the remaining heights would be equally distributed on either side. Furthermore, 68.5% of all values would fall within ±1 standard deviation of the mean, 95.4% would fall within ±2 standard deviations and 99.7% would fall within ±3 standard deviations. The solid black line shows a typical bell curve with a normal distribution. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FzIGvuXWMNCJAFzxbrDfh%252Frw-5-fattails.png%3Falt%3Dmedia%26token%3D98976e35-6750-472d-ab45-8c0a7573cf04&width=768&dpr=4&quality=100&sign=955050c0&sv=2) Illustration of Normal Distribution Bell Curve and Fat Tails Statisticians have found that a distribution of stock returns forms a curve with “fat tails”. In a normal distribution, 99.7% of all these returns would be within ±3 standard deviations of the mean. This, however, is not the case for stock returns. Instead, the distribution has fat tails, shown in the dotted lines on the graphic above. This means a relatively high number of returns fall outside the normal distribution. Some are lower and some are higher. These abnormal returns provide evidence of extended moves, outsized moves or trends. Note that the image above is just a hypothetical example to illustrate a point. ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/random-walk-vs.-non-random-walk#visual_evidence) Visual Evidence Anyone who has followed the stock market for any length of time realizes that trends can and will take hold. To be fair, not all stocks trend and trends do not last forever. However, there are enough asset classes, major indices, sectors, industry groups or stocks out there to ensure that something is trending at some point. The challenge, as always, is to find that trend and ride it. The next three charts show some individual stocks with clear signals and trends. Identifying a simple double top and getting out of Citigroup (C) would have avoided a whole lot of pain. The same can be said for Enron, Worldcom and the few other debacles. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FRLG2AU37GDZhNcUT9vxA%252Frw-6-c-trend.png%3Falt%3Dmedia%26token%3D38933736-47b3-452b-a965-09395741151d&width=768&dpr=4&quality=100&sign=58ec4f36&sv=2) Example of a Double Top Pattern on a Citigroup Chart ExxonMobil (XOM) was choppy in 2009, down the first half of 2010 and then up sharply from July 2010 to February 2011. Catching this one big trend would have made up for quite a few losses. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FCsJ0MZf0NpER17Z3IvPf%252Frw-7-xom-trend.png%3Falt%3Dmedia%26token%3D8458f427-9500-4532-943e-3b83c1ba08ae&width=768&dpr=4&quality=100&sign=9dab17ef&sv=2) Example of a Trend on a Exxon Mobile Chart Pfizer (PFE) shows an example of three sizable trends emerging over a two year period. The stock was up over 50% in 2009, down about 25% in the first half of 2010 and up around 50% from July 2010 to March 2011. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FTW7tKBtmZJi7p8NgnYJL%252Frw-8-pfe-trend.png%3Falt%3Dmedia%26token%3Dc978f3b2-6555-4f6b-81ff-a31a541061e3&width=768&dpr=4&quality=100&sign=16e9bfa6&sv=2) Example of Trends on a Pfizer Chart ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/random-walk-vs.-non-random-walk#conclusion) Conclusion To be perfectly fair, the financial markets have random and non-random aspects. Stocks sometimes trend and react well to patterns or indicators. Stocks sometimes trade choppy and ignore pattern setups or indicator signals. It is the job of the technical analyst or chartist to separate the wheat from the chaff. Chartists must also be able to adapt to ever-changing conditions. Andrew Lo notes that beating the market is not easy, nor easy to maintain. Lo likens the pursuit of above-average returns to that of a company trying to maintain its competitive advantage. After introducing a hot new product, a company cannot just sit back and wait for the money to roll in. To remain above the competition, management must be flexible and look for ways to improve and innovate continuously; otherwise, the competition will overtake them. Money managers, traders, and investors who find ways to outperform the market must remain flexible and innovative. **Just because a method works today does not mean it will work tomorrow.** In an interview with _Technical Analysis of Stocks and Commodities_, Lo sums it up by stating: _“The more creativity you bring to the investment process, the more rewarding it will be. The only way to maintain ongoing success, however, is to constantly innovate. That's much the same in all endeavors. The only way to continue making money, to continue growing and keeping your profit margins healthy, is to constantly come up with new ideas.”_ ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/random-walk-vs.-non-random-walk#further_study) Further Study [**The Stock Market Barometer**arrow-up-right](https://a.co/d/cJnqxcW) William Hamilton [**Far from Random**arrow-up-right](https://www.amazon.com/Far-Random-Investor-Behavior-Analysis/dp/1576603237/ref=sr_1_1?crid=1P0S97GRRQRQG&dib=eyJ2IjoiMSJ9.lSn_4M8eXDIl2NNDVUYGrf45GZvIcwoWPRg5pfjx95l1ASSycZiTHrGxVdNgewvN6GahA3vT_UouqBTqZR54w_Vk7KNgutqF-LmuijJELj6uXWV6u3QbIk0AqIIEynPjgjg2KAXnikSplnsqjMLAbbCUBdryWSJ0C4DgTcsOtdX2BztwjkWgQAqO2sWo5ovq_NpYWGG--2FX-gBaqZ1Aw1XmMuqG5vf8ekmDVE3TWuk.DO-gX8HHMl7PQ6gePQcMaAIfZM6XQmW2aHsUXacHZ0g&dib_tag=se&keywords=far+from+random&qid=1720546468&s=books&sprefix=far+from+random%2Cstripbooks%2C111&sr=1-1) Richard Lehman [PreviousFundamental Analysischevron-left](https://chartschool.stockcharts.com/table-of-contents/overview/fundamental-analysis) [NextAsset Allocation and Diversificationchevron-right](https://chartschool.stockcharts.com/table-of-contents/overview/asset-allocation-and-diversification) Last updated 2 months ago Was this helpful? * [Introduction](https://chartschool.stockcharts.com/table-of-contents/overview/random-walk-vs.-non-random-walk#introduction) * [Random Walk Theory](https://chartschool.stockcharts.com/table-of-contents/overview/random-walk-vs.-non-random-walk#random_walk_theory) * [Non-Random Walk Theory](https://chartschool.stockcharts.com/table-of-contents/overview/random-walk-vs.-non-random-walk#non-random_walk_theory) * [Dow Theory](https://chartschool.stockcharts.com/table-of-contents/overview/random-walk-vs.-non-random-walk#dow_theory) * [Fat Tails and Trends](https://chartschool.stockcharts.com/table-of-contents/overview/random-walk-vs.-non-random-walk#fat_tails_and_trends) * [Visual Evidence](https://chartschool.stockcharts.com/table-of-contents/overview/random-walk-vs.-non-random-walk#visual_evidence) * [Conclusion](https://chartschool.stockcharts.com/table-of-contents/overview/random-walk-vs.-non-random-walk#conclusion) * [Further Study](https://chartschool.stockcharts.com/table-of-contents/overview/random-walk-vs.-non-random-walk#further_study) Was this helpful? sun-brightdesktopmoon sun-brightdesktopmoon --- # Asset Allocation and Diversification | ChartSchool | StockCharts.com [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/asset-allocation-and-diversification#introduction) What Is Asset Allocation? ---------------------------------------------------------------------------------------------------------------------------------------------------------- The term “asset allocation” describes the money management strategy that designates how capital should be distributed within an investment portfolio. Generally, this involves identifying how much of the portfolio should be distributed into various asset classes or broad investments such as stocks, bonds, commodities, and cash. Asset allocation aims to optimize the mix of the investments into different asset classes to _maximize_ the return of the investment portfolio while _minimizing_ the potential risk. This optimization is based on your timeframe, risk tolerance, and long-term investment goals. Evidence suggests that certain asset classes perform better or worse depending on economic conditions, market forces, government policy, and political influence. An asset allocation strategy aims to identify these conditions and allocate resources appropriately. A concept that is closely associated with asset allocation is “diversification.” In practice, these terms are often used interchangeably. **Asset allocation** is principally concerned with allocating capital into different asset classes. For example, a typical asset allocation strategy might dictate that your portfolio should have 50% invested in stocks, 30% in bonds, 10% in commodities, and 10% in cash. **Diversification** is typically associated with allocating capital within asset classes such as stocks, bonds, and commodities. For example, within the stock allocation of a portfolio, you could allocate 50% to large-cap stocks, 20% to mid-cap stocks, 10% to small-cap stocks, 10% to international stocks, and 10% to emerging market stocks. The concept of diversification involves the distribution of assets within individual asset classes. Because risk is distributed among the asset classes of the overall portfolio, diversification reduces risk within each asset class. Below is a hypothetical example of asset allocations in a typical vs a diversified portfolio. ![Illustration displaying a hypothetical example of asset allocations in a typical versus diversified portfolio](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FlkypCkr4RTL8nMpPakUj%252Faad-figure1.png%3Falt%3Dmedia%26token%3D0abf72db-4e50-41df-99a3-bb79c4e83808&width=768&dpr=4&quality=100&sign=84684303&sv=2) Illustration of asset allocations in a typical versus a diversified portfolio [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/asset-allocation-and-diversification#history_of_asset_allocation) History of Asset Allocation --------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Utilizing asset allocation strategies as risk management is not a new concept. The idea of _“not putting all of your eggs in one basket”_ is something we learn as children and has been around for thousands of years. Yet, the term _asset allocation_ did not exist within the investment community until recently. Even before the advent of modern financial markets, people understood that one's assets should be divided among different classes, such as land, ownership of a business, and reserves (cash). That conception of asset allocation as a fact of life stayed relatively unchanged until the middle of the 20th Century. The diagram below represents early forms of portfolio diversification. ![An illustration showing early forms of portfolio diversification](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FUCKGb6KF2laBBU5zJGV3%252Faad-figure2.png%3Falt%3Dmedia%26token%3D76d0d563-366f-46e1-bb56-6e3870880623&width=768&dpr=4&quality=100&sign=c9d18fe3&sv=2) Illustration of early forms of portfolio diversification So, what changed to create the asset allocation models we are familiar with today? In 1952, an American economist named Harry Markowitz wrote a paper in the Journal of Finance entitled _“Portfolio Selection,”_ in which he developed the first mathematical model emphasizing volatility reduction in a portfolio by combining investments with different patterns of returns. This paper was the basis for the standard in portfolio management known as _“Modern Portfolio Theory.”_ Before Markowitz's contribution to portfolio asset allocation, diversification focused on the return and risk characteristics of individual securities irrespective of how the returns correlated with one another. After Markowitz created his mathematical models for portfolio construction, his ideas quickly became accepted in academic circles. Much research was published verifying the benefits of asset allocation, and it rapidly became popular among financial professionals. In 1974, the Employee Retirement Income Security Act (ERISA) was enacted as a federal law establishing minimum standards for investment allocations in pension plans. After ERISA became law, asset allocation and modern portfolio theory became standard practices for portfolio managers required to be in compliance with the Act when allocating investor capital in pension plans. [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/asset-allocation-and-diversification#modern_portfolio_theory_mpt_concepts_and_assumptions) Modern Portfolio Theory (MPT) Concepts and Assumptions ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Modern Portfolio Theory (MPT) has significantly impacted how portfolio managers construct investment portfolios. The concept of MPT is reasonably straightforward. However, it requires the investor to make several assumptions about the financial markets; additionally, the mathematical equations used to calculate correlation and risk can be somewhat complex. The basic premise of MPT is simple: by combining securities from different asset classes together that are not highly correlated, you can reduce the volatility of the portfolio and increase risk-adjusted performance. In other words, combining assets that aren't correlated will produce the most efficient portfolio, one that delivers the greatest return for a given amount of risk. Asset returns don't have to be negatively correlated or non-correlated to provide diversification benefits. They just cannot be perfectly correlated. For example, in the chart below, international stocks (represented by the iShares MSCI EAFE Index) are compared to US domestic stocks (represented by the S&P 500 index). Using the [Correlation Coefficient indicator](https://chartschool.stockcharts.com/table-of-contents/technical-indicators-and-overlays/technical-indicators/correlation-coefficient) , you can see that the correlation is positive for most of the five-year period. However, it isn't perfectly correlated (a correlation coefficient of 1.0). ![Chart from StockCharts.com showing the correlation between US and international stocks using the Correlation Coefficient indicator](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FBA2KFRDGEmh2XAsfgjsZ%252Faad-figure3.png%3Falt%3Dmedia%26token%3D30cbaa02-172b-4028-83d3-64ab26115a9c&width=768&dpr=4&quality=100&sign=a927993f&sv=2) The Correlation Coefficient indicator shows a positive correlation between US and international stocks. There are periods of low correlation and even negative correlation within this period. So, suppose you invested in US domestic stocks and international stocks. In that case, the overall volatility of your portfolio can be decreased since correlation varies enough between the two asset classes to provide meaningful diversification. The concept of MPT illustrates that adding a volatile asset to a portfolio can still decrease overall volatility if the returns have differences in correlation. This is an intriguing concept—that overall portfolio volatility can be decreased by combining asset classes that have returns with higher volatility. The assumption is that by combining asset classes that aren't perfectly correlated, when one asset is declining in value, another asset in the portfolio increases in value over the same period. So even if all asset classes are highly volatile by themselves, when combined together in one portfolio, the volatility is reduced. The following chart shows an extreme example of negative correlation: the US Dollar Index ($USD) compared to the price of Gold ($GOLD) over the last five years. If an investor invested in both these volatile assets, the portfolio's overall volatility would have been lowered significantly due to the negative correlation. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FlKTEZpKQM7MvZm4r2Lqy%252Faad-figure4.png%3Falt%3Dmedia%26token%3D88ee3bde-c0dc-4312-8658-f9c8c3355fbb&width=768&dpr=4&quality=100&sign=bc4a03e2&sv=2) As mentioned earlier, MPT requires that the investor make certain assumptions about the financial markets in order to calculate the theory's potential benefits. The principal assumptions are: * Financial markets are efficient. * Market returns are randomly distributed. * Investors are rational. These assumptions are necessary for accurately calculating standard deviation and correlation using a normal distribution or bell curve. Using a normal distribution function (which defines risk as the standard deviation of returns), risk and correlation can be mathematically calculated for individual assets and portfolios. However, if, in reality, markets are not entirely efficient, then asset returns don't necessarily follow a normal distribution, and the correlation and risk calculations used in MPT may be flawed. With the extreme market volatility seen during the “dot-com” bubble of the early 2000s and the financial crisis of 2008–2009, the assumptions used in MPT have been highly scrutinized. [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/asset-allocation-and-diversification#diversification_and_asset_allocation_definitions) Diversification and Asset Allocation Definitions --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Although the assumptions of Modern Portfolio Theory are most likely flawed to a certain extent, asset allocation using MPT is still a proven method for reducing volatility in an investment portfolio. A simple example using two separate investors can help explain the value of diversification. Our first investor, investor A, has his entire portfolio invested in just one company's stock. By comparison, investor B has her portfolio invested equally in the stocks of 30 different companies. Both investors carry the risk that the entire stock market could go down and negatively affect their respective portfolios. However, investor A also has risks associated with the one company whose stock he owns. If something specific happens to that one company (i.e., an earnings disappointment, product recall, investor fraud, etc.), investor A could lose a significant portion of his investment. In contrast, if this exact scenario happened to one of the thirty stocks in investor B's portfolio, it would not be devastating to the value of the whole portfolio. In a worst-case scenario, investor A could lose his entire investment if the company goes out of business. Investor B would only lose 1/30th of her portfolio. The preceding example identifies the two types of risk associated with investing in the financial markets. The first type of risk is associated with the entire market or **systematic risk**. Systematic risk affects all of the stocks in the entire market together, as a whole, and cannot be diversified away within that market. For example, if the entire U.S. economy is weakening, it will affect all stocks within the S&P 500 to some extent. Diversifying your portfolio with other stocks within the S&P 500 will not significantly decrease the overall risk in the portfolio because other stocks share the same characteristic of being stocks. The other type of risk is the risk specifically associated with the individual security, or non-systematic risk. Non-systematic risk is easily diversifiable, as shown by the earlier example of diversification. If you had invested equally in the stocks of 30 different companies, and one of those companies went out of business, the loss to the overall portfolio would only be 3.3%. [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/asset-allocation-and-diversification#asset_allocation_strategies) Asset Allocation Strategies --------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Asset Allocation can be applied to portfolio management in different ways. Most asset allocation techniques fall within two distinct strategies—_strategic asset allocation_ and _tactical asset allocation_. ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/asset-allocation-and-diversification#strategic-asset-allocation) Strategic Asset Allocation This is a more traditional approach to asset allocation that utilizes the tenets and assumptions of Modern Portfolio Theory in a passive investment style. The goal of strategic asset allocation is to create a portfolio based on the investor's investment goals and risk tolerances. Changes in the investment portfolio are usually only made when the portfolio becomes “unbalanced” due to fluctuations in the market or the investor's risk/reward profile changes, requiring an adjustment in the allocation. Making changes to the portfolio when it becomes “unbalanced” is consistent with a “value investing” philosophy that chooses investments due to their perceived low valuation versus an estimated intrinsic value. For example, if the international stock allocation of the portfolio underperforms the domestic stock allocation, then, over time, the international allocation will make up a smaller portion of the overall portfolio because fewer unrealized gains are contributing to the total dollar investment. To reallocate the portfolio and return to the original asset mix percentages, you must sell some domestic stock and purchase more international stock. This is consistent with value investing, as you would buy stock that is out of favor (possibly undervalued) while selling stock that is in favor (perhaps overvalued). ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/asset-allocation-and-diversification#tactical-asset-allocation) Tactical Asset Allocation This is similar to strategic asset allocation but with a few noteworthy differences. Like strategic asset allocation, tactical asset allocation is based on the assumptions of Modern Portfolio Theory. However, unlike strategic asset allocation, it uses a more active investment approach involving the concepts of [relative strength](https://chartschool.stockcharts.com/table-of-contents/technical-indicators-and-overlays/technical-indicators/price-relative-relative-strength) , [sector rotation](https://chartschool.stockcharts.com/table-of-contents/market-analysis/sector-rotation-analysis) , and momentum. Instead of reallocating the portfolio when it becomes unbalanced due to market fluctuations, the allocation is purposely over-weighted in market sectors that outperform the overall market. A tactical asset allocation strategy differs from value investing in that instead of buying underperforming stocks, you purchase or add to positions that are outperforming the broad market. So, in a tactically allocated portfolio based on relative strength, you can be significantly concentrated in particular market sectors. The idea behind this type of asset allocation is to remain somewhat diversified but concentrate more of the portfolio on improving areas of the economy. Studies have shown that when one sector of the economy is outperforming the overall market, there is a tendency for that sector to outperform for an extended period. The following chart shows the performance of the 11 sector ETFs (representing the 11 S&P 500 sectors) compared to the performance of the S&P 500 index over a one-year timeframe. ![PerfChart from StockCharts showing the performance of the 11 S&P sector ETFs. This chart can help to identify outperforming and underperforming sectors to help investors choose how they want to invest.](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252F8lfk61uCKd2AeBAqdUvA%252Fasset-allocation-perfchart.png%3Falt%3Dmedia%26token%3D0ef5d130-54e3-49d6-b3c4-185a6eee3971&width=768&dpr=4&quality=100&sign=2b29bc3d&sv=2) PerfChart of the 11 sector ETFs. The top-performing sectors are Communication Services and Technology. The two worst-performing sectors are Real Estate and Staples. An investor using a tactical asset allocation strategy can use this information to choose investments that outperform the broader market and avoid investments that underperform the broader market. [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/asset-allocation-and-diversification#limitations_of_asset_allocation) Limitations of Asset Allocation ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Even with all of its benefits, asset allocation as a risk management strategy has limitations. Awareness of these limitations will help investors realize when other tools may be used to minimize portfolio risk. One major criticism of asset allocation is that “black swan” events (unexpected events with catastrophic consequences) seem to occur more often in the financial markets than would be statistically expected if the markets followed a normal distribution. If this is true, using standard deviation as a measure of risk may be misleading, and statistical correlation between asset classes may be distorted. Also, correlation tends to increase between asset classes during a crisis period, which would make asset allocation less useful as a risk management strategy precisely when it is needed most. Another criticism of asset allocation is that it does not tell the investor when to buy or sell a security. Buy and sell decisions are based on reallocating the portfolio (usually arbitrarily) when it appears to need rebalancing due to the investor's risk parameters, without regard to changing market conditions. Tactical asset allocation strategies can address some of the timing of buy and sell decisions, which are usually not part of strategic asset allocation investment decisions. Finally, asset allocation as a risk management tool does not address the risk of portfolio drawdown. Drawdown is defined as the minimum value of a single investment or investment portfolio reached following a previous peak in value. During secular bear markets, portfolio drawdown can be significant. Simply spreading one's investments across multiple asset classes may not provide adequate risk protection. [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/asset-allocation-and-diversification#using_technical_analysis_to_complement_asset_allocation_and_manage_risk) Using Technical Analysis to Complement Asset Allocation and Risk Management ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Many technical analysis tools can be used with asset allocation strategies to provide a comprehensive risk management plan for an investment portfolio. Fortunately, utilizing protection strategies available through technical analysis can minimize many of the shortcomings of traditional asset allocation. One of the most valuable tools available for risk management is the protective stop. Stops are used to exit a position when a predefined profit target is achieved, or a predefined loss limit is reached. Using stops eliminates many of the pitfalls of asset allocation since it minimizes drawdown to a predefined amount, no matter what effect outside influences have on the portfolio. For example, the correlation between different asset classes became uncharacteristically high during the recent financial crisis. Due to this increase in correlation, traditional asset allocation strategies were ineffective from a risk management perspective. However, protective stops placed at predetermined levels would protect investors from a catastrophic loss. Stops placed before the severe downturn in the market would have been executed at levels acceptable to the investor ahead of time and provided the risk management needed to keep the portfolio drawdown from being excessive. The chart below shows how a simple moving average stop loss strategy would have worked well as a risk management tool during the last two major bear markets. This hypothetical example shows the S&P 500 SPDRS (SPY) with a 20-period simple moving average over 20 years. If an investor had sold or decreased his position (stopped out) when it went below the 20-period moving average and then bought it back when it went back above the 20-period moving average, portfolio drawdown would have decreased significantly. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252F48U07eCn1HcIbetO1ZlM%252Faad-figure6.png%3Falt%3Dmedia%26token%3D38324781-f4bb-4578-8e3b-3f53254a9a0b&width=768&dpr=4&quality=100&sign=8b410f3e&sv=2) Another valuable use of Technical Analysis is to calculate potential trade entry and exit points before you enter the position. Predefining where entry and exit points should be can provide information on the potential reward and risk of each position. This helps the investor identify attractive trade setups and investment opportunities prior to committing capital. [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/asset-allocation-and-diversification#other_risk_management_considerations) Other Risk Management Considerations --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- One question often asked is how much capital you should risk in each position. Using a fundamental asset allocation approach, you would diversify across multiple asset classes based on individual timeframes and risk tolerance. After deciding on an appropriate asset mix, the portfolio would remain fully invested throughout the determined period, regardless of changing market conditions. Using this passive strategy, the portfolio could simply “ride out” the corrections in the market and hopefully regain any losses during market advances. Many methods are available to determine individual position size for actively managed portfolios. These include comprehensive methods such as the _Kelly criterion_ (or _Optimal f_) and the _Risk of Ruin Formula_, or a simple rule of thumb like not risking more than 2% of the entire portfolio on any one position. For example, if you have a $250,000 portfolio, no more than $5,000 should be invested in any one security under the 2% max position size rule. Exchange Traded Funds (ETFs) are another excellent tool for investors who want to actively manage their investment portfolios. ETFs can be traded like individual securities. However, they contain a basket of securities that provides diversification within the ETF. When choosing ETFs, due diligence is required by the investor since some ETFs are well diversified and others can be highly concentrated in a few positions. Also, some ETFs carry other risks, such as leverage and tracking errors. One last consideration on risk is deciding how much of the portfolio should be actively traded and how much should simply be allocated to passive, long-term investments. This is why developing a rules-based trading system and maintaining a trading journal to track your performance are essential components of active trading or investing. If you are just starting out, you should only trade the amount of your portfolio you are willing and able to lose. Once you gain confidence as a trader and can quantify your abilities with a bona fide track record, you may begin managing an increasingly larger portfolio segment. One of the most difficult aspects of trading is managing your emotions and objectively critiquing your own trading abilities. If you cannot consistently outperform a buy-and-hold strategy, actively managing a larger portion of your portfolio is probably not a good idea. If you do not enjoy trading and cannot separate your emotions from your trading, then it may make more sense to let a professional manage your investments or invest passively using mutual funds or ETFs. Being honest will also help you develop a trading strategy that fits your personality. Each individual trader or investor is different, and while one style of trading may be appropriate for one person, it may not be appropriate for another. A key component to developing a strategy is that it should be easy for the trader to conceptualize and follow the trading plan. Most of all, it needs to be enjoyable for the trader and not conflict with his or her core values. [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/asset-allocation-and-diversification#for_more_information) For More Information ------------------------------------------------------------------------------------------------------------------------------------------------------------- [Gatis Roze's 3-Part Series on Asset Allocationarrow-up-right](https://stockcharts.com/articles/journal/2015/01/my-methodology-allocation-beats-asset-allocation.html) [PreviousRandom Walk vs. Non-Random Walkchevron-left](https://chartschool.stockcharts.com/table-of-contents/overview/random-walk-vs.-non-random-walk) [NextOptions Tradingchevron-right](https://chartschool.stockcharts.com/table-of-contents/overview/options-trading) Last updated 1 year ago Was this helpful? * [What Is Asset Allocation?](https://chartschool.stockcharts.com/table-of-contents/overview/asset-allocation-and-diversification#introduction) * [History of Asset Allocation](https://chartschool.stockcharts.com/table-of-contents/overview/asset-allocation-and-diversification#history_of_asset_allocation) * [Modern Portfolio Theory (MPT) Concepts and Assumptions](https://chartschool.stockcharts.com/table-of-contents/overview/asset-allocation-and-diversification#modern_portfolio_theory_mpt_concepts_and_assumptions) * [Diversification and Asset Allocation Definitions](https://chartschool.stockcharts.com/table-of-contents/overview/asset-allocation-and-diversification#diversification_and_asset_allocation_definitions) * [Asset Allocation Strategies](https://chartschool.stockcharts.com/table-of-contents/overview/asset-allocation-and-diversification#asset_allocation_strategies) * [Strategic Asset Allocation](https://chartschool.stockcharts.com/table-of-contents/overview/asset-allocation-and-diversification#strategic-asset-allocation) * [Tactical Asset Allocation](https://chartschool.stockcharts.com/table-of-contents/overview/asset-allocation-and-diversification#tactical-asset-allocation) * [Limitations of Asset Allocation](https://chartschool.stockcharts.com/table-of-contents/overview/asset-allocation-and-diversification#limitations_of_asset_allocation) * [Using Technical Analysis to Complement Asset Allocation and Risk Management](https://chartschool.stockcharts.com/table-of-contents/overview/asset-allocation-and-diversification#using_technical_analysis_to_complement_asset_allocation_and_manage_risk) * [Other Risk Management Considerations](https://chartschool.stockcharts.com/table-of-contents/overview/asset-allocation-and-diversification#other_risk_management_considerations) * [For More Information](https://chartschool.stockcharts.com/table-of-contents/overview/asset-allocation-and-diversification#for_more_information) Was this helpful? sun-brightdesktopmoon sun-brightdesktopmoon --- # Options Pricing and Options Chains | ChartSchool | StockCharts.com You want your options trades to be profitable, so how do you choose an options contract to buy (or sell) that will maximize your odds of profiting while minimizing your risk? There are many factors to consider when evaluating an options contract, which can make the process feel daunting. In this article, we'll talk about the variables that help determine the price (premium) of an options contract. We'll also look at an options chain, which is an invaluable tool for gathering information about the available options contracts for a specific security. [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/options-trading/options-pricing-and-options-chains#options-trade-components) Options Trade Components ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- First, let's review the components of an options trade. A buy order for an options contract might look something like: _**1 NVDA October 18, 119 call for $6.35**_ The six components of this trade are as follows: * **Quantity**: _1_ options contract is being purchased, representing 100 shares of the underlying asset. * **Underlying Asset**: _NVDA_ is the stock that will be bought or sold if the options contract is exercised. * **Expiration Date**: _October 18_ is the expiration date of the contract; if the contract buyer wishes to exercise their option and buy 100 shares at the strike price, it must be done by October 18th. * **Strike Price**: _119_ is the strike price of the contract; this is the amount the contract buyer will pay per share of NVDA if they exercise the contract. * **Contract Type**: _Call_ is the type of options contract, which gives the contract buyer the right to _buy_ NVDA shares at the strike price; if they wanted to buy the right to _sell_ NVDA shares at the strike price, they would purchase a _put_ option instead. * **Premium**: _$6.35_ is the per-share premium/price of the options contract. Note: each contract controls 100 shares of the underlying asset, so the cost would be $635 plus any transaction fees. One of the key pieces of information you need to provide when placing an options trade order is the premium. Buyers pay the premium in order to have the option to exercise the contract later, and sellers collect the premium in return for taking on the risk that they'll have to fulfill the contract terms when the buyer exercises the contract, even if that results in a loss for the seller. Choosing the right premium is key to making a successful options trade. circle-info **Learn More:** [Introduction to Options](https://chartschool.stockcharts.com/table-of-contents/overview/options-trading/introduction-to-options) [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/options-trading/options-pricing-and-options-chains#options-premiums) Options Premiums ------------------------------------------------------------------------------------------------------------------------------------------------------------------- Because options contract sellers make money by collecting the premium from the options contract buyer, the premium tends to increase as the seller's risk of losing money increases. If they take on high risk, they demand a high premium to offset that risk. Therefore, any factors that tend to increase the risk of the seller losing money will likely result in higher premiums for the options contract. The three main variables that impact the price (premium) of an options contract are: * **Moneyness**: the relationship between the underlying asset's price and the strike price * **Implied Volatility**: how much the security's price is expected to move over a specific time period * **Expiration Date**: the number of days left until the contract expires Let's take a closer look at each of these important concepts. ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/options-trading/options-pricing-and-options-chains#moneyness) Moneyness The "moneyness", or the relationship between the strike price of the options contract and the price of the contract's underlying asset, plays a huge part in the cost and outcome of an options trade. The moneyness of an option is determined by whether the strike price of the option is higher, lower, or the same as the price of the underlying asset. The terms “in the money” (ITM), “out of the money” (OTM), and “at the money” (ATM) are often used to describe this relationship. **In the Money (ITM)** describes an option with intrinsic value for the buyer. If you exercise an ITM contract, you will get a better price than the current stock price. It’s different for call and put options: * A call option is ITM when its strike price is lower than the price of the underlying asset. The buyer will be able to buy shares at a lower price when exercising the contract. * A put option is ITM when its strike price is higher than the price of the underlying asset. The buyer will be able to sell shares at a higher price when exercising the contract. **Out of the Money (OTM)** describes an option with no intrinsic value for the buyer. If you exercise an OTM contract, you will get a worse price than the current stock price: * A call option is OTM when its strike price is higher than the price of the underlying asset. The buyer will not want to purchase shares for more than the current share price, so will likely let the option expire worthless. * A put option is OTM when its strike price is lower than the price of the underlying asset. The buyer will not want to sell shares for less than the current share price, so will likely let the option expire worthless. **At the Money (ATM)** describes an option with a strike price that is the same, or very close to, the price of the underlying asset. How does the moneyness affect the premium? If the options contract buyer exercises the option while it's in the money, the seller will lose money. Therefore, the seller requires a higher premium to make it worthwhile to take on the risk of entering a contract that is favorable (in the money) for the buyer. The greater the difference between the two prices, the higher the seller's risk and the higher the premium. But moneyness is not the only factor in options pricing, because the price of the underlying asset (and therefore the moneyness) can change before the buyer exercises the options contract or the contract expires. ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/options-trading/options-pricing-and-options-chains#implied-volatility) Implied Volatility The volatility, or how much the underlying asset's price changes over time, can also have an impact on the premium. There are two types of volatility: historical and implied. Historical volatility is how much a stock’s price has deviated from its average price over a specific period, usually one year. You can compare the historical volatility of different stocks to get a general idea of how much a stock’s price moves over one year. Implied volatility (IV) is what the market expects a stock's volatility to be in the future. It gives you an idea of how much the market price could move over a specific period. However, that move could be in either direction. For example, an options contract with an IV of 52% means that, all else equal, the stock price could move up or down by 52%. How does the Implied Volatility (IV) affect the premium? When there is high volatility, both the buyer and seller are taking a bigger risk. If the security is prone to large price swings, there is a greater risk that the underlying asset's price will change enough to affect the moneyness of the options contract. The higher the IV, the higher the risk. The seller requires a higher premium for taking on that greater risk, and the buyer may be willing to pay a higher premium in hopes of a greater reward. Just like the moneyness, the implied volatility is not static. It tends to decrease as the options contract gets closer to its expiration date. ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/options-trading/options-pricing-and-options-chains#expiration-date) Expiration Date All things being equal, an options contract with a shorter time to expiration will usually cost less to buy than one with an expiration date that's further out. This is, quite simply, because there isn't much time for the underlying asset's price to change significantly enough to affect the moneyness of the options contract. Everybody involved has a good idea of where things are likely to stand when the contract expires. Longer-term options, those with more than 30 days to expiration, provide more time for the underlying asset to make a bigger price move, potentially changing the moneyness. This higher risk typically comes with a higher premium. While this is generally true, remember that the risk to the seller is ultimately what is driving the price of the options contract. Regardless of how close to expiration the options contract is, if it's in the money, and its moneyness is unlikely to change before the expiration (due to a decrease in its Implied Volatility), then the seller's risk of loss is high, and the seller will demand a higher premium to offset that risk. As shown in the previous example, all three variables play a role in determining the pricing of the options contract, and they all should be taken into consideration when assessing a contract's premium. **Conditions Resulting in Higher Premiums** **Conditions Resulting in Lower Premiums** **Moneyness** In the Money contracts Out of the Money contracts **Implied Volatility** High IV Low IV **Expiration Date** More than 30 days to expiration Less than 30 days to expiration [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/options-trading/options-pricing-and-options-chains#options-liquidity) Options Liquidity --------------------------------------------------------------------------------------------------------------------------------------------------------------------- Options pricing is a major factor in choosing which options contract to buy or sell, but it is not the only factor. It is also important to consider the liquidity of an options contract. If traders have little interest in an options contract with a particular strike price and expiration date, then it may be a challenge to buy or sell that options contract in a timely manner and at a fair price. Just like when purchasing stocks using technical analysis, it is recommended to look for more liquid options contracts to invest in. To assess the liquidity of an options contract, look at the bid/ask sizes, the volume, and the open interest for a contract. These concepts are discussed in the Options Chains section below. [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/options-trading/options-pricing-and-options-chains#options-chains) Options Chains --------------------------------------------------------------------------------------------------------------------------------------------------------------- An options chain is a table that summarizes key information about available options contracts for a specific stock or other asset. It enables you to quickly assess the premium, moneyness, implied volatility, and liquidity for options contracts of various expiration dates and strike prices. When you first view an options chain, it can be overwhelming. There are many data points to consider, and they are constantly changing. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252Fg7kLPFuxYtMsORqEpizg%252FOptionsChain-Example.png%3Falt%3Dmedia%26token%3D804bb109-f9f7-491a-b988-edf0bc4b7088&width=768&dpr=4&quality=100&sign=a1fe56ba&sv=2) circle-check **Cool Tip:** StockCharts' options chains can be laid out with call and put data for a specific strike price shown side by side (Straddle View), or with calls and puts in separate tables (List View). You can also use the Strike Range slider above the table to limit the range of strike prices shown. Armed with our new knowledge about moneyness, implied volatility, time to expiration, and liquidity, let's look at the different components of an options chain. ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/options-trading/options-pricing-and-options-chains#contract-expiration-date) Contract Expiration Date The expiration date of the contract can be changed on a StockCharts options chain using the dropdown menu above the table. The number in parentheses indicates the number of days until that contract expires. circle-exclamation **Note:** Expiration dates with a (W) after them are weekly option contracts. Most options contracts are monthly, but the shorter-term weekly options contracts can be used to take advantage of price moves within a specific week. ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/options-trading/options-pricing-and-options-chains#moneyness-1) Moneyness If an options contract is in the money (the difference between the strike price and the stock's price is favorable to the buyer), the data will be highlighted in green in the StockCharts options chain. This allows you to see the moneyness of individual options contracts at a glance. In the money contracts tend to have higher premiums than out of the money contracts. ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/options-trading/options-pricing-and-options-chains#strike-price) Strike Price The Strike Price is the per-share price at which the buyer will buy (for a call option) or sell (for a put option) the underlying shares when exercising the options contract. This column is highlighted in grey in the StockCharts options chain. ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/options-trading/options-pricing-and-options-chains#bid-ask-data) Bid/Ask Data The bid/ask values in the table show the range of premiums available for that contract. The **Bid** is the highest premium a buyer is willing to pay for that options contract, while the **Ask** is the lowest price a seller is willing to sell the same contract for. The **Mid** price is just the midpoint between the bid and ask. The **Bid Size** shows the number of options contracts investors are willing to buy at the bid price, while **Ask Size** shows the number of options contracts available for sale at the ask price. These numbers show the supply and demand levels for a specific options contract, and can help options traders choose a more liquid contract. circle-check **Cool Tip:** If the Bid Size and Ask Size are not shown on your StockCharts options chain, make sure the **Show All Columns** checkbox is checked. ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/options-trading/options-pricing-and-options-chains#volume-and-open-interest) Volume and Open Interest The **Vol** column shows the trading volume for that particular options contract on the current trading day. The **OI** (open interest) column indicates the total number of active contracts in existence for that options contract. A relatively high open interest means the contract is more liquid. Like bid/ask data, both of these measures help traders choose a more liquid options contract to invest in. ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/options-trading/options-pricing-and-options-chains#implied-volatility-iv) Implied Volatility (IV) The **IV** column indicates how much the stock price is expected to change over a specific time period (typically one year). Remember that this measure indicates how far it may move, but not in which direction. If the IV is 17%, the price could go up 17% or go down 17%. Options contracts with high implied volatility tend to be riskier than those with low implied volatility. ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/options-trading/options-pricing-and-options-chains#greeks) Greeks The "greeks" are calculated values that measure the sensitivity of options contract premiums to changes in various market factors, such as movement in the underlying asset's price, implied volatility, time to expiration, and interest rates. The **Delta** column shows the expected ratio between the change in the option premium and the change in stock price. For example, if the delta is 0.5, that means the premium price is expected to increase 50 cents for each dollar the stock price increases. Some traders feel that options contracts with a high delta are more likely to be in the money at expiration. The **Theta** column shows the time decay of the options premium as it gets closer to expiration. It represents the cents/day that the premium is expected to be reduced by. The theta tends to get higher as you get closer to the expiration date, as the premium starts to drop more rapidly. The **Gamma** column shows the expected ratio between the change in Delta and the change in stock price. It essentially measures the volatility of Delta. The highest gamma values are typically seen when the option is at the money and close to expiration. Some traders feel that options contracts with a high gamma have a lower chance of expiring in the money. The **Vega** column shows the expected increase or decrease in the option's premium based on a 1% change in implied volatility (IV). This value tends to be higher when the contract is further away from its expiration date. The **Rho** column shows the expected increase or decrease in the option's premium based on a 1% change in the risk-free interest rate. circle-check **Cool Tip:** If only the Delta is shown on your StockCharts options chain, make sure the **Show All Columns** checkbox is checked in order to view the other greeks. [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/options-trading/options-pricing-and-options-chains#the-bottom-line) The Bottom Line ----------------------------------------------------------------------------------------------------------------------------------------------------------------- Options contract premiums are in large part determined by the risk the seller is taking on when entering into an options contract. The higher the risk of loss to the seller, the higher the premium. Three main variables that impact the premium for an options contract are the moneyness of the contract, the implied volatility of the option, and the number of days until the contract expires. Liquidity of the options contract is also an important factor to consider when making options trades, as contracts with low liquidity may be more difficult to buy or sell in a timely manner and at a fair price. Options traders use an options chain to research the moneyness, implied volatility, liquidity, and other important info about available options contracts for a specific underlying asset. Options chains are invaluable tools for choosing the right options contract at the right price. [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/options-trading/options-pricing-and-options-chains#researching-options-contracts-with-stockcharts) Researching Options Contracts with StockCharts ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/options-trading/options-pricing-and-options-chains#viewing-options-chain-information) Viewing Options Chain Information The Options Summary shows options chain information for US stocks. To access the Options Summary, choose Options from the Charts & Tools menu, then enter the symbol you want to view options info for. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FwcfrCdKV8wfSjOSBGghr%252FOptionsSummary.png%3Falt%3Dmedia%26token%3D0ae7060d-1031-41d6-aef9-a7021916ef4b&width=768&dpr=4&quality=100&sign=1a40a497&sv=2) [Click here to view a live version of this Options Summaryarrow-up-right](https://stockcharts.com/freecharts/options/?sym=gm&view=straddle#) Options chain information is also available on the Options tab in both StockChartsACP and the SharpCharts Workbench. In addition, members can view options information for the symbols in their ChartList using Options View. circle-info **Learn More:** [Options Summary](https://help.stockcharts.com/charts-and-tools/research-tools/options-summary) [PreviousIntroduction to Optionschevron-left](https://chartschool.stockcharts.com/table-of-contents/overview/options-trading/introduction-to-options) [NextOptions Trading Strategieschevron-right](https://chartschool.stockcharts.com/table-of-contents/overview/options-trading/options-trading-strategies) Last updated 5 months ago Was this helpful? * [Options Trade Components](https://chartschool.stockcharts.com/table-of-contents/overview/options-trading/options-pricing-and-options-chains#options-trade-components) * [Options Premiums](https://chartschool.stockcharts.com/table-of-contents/overview/options-trading/options-pricing-and-options-chains#options-premiums) * [Moneyness](https://chartschool.stockcharts.com/table-of-contents/overview/options-trading/options-pricing-and-options-chains#moneyness) * [Implied Volatility](https://chartschool.stockcharts.com/table-of-contents/overview/options-trading/options-pricing-and-options-chains#implied-volatility) * [Expiration Date](https://chartschool.stockcharts.com/table-of-contents/overview/options-trading/options-pricing-and-options-chains#expiration-date) * [Options Liquidity](https://chartschool.stockcharts.com/table-of-contents/overview/options-trading/options-pricing-and-options-chains#options-liquidity) * [Options Chains](https://chartschool.stockcharts.com/table-of-contents/overview/options-trading/options-pricing-and-options-chains#options-chains) * [Contract Expiration Date](https://chartschool.stockcharts.com/table-of-contents/overview/options-trading/options-pricing-and-options-chains#contract-expiration-date) * [Moneyness](https://chartschool.stockcharts.com/table-of-contents/overview/options-trading/options-pricing-and-options-chains#moneyness-1) * [Strike Price](https://chartschool.stockcharts.com/table-of-contents/overview/options-trading/options-pricing-and-options-chains#strike-price) * [Bid/Ask Data](https://chartschool.stockcharts.com/table-of-contents/overview/options-trading/options-pricing-and-options-chains#bid-ask-data) * [Volume and Open Interest](https://chartschool.stockcharts.com/table-of-contents/overview/options-trading/options-pricing-and-options-chains#volume-and-open-interest) * [Implied Volatility (IV)](https://chartschool.stockcharts.com/table-of-contents/overview/options-trading/options-pricing-and-options-chains#implied-volatility-iv) * [Greeks](https://chartschool.stockcharts.com/table-of-contents/overview/options-trading/options-pricing-and-options-chains#greeks) * [The Bottom Line](https://chartschool.stockcharts.com/table-of-contents/overview/options-trading/options-pricing-and-options-chains#the-bottom-line) * [Researching Options Contracts with StockCharts](https://chartschool.stockcharts.com/table-of-contents/overview/options-trading/options-pricing-and-options-chains#researching-options-contracts-with-stockcharts) * [Viewing Options Chain Information](https://chartschool.stockcharts.com/table-of-contents/overview/options-trading/options-pricing-and-options-chains#viewing-options-chain-information) Was this helpful? sun-brightdesktopmoon sun-brightdesktopmoon --- # Introduction to Options | ChartSchool | StockCharts.com Options are derivatives based on an underlying asset like stocks, exchange-traded funds (ETFs), indexes, or futures. In a nutshell, options are contracts in which the buyer and seller agree to buy or sell an underlying asset for a specific price before the contract expires. Buying options contracts allows traders to pay a per-share fee (called the **premium**) to lock in the price for a specific security, and then buy or sell at that locked-in price even after the price of the underlying asset has changed. The price is locked in only until the **expiration date** of the options contract. If the price of the underlying asset changes in a way that would be profitable for the options contract buyer, they can **exercise the option**, and buy or sell the shares at the agreed-upon price (called the **strike price**). Options contract sellers agree to be on the other side of that transaction, furnishing the shares that the options contract buyer wants to buy (or purchasing the shares that the options contract buyer wants to sell) at the locked-in price. In return, the options contract seller receives the premium. The process of matching options contract buyers and sellers is handled by a third party, and is called **assignment**. If the price of the underlying asset changes in a way that is not favorable for the options contract buyer, the buyer can just let the option expire without exercising it. In this scenario, no shares change hands, but the seller still keeps the premium. [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/options-trading/introduction-to-options#why-trade-options) Why Trade Options? ----------------------------------------------------------------------------------------------------------------------------------------------------------- There are a few main reasons that traders use options: 1. **For speculating**. Traders think they know whether a security will move up or down in price, and want to take advantage of those moves without investing in the full cost of owning the stock. 2. **For generating income**. Sellers of options contracts keep the premium, whether the buyer exercises their option or not, which can be a good source of income, as long as the seller makes sure to protect against downside risk. 3. **For portfolio protection**. You can use an options contract like an insurance policy, to protect stocks in your portfolio in the event of price declines, for just the cost of the premium. Before you trade your first option, it’s necessary to know some of the basics. We'll explore what an options contract looks like, what the different components are, and the four basic types of options trades that can be made. [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/options-trading/introduction-to-options#anatomy-of-an-options-trade) Anatomy of an Options Trade ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ A buy order for an options contract might look something like: _**1 NVDA October 18, 119 call for $6.35**_ The six components of this trade are as follows: * **Quantity**: _1_ options contract is being purchased, representing 100 shares of the underlying asset. * **Underlying Asset**: _NVDA_ is the stock that will be bought or sold if the options contract is exercised. * **Expiration Date**: _October 18_ is the expiration date of the contract; if the contract buyer wishes to exercise their option and buy 100 shares at the strike price, it must be done by October 18th. * **Strike Price**: _119_ is the strike price of the contract; this is the amount the contract buyer will pay per share of NVDA if they exercise the contract. * **Contract Type**: _Call_ is the type of options contract, which gives the contract buyer the right to _buy_ NVDA shares at the strike price; if they wanted to buy the right to _sell_ NVDA shares at the strike price, they would purchase a _put_ option instead. * **Premium**: _$6.35_ is the per-share premium/price of the options contract. Note: each contract controls 100 shares of the underlying asset, so the cost would be $635 plus any transaction fees. Both buyer and seller agree to these terms when buying or selling an options contract. [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/options-trading/introduction-to-options#calls-vs.-puts) Calls vs. Puts ---------------------------------------------------------------------------------------------------------------------------------------------------- There are two types of options contracts - calls and puts. A **call option** is a contract to buy a stock or an underlying asset at a specific price. circle-exclamation **Reminder:** one options contract generally equals 100 shares. When you buy a call option, you obtain the right (but not the obligation) to buy the underlying asset at a specific price, called the strike price, at any time before the contract expires. When you sell a call option, you’re taking on the obligation to supply the underlying asset at the strike price if the buyer of the call contract exercises the option. In other words, you’ll be assigned. In this scenario, the buyer feels bullish on the stock, purchases a call option, and waits for the price to go up before exercising the option to buy the underlying stock at the lower strike price. The seller, by contrast, feels bearish on the stock. The seller hopes that the stock price goes down and the buyer does not exercise the contract, letting it expire and allowing the seller to keep the premium without having to sell any stock to the buyer at a lower price. A **put option** is a contract to sell a stock or underlying asset at a specific price. When you buy a put option, you obtain the right (but not the obligation) to sell the underlying asset at a specific price, called the strike price, at any time before expiration. When you sell a put option, you take on the obligation to buy the underlying asset at the strike price if the buyer of the put option exercises the contract. In this scenario, the buyer feels bearish on the stock, purchases a put option, and waits for the price to go down before exercising the option to sell the underlying stock at the higher strike price. The seller, by contrast, feels bullish on the stock. The seller hopes that the stock price goes up and the buyer does not exercise the contract, letting it expire and allowing the seller to keep the premium without having to buy any stock from the buyer at a higher price. [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/options-trading/introduction-to-options#four-ways-to-trade-options) Four Ways to Trade Options ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------- When would you buy or sell a call option and when would you buy or sell a put option? The table below shows four different ways to trade options, based on what direction you think the security's price will go and the risk/reward ratio you are comfortable with. **Directional Bias** **Max Return** **Max Risk** **Buy call** Bullish (you expect the stock to go up in price) Unlimited (if the stock rises) Options contract premium **Buy put** Bearish (you expect the stock to go down in price) Strike price minus premium Options contract premium **Sell call** Bearish to neutral Options contract premium Unlimited **Sell put** Bullish to neutral Options contract premium Strike price minus premium Buyers (whether of calls or puts) pay a premium in order to reduce the risk of larger losses if the stock price doesn't move the way they expect. Sellers take on that larger risk for buyers, in exchange for the guaranteed income from the premiums they receive from the buyers. Sellers must hedge their risk in other ways, such as using a covered call strategy. Let's look at each of these four options trading scenarios in more detail. ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/options-trading/introduction-to-options#buying-a-call-option) Buying a Call Option Buying a call (sometimes referred to as a "long call") is similar to buying a stock. If you expect the price of a stock to rise in the next few months, you could buy a call option instead of buying the stock outright. This gives you the right to buy the underlying stock at the strike price specified in the options contract. If the stock price rises before the options contract expires, you can exercise the option and acquire the stock at the lower strike price, then sell the stock at the higher market price. If the stock price falls (or rises by less than the per-share premium you paid), you can choose not to exercise the option, letting it expire worthless. In that case, you would basically lose the premium that you paid for the contract. Below is a typical risk graph for a long call. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FBIqgD6Tgg0fm0pIlr0QC%252FBuyingCalls-PLDiagram.png%3Falt%3Dmedia%26token%3D9433f18b-6b33-45c4-a921-72afaf3de2cf&width=768&dpr=4&quality=100&sign=3768e79c&sv=2) The x-axis of the risk graph shows the underlying stock price. The y-axis shows the potential profit or loss at that underlying stock price. The areas below the x-axis (in red) represent potential losses at various stock prices, and the areas above the x-axis (in green) represent potential gains. Let's look at a specific example of buying a call option on GM for a premium of $2.83/share ($283 total, since an options contract generally covers 100 shares), and a strike price of $53. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252F53OgyQqwgOUyNXJWQqHH%252FBuyingCalls-Example.png%3Falt%3Dmedia%26token%3D4d4695d6-e39f-4c47-8b45-0b8f2f89e4ef&width=768&dpr=4&quality=100&sign=483175ed&sv=2) The max risk (maximum potential loss) with this options contract is the cost of the premium, regardless of how low the stock price goes. This is because if the stock price goes below the strike price of $53, the option holder would just not exercise the option to purchase shares for $53/share. If the stock price rises to $55.83 (the strike price plus the per-share premium price), then the option holder would break even. Any stock price above $55.83 would result in a profit if the call option is exercised. The max reward (maximum potential profit) is theoretically unlimited, although it is unlikely the stock price will rise drastically before the contract expires. Buying a call option is a speculative trade and isn't ideal for beginner options traders. The stock price will have to rise, sometimes significantly, before the contract expires, in order to turn a profit. In the example above, the price of GM would have to go up more than $2.83 per share within the 50 days remaining on the contract for the trade to be profitable. ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/options-trading/introduction-to-options#buying-a-put) Buying a Put Buying a put option (sometimes referred to as a "long put"), gives you the right to sell the underlying stock at the strike price specified in the options contract. If the stock price falls before the options contract expires, you can acquire shares of the stock for a lower price, then exercise the option and sell the stock at the higher strike price. If the stock price rises (or falls by less than the per-share premium you paid), you can choose not to exercise the option, letting it expire worthless. In that case, you would only lose the premium that you paid for the contract. Below is a typical risk graph for a long put. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252F2p8inYo3imWBDo4a3UI5%252FBuyingPuts-PLDiagram.png%3Falt%3Dmedia%26token%3D143f0c80-a170-4c16-b9bf-9d2092631191&width=768&dpr=4&quality=100&sign=bc65d744&sv=2) Let's look at a specific example of buying a put option on GM for a premium of $2.71/share ($271 total, since an options contract generally covers 100 shares), and a strike price of $54. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FpospDL7qgo7ckYcpYWBC%252FBuyingPuts-Example.png%3Falt%3Dmedia%26token%3D0ec257c4-64f2-44e1-964b-cf5ac38e07db&width=768&dpr=4&quality=100&sign=cc7cc7ab&sv=2) The max risk (maximum potential loss) with this options contract is the cost of the premium, regardless of how high the stock price goes. This is because if the stock price goes above the strike price of $54, you would just not exercise the option to sell shares for only $54/share. If the stock price drops to $51.29 (the strike price minus the per-share premium price), then you would break even. Any stock price below $51.29 would result in a profit if the put option is exercised. The max reward (maximum potential profit) is theoretically unlimited, although it is unlikely the stock price will fall drastically before the contract expires. Long puts can be used to protect stocks you already own in your portfolio in the event of a decline in price. Some traders will purchase a long put at a higher strike price at the time they purchase the actual stock. If the price of the stock continues to go up, they let the put option expire worthless and keep their stock. If the price goes down, they exercise the put option and sell their stock at the higher strike price. ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/options-trading/introduction-to-options#selling-a-call) Selling a Call When you sell a call option (sometimes referred to as a "short call"), you’re selling someone the right to buy your underlying shares. This means that if the call option buyer exercises their right to buy the underlying shares, you (the option seller) will be obligated to sell the underlying stock to them at the strike price. If the stock price rises above the strike price before the options contract expires, the call option buyer may choose to exercise the option, and you would be obligated to sell them 100 shares of the underlying stock. If you do not already own those shares, you may need to purchase them at a higher price in order to provide them to the buyer at the lower strike price. When you sell a call option without owning those shares already, that is referred to as a "naked call" or "uncovered call", and it can be quite costly. Below is a typical risk graph for an uncovered short call. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FK0FRBuVOGLAMnp7KMJiS%252FSellingCalls-PLDiagram.png%3Falt%3Dmedia%26token%3D71241364-fd26-47d3-a1e1-97a8c27d5435&width=768&dpr=4&quality=100&sign=b36bf72d&sv=2) As you can see, the profit is limited to the premium, no matter how low the stock price falls. If the stock price rises, the potential losses are theoretically unlimited. If the contract buyer exercises their option and you don't already own those shares, you would need to buy 100 shares at the current stock price to sell to the contract buyer at the lower strike price. A "covered call", where you already own shares of the underlying stock at the time you sell the call option, is a much less risky and more beginner-friendly strategy. You can factor in the price you paid for the shares when choosing the strike price for the call option, and sell those shares to the buyer if they exercise the option. If the stock price falls, the call option buyer will likely let the option expire worthless, in which case no shares change hands and you keep the premium. Let's look at a specific example of a covered call, selling a call option on GM for a premium of $1.75/share ($175 total, since an options contract generally covers 100 shares), and a strike price of $55. This graph assumes the call option seller already owns 100 shares of GM purchased at $54/share, in order to have shares to sell if the call option buyer exercises their contract. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252F8iqSDzwn82ANev8mKVih%252FSellingCalls-Example.png%3Falt%3Dmedia%26token%3D8b5049cb-cead-4fec-b8eb-2c80a7128b90&width=768&dpr=4&quality=100&sign=4faa5104&sv=2) Owning those shares flips the risk graph around for selling a covered call. Now the best outcome for both the call option buyer and the call option seller is for the stock price to go up. If the stock price rises above the strike price of $55 before the contract expires, the call option buyer will likely exercise their option. You will sell them your shares at the strike price of $55, making a $1/share profit on those shares that you purchased for $54/share. You will also keep the premium ($1.75/share), for a max reward (maximum potential profit) of $2.75/share, or $275. If the stock price falls below the strike price of $55, the call option buyer will not exercise the option to buy shares for $55/share. In this scenario, you keep the premium and retain the shares to sell at a later date. However, you will incur losses on the shares themselves if the stock price drops below the price you purchased them for. Theoretically, your max risk (maximum potential loss) is the share purchase price minus the premium ($52.25/share), although this worst-case scenario would only happen if the stock price went to $0, which is unlikely. Selling a call on stocks you don’t own (a naked or uncovered call) is not a strategy for beginners. Selling a call on stocks you own (a covered call) reduces your risk potential and is suitable for beginner options traders. ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/options-trading/introduction-to-options#selling-a-put) Selling a Put When you sell a put option (sometimes referred to as a "short put"), you are selling someone the right to sell you the underlying shares at the strike price before the contract expires. This means that if the buyer of the put contract exercises his/her right to sell the underlying shares before the contract expires, you as the buyer, are obligated to buy the underlying shares at the strike price of the contract. If the stock price falls before the options contract expires, the trader buying the put option may choose to exercise the option, and you would be obligated to buy 100 shares of the underlying stock from them at the strike price. If you have not already taken a short position on those shares, you may need to purchase all 100 shares at the higher strike price, which can require a lot of cash. When you sell a put option without having shorted those shares already, that is referred to as a "naked put" or "uncovered put". If the stock price rises, the trader buying the put option may let the option expire worthless, in which case no shares change hands and you keep the premium. Below is a typical risk graph for a short put. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FoQ4jKDKBOdU3sSN0tIn0%252FSellingPuts-PLDiagram.png%3Falt%3Dmedia%26token%3D9f78643e-06ac-4d3a-9d51-2a39c0190008&width=768&dpr=4&quality=100&sign=e4d1c11c&sv=2) Let's look at a specific example of selling a put option on GM for a premium of $1.36/share ($136 total, since an options contract generally covers 100 shares), and a strike price of $52.  ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252F9xdELASrWK3ypBkdJc5w%252FSellingPuts-Example.png%3Falt%3Dmedia%26token%3Db8278131-ba89-4346-94a1-0817789b3869&width=768&dpr=4&quality=100&sign=6e9ddaa2&sv=2) The max reward (maximum potential profit) with this options contract is the premium, regardless of how high the stock price goes. This is because if the stock price stays above the strike price of $52, the put option buyer will not exercise the option to sell their shares for only $52/share. Once the option expires worthless, the put option seller will keep the $1.36/share premium and not have to buy any shares. If the stock price drops to $50.64 (the strike price minus the per-share premium price), then the put option buyer would break even. If the stock price goes below $50.64, the put option buyer might choose to exercise the option and the put option seller would be obligated to buy the shares at the higher strike price to fulfill the contract. The max risk (maximum potential loss) is the strike price minus the premium ($50.64), although this worst-case scenario would only happen if the stock price went to $0, which is unlikely. Like selling naked calls, selling naked puts is a strategy for veteran options traders. The potential losses can be substantial, depending on how low the price falls before the buyer exercises their option. [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/options-trading/introduction-to-options#the-bottom-line) The Bottom Line ------------------------------------------------------------------------------------------------------------------------------------------------------ Options contracts allow traders to pay a small premium for the right to lock in the price of a specific security for a limited amount of time. The contract gives the buyer the option to buy shares at the price specified in the contract (for call options contracts) or to sell shares at the specified price (for put options contracts). If the security's price changes in a way that is favorable for the options contract holder, they can exercise the option before the contract expires and take advantage of the favorable pricing set in the options contract. The seller of the options contract receives the premium whether the contract buyer exercises the option or not. Being the seller of the options contract carries more risk if the price of the underlying asset does not go the way they expect. If the contract buyer exercises the option, the contract seller may be forced to sell shares (in the case of call options contracts) or purchase shares (in the case of put options contracts) at unfavorable pricing to satisfy the contract. The potential losses for the contract seller can be substantial. Buying a call, buying a put, selling a call, and selling a put are the four basic ways to trade options. Once you understand the potential risk and reward tradeoffs for each of these four strategies, you can use them in different ways to achieve your options trading goals, whether you're interested in speculation, income generation, or portfolio protection. circle-info **Learn More:** [Options Trading Strategies](https://chartschool.stockcharts.com/table-of-contents/overview/options-trading/options-trading-strategies) [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/options-trading/introduction-to-options#researching-options-contracts-with-stockcharts) Researching Options Contracts with StockCharts -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/options-trading/introduction-to-options#viewing-options-chain-information) Viewing Options Chain Information The Options Summary shows options chain information for US stocks. To access the Options Summary, choose Options from the Charts & Tools menu, then enter the symbol you want to view options info for. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252F5ozQzjuhrlJsjgatKfwn%252FOptionsSummary.png%3Falt%3Dmedia%26token%3D2126c7f5-0297-45e2-90a1-76cdfa0ffbc4&width=768&dpr=4&quality=100&sign=198cc9d3&sv=2) [ Click here to view a live version of this Options Summaryarrow-up-right](https://stockcharts.com/freecharts/options/?sym=gm&view=straddle#) Options chain information is also available on the Options tab in both StockChartsACP and the SharpCharts Workbench. In addition, members can view options information for the symbols in their ChartList using Options View. circle-info **Learn More:** [Options Summary](https://help.stockcharts.com/charts-and-tools/research-tools/options-summary) | [Options Pricing and Options Chains](https://chartschool.stockcharts.com/table-of-contents/overview/options-trading/options-pricing-and-options-chains) ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/options-trading/introduction-to-options#viewing-profit-and-loss-graphs) Viewing Profit & Loss Graphs Members who have subscribed to the OptionsPlay add-on can use the OptionsPlay Explorer to research options trade ideas for a specific ticker symbol, and view Profit & Loss graphs like the ones shown above. Once the add-on has been purchased, the OptionsPlay Explorer can be accessed while viewing options chains in SharpCharts, StockChartsACP, Options Summary, or Options View. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252Foh9PlwicN42Q6vGuFIya%252FOPExplorer.png%3Falt%3Dmedia%26token%3Dc08dcb22-34bb-4049-bccc-938366b3b759&width=768&dpr=4&quality=100&sign=c9b98b34&sv=2) The OptionsPlay add-on also includes the StockCharts-exclusive OptionsPlay Strategy Center, which makes it easy to access options trade ideas that fit your individual trading preferences. circle-info **Learn More:** [OptionsPlay Add-On](https://help.stockcharts.com/your-account/stockcharts-add-ons/optionsplay-add-on) | [Options Trading Strategies](https://chartschool.stockcharts.com/table-of-contents/overview/options-trading/options-trading-strategies) [PreviousOptions Tradingchevron-left](https://chartschool.stockcharts.com/table-of-contents/overview/options-trading) [NextOptions Pricing and Options Chainschevron-right](https://chartschool.stockcharts.com/table-of-contents/overview/options-trading/options-pricing-and-options-chains) Last updated 5 months ago Was this helpful? * [Why Trade Options?](https://chartschool.stockcharts.com/table-of-contents/overview/options-trading/introduction-to-options#why-trade-options) * [Anatomy of an Options Trade](https://chartschool.stockcharts.com/table-of-contents/overview/options-trading/introduction-to-options#anatomy-of-an-options-trade) * [Calls vs. Puts](https://chartschool.stockcharts.com/table-of-contents/overview/options-trading/introduction-to-options#calls-vs.-puts) * [Four Ways to Trade Options](https://chartschool.stockcharts.com/table-of-contents/overview/options-trading/introduction-to-options#four-ways-to-trade-options) * [Buying a Call Option](https://chartschool.stockcharts.com/table-of-contents/overview/options-trading/introduction-to-options#buying-a-call-option) * [Buying a Put](https://chartschool.stockcharts.com/table-of-contents/overview/options-trading/introduction-to-options#buying-a-put) * [Selling a Call](https://chartschool.stockcharts.com/table-of-contents/overview/options-trading/introduction-to-options#selling-a-call) * [Selling a Put](https://chartschool.stockcharts.com/table-of-contents/overview/options-trading/introduction-to-options#selling-a-put) * [The Bottom Line](https://chartschool.stockcharts.com/table-of-contents/overview/options-trading/introduction-to-options#the-bottom-line) * [Researching Options Contracts with StockCharts](https://chartschool.stockcharts.com/table-of-contents/overview/options-trading/introduction-to-options#researching-options-contracts-with-stockcharts) * [Viewing Options Chain Information](https://chartschool.stockcharts.com/table-of-contents/overview/options-trading/introduction-to-options#viewing-options-chain-information) * [Viewing Profit & Loss Graphs](https://chartschool.stockcharts.com/table-of-contents/overview/options-trading/introduction-to-options#viewing-profit-and-loss-graphs) Was this helpful? sun-brightdesktopmoon sun-brightdesktopmoon --- # Options Trading Strategies | ChartSchool | StockCharts.com Options trading carries quite a bit of risk; many options trades have the potential for unlimited losses. For this reason, it is important to employ options trading strategies that help protect you from large losses. Here is a quick refresher on the four basic ways to trade options: * **Buying Calls:** This type of options trade allows you to purchase the right to buy shares of the underlying asset at the strike price before the expiration date. This type of option is sometimes called a "long call". If the price is not moving in a favorable direction, you can choose to let the options contract expire without buying any shares of the underlying asset. In this scenario, your loss is limited to the premium you paid for the options contract. * **Buying Puts:** This type of options trade allows you to purchase the right to sell shares of the underlying asset at the strike price before the expiration date. This type of option is sometimes called a "long put". If the price is not moving in a favorable direction, you can choose to let the options contract expire without selling any shares of the underlying asset. In this scenario, your loss is limited to the premium you paid for the options contract. * **Selling Calls:** This type of options trade allows you to sell the right for someone else to buy shares of the underlying asset from you at the strike price if they exercise their option. This is sometimes called a "short call". This type of options trade comes with a relatively small reward (the premium you collect from the buyer), and a potentially unlimited risk if the underlying asset's price move is unfavorable. Selling a call without taking other measures to protect, or cover, yourself against this risk is why these are also sometimes called "naked calls". * **Selling Puts:** This type of options trade allows you to sell the right for someone else to sell you shares of the underlying asset at the strike price if they exercise their option. This is sometimes called a "short put", and just like with selling calls, it comes with a small reward (the premium you collect), and potentially unlimited risk. Selling puts without protecting yourself against this risk has earned this type of options trade the nickname of "naked puts". circle-info **Learn More:** [Introduction to Options](https://chartschool.stockcharts.com/table-of-contents/overview/options-trading/introduction-to-options) Selling calls and puts is especially risky, but even buying calls and puts carries some risk. So, how can you mitigate that risk? In this article, we'll go over six types of options trading strategies that can reduce the potential for big losses in your options trades. circle-exclamation **Caution:** This is a high-level overview of options trading strategies, and does not go into detail about the premiums and other fees involved in making options trades. For example, if you buy a call option and the underlying stock price goes up by $4/share, but you paid a $5/share premium for the options contract, you are not yet making a profit. Be sure to factor in premiums and other fees when calculating your breakeven point on options trades. [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/options-trading/options-trading-strategies#collateralized-strategies) Collateralized Strategies ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------- One way to reduce the risk that comes with naked calls and puts is to "cover" that nakedness. Typically, you provide that cover either by already owning shares of the underlying asset, or setting aside cash to purchase the underlying asset if needed. The shares or the cash provide collateral for the trade. Let's look at a few popular collateralized strategies. ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/options-trading/options-trading-strategies#covered-calls) Covered Calls A covered call strategy involves selling a call option on stock (or another asset) that you already own. Covered calls can be an excellent strategy when you are already planning to (or at least are willing to) sell 100 shares of an asset that you own. In a covered call strategy, you already own 100 shares of the stock, then you sell a call option on the stock. The strike price on the option should be higher than what you paid for the underlying shares. If the underlying asset's price stays the same or drops, the options contract will likely expire worthless, and you will collect the premium from the buyer. You will still own the underlying shares. If the underlying asset's price rises above the strike price, then the buyer may exercise their option. In that case, you will supply the shares you own in order to fulfill the contract. You keep the premium, plus any profit you made on the sale of the underlying shares. While this strategy requires a larger upfront investment (to pay for the 100 shares), it is a relatively low-risk options trade, and is popular with beginner options traders. ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/options-trading/options-trading-strategies#protective-puts) Protective Puts A protective put strategy involves buying a put option on stock (or another asset) that you already own. Protective puts can act as insurance against a large drop in the underlying asset's price. In a protective put strategy, you already own 100 shares of the stock, then you buy a put option on the stock. If the underlying asset's price stays the same or rises, you can let the option expire worthless and keep the underlying shares. Your loss will be the cost of the premium for the options contract, which may even be offset by gains in the underlying asset's price. If the underlying asset's price drops significantly before the options contract's expiration date, you can exercise the option and sell your underlying shares at the higher strike price, minimizing your losses on the sale of that stock. With this strategy, the goal is to protect yourself from losses if you expect the underlying asset's price to drop. ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/options-trading/options-trading-strategies#cash-secured-puts) Cash-Secured Puts A cash-secured put strategy is when you sell a put option on stock (or another asset) that you do not own. Instead, you set aside enough money in your brokerage account to buy 100 shares of the underlying asset at the strike price, in the event that you need to purchase shares to fulfill the contract. In a cash-secured put strategy, you set aside the cash to buy 100 shares at a certain price, then you sell a put option on the stock with the strike price set to the same amount you set aside. If the underlying asset's price rises, the options contract will likely expire worthless, and you will collect the premium from the buyer. If the underlying asset's price stays the same or drops, the buyer may exercise their option. In that case, you will purchase shares of the underlying asset from the buyer for the strike price, using the cash you set aside earlier. You keep the premium from the buyer. Cash-secured puts can earn a little extra money in premiums on a share purchase that you were already planning to (or at least were willing to) make. [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/options-trading/options-trading-strategies#volatility-strategies) Volatility Strategies --------------------------------------------------------------------------------------------------------------------------------------------------------------------- High volatility can come with high risk. These two options trading strategies attempt to take advantage of big price moves, regardless of the direction of those moves, while reducing the risk that comes with a price move in the wrong direction. ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/options-trading/options-trading-strategies#straddles) Straddles A straddle is an options strategy in which you buy (or sell) both a call and a put at the same strike price and expiration date. This way, you're prepared to take advantage of a big price move in the underlying asset, regardless of whether that move is upward or downward. In a long straddle, you buy both a call option and a put option on the same stock, with the same expiration date. The strike price is the same for both contracts, and is typically at the money (close to the price of the underlying asset at the time the contracts are purchased). If the underlying asset's price rises dramatically, you exercise the call option (buying shares at the lower strike price), and let the put option expire worthless. If the underlying asset's price drops dramatically, you exercise the put option (selling shares at the higher strike price), and let the call option expire worthless. Remember that you will be paying two premiums (one for the put and one for the call), so the underlying asset must make a big enough move to offset the combined price of the two premiums. If the security's price swing is not big enough, then you will let both options expire worthless, and you only lose the cost of the two premiums. The example above is for a long straddle. There is also a short straddle strategy, where you sell both a call and a put on the same security, with the same expiration date and strike price. In this strategy, you are expecting the underlying asset to not make a big move, allowing both options to expire worthless and netting you both premiums. ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/options-trading/options-trading-strategies#strangles) Strangles A strangle is an options strategy in which you buy (or sell) both a call and a put at the same expiration date but different strike prices. This strategy is helpful when you expect the underlying asset to make a big price move before the expiration date, but you are unsure of the direction. In a long strangle, you buy a call option at a strike price higher than the current price of the underlying asset, and a put option at a lower strike price than the underlying asset's current price. The expiration date is the same for both contracts. If the underlying asset's price rises dramatically, you exercise the call option (buying shares at the strike price which is now lower than the current price of the underlying asset), and let the put option expire worthless. If the underlying asset's price drops dramatically, you exercise the put option (selling shares at the strike price which is now higher than the current price of the underlying asset), and let the call option expire worthless. Remember that you will be paying two premiums (one for the put and one for the call), so the underlying asset must make a big enough move to offset the combined price of the two premiums. If the security's price swing is not big enough, then you will let both options expire worthless, and you only lose the cost of the two premiums. The example above is for a long strangle. There is also a short strangle strategy, where you sell a call at a higher strike price and sell a put at a lower strike price, with both options having the same expiration date. In this strategy, you are expecting the underlying asset to not make a big move, allowing both options to expire worthless and netting you both premiums. **Note:** The strategy behind a strangle is very similar to the strategy behind a straddle. The primary difference is that in strangles, both the call and the put options are typically out of the money, so they usually have lower premiums than the options purchased in a straddle. With this lower cost comes higher risk, however. The underlying asset's price typically has to make a much larger move to profit from a long strangle than from a long straddle. Similarly, the premiums collected with a short strangle are typically smaller than those collected from a short straddle. [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/options-trading/options-trading-strategies#spread-strategies) Spread Strategies ------------------------------------------------------------------------------------------------------------------------------------------------------------- Spread strategies involve buying one options contract and selling one options contract (either both calls or both puts). The two contracts usually differ in the expiration date (calendar spreads) or in the strike price (vertical spreads). If the two contracts differ in both expiration date and strike price, that is called a diagonal spread. Calendar spreads and diagonal spreads can be complex for beginners, but vertical spreads are fairly straightforward strategies that can reduce risk for those new to options trading. ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/options-trading/options-trading-strategies#vertical-spreads) Vertical Spreads A vertical spread is an options strategy in which you buy a call and sell a call (or buy a put and sell a put) with the same expiration date but different strike prices. The spread refers to the difference between the strike prices on the two contracts. Vertical spreads employ competing options contracts to cap both the risk and the reward in the trade. These strategies do not have unlimited potential gains, but they also do not have unlimited potential losses, making them an attractive choice for beginners to gain experience in options trading. In a bull call spread, you buy a call option with a lower strike price and sell a call option with a higher strike price, both with the same expiration date. This strategy is helpful when you expect a moderate increase in the underlying asset's price prior to the expiration date. If the underlying asset's price remains in the range defined by the two options contracts' strike prices, you can either exercise the lower-priced option to buy shares, or let it expire worthless; this will depend on whether the modest price gains outweigh the costs to set up the options trade. The higher-priced option will expire worthless and you will keep the premium. If the underlying asset's price drops below the range defined by the two options contracts' strike prices, both options expire worthless. You will keep the premium for the option you sold (but you will need to subtract the premium for the option you bought in order to calculate your profit/loss on the trade). If the underlying asset's price rises above the range defined by the two options contracts' strike prices, then the buyer may exercise the higher-priced option. If so, you can exercise the lower-priced option to buy shares at the lower price to fulfill the other contract. The bull call spread is the most common type of vertical spread, but there are other options for buying and selling different combinations of higher-priced and lower-priced contracts. All four options are summarized in the table below. **Strategy** **Options Bought/Sold** **When to Use** **Strategy Risk** Bull Call Spread Buy lower-priced call option and sell higher-priced call option When a moderate price increase is expected Gain capped at the difference between the two strike prices, minus the net premium (difference between premium paid and premium collected). Loss capped at the net premium. Bull Put Spread Buy lower-priced put option and sell higher-priced put option When a moderate price increase is expected Gain capped at the net premium (difference between the premium paid and premium collected). Loss capped at the difference between the two strike prices, minus the net premium. Bear Call Spread Sell lower-priced call option and buy higher-priced call option When a moderate price decrease is expected Gain capped at the net premium (difference between the premium paid and premium collected). Loss capped at the difference between the two strike prices, minus the net premium. Bear Put Spread Sell lower-priced put option and buy higher-priced put option When a moderate price decrease is expected Gain capped at the difference between the two strike prices, minus the net premium (difference between premium paid and premium collected). Loss capped at the net premium. The Iron Condor strategy is a combination of a bull put spread strategy, set below the underlying asset's current price, and a bear call spread strategy, set above the underlying asset's current price. This strategy can be useful when you expect the price of the underlying asset to remain steady. The lower-priced contract of the bull put spread and the higher-priced contract of the bear call spread protect you from extreme price swings in either direction. The two options contracts in the middle define the price range that you expect the underlying asset's price to remain within. While the profit potential is quite limited with this strategy, the loss potential is also limited. [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/options-trading/options-trading-strategies#the-bottom-line) The Bottom Line --------------------------------------------------------------------------------------------------------------------------------------------------------- There are options trading strategies for every situation, whether your primary focus is on reducing risk by providing collateral, taking advantage of high volatility, or making the most of time decay and trading ranges. When used sensibly, these long options strategies can reduce risk compared to buying a single long options contract. [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/options-trading/options-trading-strategies#exploring-options-strategies-with-stockcharts-and-optionsplay) Exploring Options Strategies with StockCharts and OptionsPlay ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- StockCharts has partnered with OptionsPlay to offer the OptionsPlay Add-On for StockCharts members. The add-on provides two tools to help subscribers explore options trading strategies and vet the strategies for specific symbols. circle-info **Learn More:** [OptionsPlay Add-On](https://help.stockcharts.com/your-account/stockcharts-add-ons/optionsplay-add-on) ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/options-trading/options-trading-strategies#optionsplay-strategy-center) OptionsPlay Strategy Center The OptionsPlay Strategy Center ranks trade ideas based on your trading preferences. This tool can be used to find trade ideas for Covered Calls, Long Calls, Long and Short Puts, and various vertical spread strategies, including the Iron Condor. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FbFkCwf7jwzh1OJdMF9Cr%252FOPStrategyCenter.png%3Falt%3Dmedia%26token%3D0d01fc3e-5e87-4e47-a0be-e6f12d01a747&width=768&dpr=4&quality=100&sign=109bf973&sv=2) circle-info **Learn More:** [OptionsPlay Strategy Center](https://help.stockcharts.com/charts-and-tools/research-tools/optionsplay-strategy-center) ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/options-trading/options-trading-strategies#optionsplay-explorer) OptionsPlay Explorer Members who have subscribed to the OptionsPlay add-on can use the OptionsPlay Explorer to research options trade ideas for a specific ticker symbol. The OptionsPlay Explorer suggests promising options strategies for US stocks. Enter the stock you are interested in, and the OptionsPlay Explorer will suggest three potential options strategies to use, along with profit/loss graphs and other information to help assess the strategy. Users can also click the Modify button on any suggested strategy to customize the trade parameters or choose a different strategy entirely. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FFSeTLijI4YzssSSC4OqE%252FOPExplorer.png%3Falt%3Dmedia%26token%3D33aee464-db6a-4ab9-b67d-3b9404c186a1&width=768&dpr=4&quality=100&sign=a61c5293&sv=2) circle-info **Learn More:** [OptionsPlay Explorer](https://help.stockcharts.com/charts-and-tools/research-tools/options-summary/optionsplay-explorer) [PreviousOptions Pricing and Options Chainschevron-left](https://chartschool.stockcharts.com/table-of-contents/overview/options-trading/options-pricing-and-options-chains) [NextJohn Murphy's 10 Laws of Technical Tradingchevron-right](https://chartschool.stockcharts.com/table-of-contents/overview/john-murphys-10-laws-of-technical-trading) Last updated 5 months ago Was this helpful? * [Collateralized Strategies](https://chartschool.stockcharts.com/table-of-contents/overview/options-trading/options-trading-strategies#collateralized-strategies) * [Covered Calls](https://chartschool.stockcharts.com/table-of-contents/overview/options-trading/options-trading-strategies#covered-calls) * [Protective Puts](https://chartschool.stockcharts.com/table-of-contents/overview/options-trading/options-trading-strategies#protective-puts) * [Cash-Secured Puts](https://chartschool.stockcharts.com/table-of-contents/overview/options-trading/options-trading-strategies#cash-secured-puts) * [Volatility Strategies](https://chartschool.stockcharts.com/table-of-contents/overview/options-trading/options-trading-strategies#volatility-strategies) * [Straddles](https://chartschool.stockcharts.com/table-of-contents/overview/options-trading/options-trading-strategies#straddles) * [Strangles](https://chartschool.stockcharts.com/table-of-contents/overview/options-trading/options-trading-strategies#strangles) * [Spread Strategies](https://chartschool.stockcharts.com/table-of-contents/overview/options-trading/options-trading-strategies#spread-strategies) * [Vertical Spreads](https://chartschool.stockcharts.com/table-of-contents/overview/options-trading/options-trading-strategies#vertical-spreads) * [The Bottom Line](https://chartschool.stockcharts.com/table-of-contents/overview/options-trading/options-trading-strategies#the-bottom-line) * [Exploring Options Strategies with StockCharts and OptionsPlay](https://chartschool.stockcharts.com/table-of-contents/overview/options-trading/options-trading-strategies#exploring-options-strategies-with-stockcharts-and-optionsplay) * [OptionsPlay Strategy Center](https://chartschool.stockcharts.com/table-of-contents/overview/options-trading/options-trading-strategies#optionsplay-strategy-center) * [OptionsPlay Explorer](https://chartschool.stockcharts.com/table-of-contents/overview/options-trading/options-trading-strategies#optionsplay-explorer) Was this helpful? sun-brightdesktopmoon sun-brightdesktopmoon --- # ChartSchool | ChartSchool | StockCharts.com ![Page cover](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FBFeyZ5L4SHU6L6D6L7X9%252Fchartschool-splash-min.png%3Falt%3Dmedia%26token%3Db7e4c324-5a98-4b66-87ea-8c0be1772df9&width=1248&dpr=4&quality=100&sign=61ba7abf&sv=2) Welcome to ChartSchool, [StockCharts.comarrow-up-right](https://stockcharts.com/) 's extensive educational resource for investors of all levels. Here, you can learn everything about investing and financial chart analysis. circle-info Got a question about investing or financial chart analysis? Use the "Ask or Search" box in the upper right corner of this page to get an AI-assisted answer instantly! ### [hashtag](https://chartschool.stockcharts.com/#table-of-contents) Table of Contents [**Overview**](https://chartschool.stockcharts.com/table-of-contents/overview) A diverse collection of educational articles about investing and trading. This is a good place to start, especially if you're new to investing. [**Chart Analysis**](https://chartschool.stockcharts.com/table-of-contents/chart-analysis) A deep dive into the different methods investors and traders can use to analyze financial charts. [**Technical Indicators and Overlays**](https://chartschool.stockcharts.com/table-of-contents/technical-indicators-and-overlays) Descriptions of technical indicators used to analyze the performance of stocks and other securities. [**Market Indicators**](https://chartschool.stockcharts.com/table-of-contents/market-indicators) Descriptions of indicators that gauge the strength of the broader financial markets. [**Market Analysis**](https://chartschool.stockcharts.com/table-of-contents/market-analysis) Explore the different ways you can analyze the financial markets. [**Trading Strategies and Models**](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models) Explore different trading strategies and systems you can apply to make better trading and investing decisions. [**Index and Market Indicator Catalog**](https://chartschool.stockcharts.com/table-of-contents/index-and-market-indicator-catalog) Documentation of the index symbols available in StockCharts.com. [**Glossary**](https://chartschool.stockcharts.com/table-of-contents/glossary/glossary-a) Helpful definitions for common financial terminology [NextOverviewchevron-right](https://chartschool.stockcharts.com/table-of-contents/overview) Last updated 1 year ago Was this helpful? --- # Overview | ChartSchool | StockCharts.com ![Page cover](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FAw2M25DEtKRfxkNOZjij%252FChartSchoolHeader-Option4.png%3Falt%3Dmedia%26token%3Da3c617b6-878d-4dbc-9074-98aa974bcfee&width=1248&dpr=4&quality=100&sign=ce5abd40&sv=2) [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview#what_is_technical_analysis) What is Technical Analysis? ------------------------------------------------------------------------------------------------------------------------------------- John Murphy defines **Technical Analysis** as “the study of market action, primarily through the use of charts, for the purpose of forecasting future price trends.” Market action refers to price, volume, and open interest data. While analysis of this data can't make absolute predictions about the future, studying the past price movements on a chart can help technical analysts anticipate what is “likely” to happen to prices going forward. [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview#introduction_to_investing) Introduction to Investing ---------------------------------------------------------------------------------------------------------------------------------- [**Why Analyze Securities?**](https://chartschool.stockcharts.com/table-of-contents/overview/why-analyze-securities) What's the “best” way to invest? We discuss the three types of market analysts and how you can understand investment from a “big picture” perspective. [**Technical Analysis**](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis) What is Technical Analysis? We explain what Technical Analysis is, how it works, and the general steps one should take when using technical charts and indicators to analyze stocks. [**Fundamental Analysis**](https://chartschool.stockcharts.com/table-of-contents/overview/fundamental-analysis) We look at the theory behind Fundamental Analysis and the general steps fundamental analysts take when evaluating stocks, concluding with a look at the strengths and weaknesses of the fundamental approach. [**Random Walk vs. Non-Random Walk**](https://chartschool.stockcharts.com/table-of-contents/overview/random-walk-vs.-non-random-walk) Can you really outperform the market? We compare the Random-Walk Theory of financial markets and its counterpart, the Non-Random Walk Theory, while considering how these competing concepts impact Technical Analysis. [**Asset Allocation and Diversification**](https://chartschool.stockcharts.com/table-of-contents/overview/asset-allocation-and-diversification) What's the best way to minimize your risk while trading? We look at how asset allocation can be combined with technical analysis to ensure a strong trading portfolio. [**Options Trading**](https://chartschool.stockcharts.com/table-of-contents/overview/options-trading) Learn more about the process of trading options, how to read options chains, and popular options trading strategies. [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview#must-read_technical_analysis_articles) "Must-Read" Technical Analysis Articles ------------------------------------------------------------------------------------------------------------------------------------------------------------ [**John Murphy's Ten Laws of Technical Trading**](https://chartschool.stockcharts.com/table-of-contents/overview/john-murphys-10-laws-of-technical-trading) John's famous ten (plus one) rules that everyone should know about charting and technical analysis. [**John Murphy's "Charting Made Easy" eBook**](https://chartschool.stockcharts.com/table-of-contents/overview/john-murphys-charting-made-easy-ebook) An easy-to-read introduction to Technical Analysis written by John Murphy, covering all the basics in John's easily accessible style. [**Technical Analysis 101**](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101) A short course in the basic tenets of the field, designed to provide newcomers with a working background of technical analysis. [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview#the_psychology_of_investing) The Psychology of Investing -------------------------------------------------------------------------------------------------------------------------------------- [**Irrational Exuberance**](https://chartschool.stockcharts.com/table-of-contents/overview/irrational-exuberance) Describes the findings in Robert Shiller's behavioral finance book _Irrational Exuberance_, which looks at the cultural and psychological factors that influence the decision-making process when investing in stocks, using the 2000 stock market bubble as a case study. [**Cognitive Biases**](https://chartschool.stockcharts.com/table-of-contents/overview/cognitive-biases) A look at eleven of the most powerful and common cognitive biases faced by both the average individual throughout daily life and investors in today's financial markets. [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview#technical_analysis_rules_and_guidelines) Technical Analysis Rules and Guidelines -------------------------------------------------------------------------------------------------------------------------------------------------------------- [**Arthur Hill on Goals, Style and Strategy**](https://chartschool.stockcharts.com/table-of-contents/overview/arthur-hill-on-goals-style-and-strategy) StockCharts contributor Arthur Hill discusses how to approach financial market investing and trading in a must-read article for all StockCharts users. [**Arthur Hill on Moving Average Crossovers**](https://chartschool.stockcharts.com/table-of-contents/overview/arthur-hill-on-moving-average-crossovers) Arthur gives his take on moving average crossover systems, discussing pros and cons as well as their uncanny ability to “predict the past.” [**Multicollinearity**](https://chartschool.stockcharts.com/table-of-contents/overview/multicollinearity) A look at how to avoid having two very similar signals on the same chart and the importance of doing so. [**"The Trader's Journal" by Gatis Roze**](https://chartschool.stockcharts.com/table-of-contents/overview/the-traders-journal-by-gatis-roze) A collection of short articles by a successful technical trader about his tools, his routines and the lessons he has learned throughout his years in the market. [**Bob Farrell's 10 Rules**](https://chartschool.stockcharts.com/table-of-contents/overview/bob-farrells-10-rules) Wall Street veteran Bob Farrell of Merrill Lynch teaches investors to think outside the box with his 10 rules of investing. [**Richard Rhodes' Trading Rules**](https://chartschool.stockcharts.com/table-of-contents/overview/richard-rhodes-trading-rules) The 18 stock trading rules that Richard lives by. “The rules are simple; adherence to the rules is difficult.” [**Donchian Trading Guidelines**](https://chartschool.stockcharts.com/table-of-contents/overview/donchian-trading-guidelines) 20 trading guidelines developed by Richard Donchian, the father of trend following. [**Why and How To Use Correlation**](https://chartschool.stockcharts.com/table-of-contents/overview/why-and-how-to-use-correlation) An explanation of why and how to use correlation to build a stronger, more diversified and stable portfolio. [PreviousChartSchoolchevron-left](https://chartschool.stockcharts.com/) [NextWhy Analyze Securities?chevron-right](https://chartschool.stockcharts.com/table-of-contents/overview/why-analyze-securities) Last updated 5 months ago Was this helpful? * [What is Technical Analysis?](https://chartschool.stockcharts.com/table-of-contents/overview#what_is_technical_analysis) * [Introduction to Investing](https://chartschool.stockcharts.com/table-of-contents/overview#introduction_to_investing) * ["Must-Read" Technical Analysis Articles](https://chartschool.stockcharts.com/table-of-contents/overview#must-read_technical_analysis_articles) * [The Psychology of Investing](https://chartschool.stockcharts.com/table-of-contents/overview#the_psychology_of_investing) * [Technical Analysis Rules and Guidelines](https://chartschool.stockcharts.com/table-of-contents/overview#technical_analysis_rules_and_guidelines) Was this helpful? sun-brightdesktopmoon sun-brightdesktopmoon --- # John Murphy's 10 Laws of Technical Trading | ChartSchool | StockCharts.com _StockCharts.com's Chief Technical Analyst, John Murphy, is a popular author, columnist, and speaker on the subject of Technical Analysis. John's essay, “Ten Laws of Technical Trading,” is a collection of recommendations John frequently offers to those who are new to Technical Analysis. They are based on questions and comments he has received over the years after speaking to various audiences. If you are confused about how to use Technical Analysis at a practical day-to-day level, these suggestions should help._ [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/john-murphys-10-laws-of-technical-trading#introduction) Introduction -------------------------------------------------------------------------------------------------------------------------------------------------- Which way is the market moving? How far up or down will it go? And when will it go the other way? These are the basic concerns of the technical analyst. Behind the charts and graphs and mathematical formulas used to analyze market trends are some basic concepts that apply to most of the theories employed by today's technical analysts. John Murphy, StockCharts.com's Chief Technical Analyst, has drawn upon his thirty years of experience in the field to develop ten basic laws of technical trading: rules that are designed to help explain the whole idea of technical trading for the beginner and to streamline the trading methodology for the more experienced practitioner. These precepts define the key tools of technical analysis and how to use them to identify buying and selling opportunities. Before joining StockCharts, John was the technical analyst for CNBC-TV for seven years on the popular show **Tech Talk**, and has authored three best-selling books on the subject: [_Technical Analysis of the Financial Markets_arrow-up-right](https://store.stockcharts.com/products/technical-analysis-of-the-financial-markets-1) , [_Trading with Intermarket Analysis_arrow-up-right](https://store.stockcharts.com/products/trading-with-intermarket-analysis) _,_ and [_The Visual Investor_arrow-up-right](https://store.stockcharts.com/products/the-visual-investor-2nd-edition) . In _The Visual Investor_, John demonstrates the essential visual elements of technical analysis. The fundamentals of John's approach to technical analysis illustrate that it is more important to determine where a market is going (up or down) rather than the reason behind its direction. #### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/john-murphys-10-laws-of-technical-trading#the-following-are-johns-ten-most-important-rules-of-technical-trading) The following are John's ten most important rules of technical trading: ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/john-murphys-10-laws-of-technical-trading#map_the_trends) 1\. Map the Trends **Study long-term charts.** Begin a chart analysis with monthly and weekly charts spanning several years. A larger scale map of the market provides more visibility and a better long-term perspective on a market. Once the long-term has been established, then consult daily and intra-day charts. A short-term market view alone can often be deceptive. Even if you only trade the short term, you will do better if you're trading in the same direction as the intermediate- and longer-term trends. ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/john-murphys-10-laws-of-technical-trading#spot_the_trend_and_go_with_it) 2\. Spot the Trend and Go With It **Determine the trend and follow it.** Market trends come in many sizes – long-term, intermediate-term and short-term. First, determine which one you're going to trade and use the appropriate chart. Make sure you trade in the direction of that trend. Buy dips if the trend is up. Sell rallies if the trend is down. If you're trading the intermediate trend, use daily and weekly charts. If you're day trading, use daily and intra-day charts. But in each case, let the longer range chart determine the trend, and then use the shorter term chart for timing. ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/john-murphys-10-laws-of-technical-trading#find_the_low_and_high_of_it) 3\. Find the Low and High of It **Find support and resistance levels.** The best place to buy a market is near support levels. That support is usually a previous reaction low. The best place to sell a market is near resistance levels. Resistance is usually a previous peak. After a resistance peak has been broken, it will usually provide support on subsequent pullbacks. In other words, the old “high” becomes the new low. In the same way, when a support level has been broken, it will usually produce selling on subsequent rallies – the old “low” can become the new “high.” ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/john-murphys-10-laws-of-technical-trading#know_how_far_to_backtrack) 4\. Know How Far to Backtrack **Measure percentage retracements.** Market corrections up or down usually retrace a significant portion of the previous trend. You can measure the corrections in an existing trend in simple percentages. A fifty percent retracement of a prior trend is most common. A minimum retracement is usually one-third of the previous trend. The maximum retracement is usually two-thirds. Fibonacci Retracements (1) of 38% and 62% are also worth watching. Therefore, during a pullback in an uptrend, initial buy points are in the 33–38% retracement area. ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/john-murphys-10-laws-of-technical-trading#draw_the_line) 5\. Draw the Line **Draw trend lines.** Trend lines are one of the simplest and most effective charting tools. All you need is a straight edge and two points on the chart. Uptrend lines are drawn along two successive lows. Down trend lines are drawn along two successive peaks. Prices will often pull back to trend lines before resuming their trend. The breaking of trend lines usually signals a change in trend. A valid trend line should be touched at least three times. The longer a trend line has been in effect and the more times it has been tested, the more critical it becomes. ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/john-murphys-10-laws-of-technical-trading#follow_that_average) 6\. Follow that Average **Follow moving averages.** Price moves above or below moving averages provide objective buy and sell signals. They tell you if the existing trend is still in motion, and they help confirm trend changes. However, moving averages do not tell you in advance that a trend change is imminent. In stock trading, the three most important ones are the 20-day average for short-term trends, 50-day for intermediate trends, and 200-day for major trends. Crossings of two moving averages also provide trading signals. Three popular combinations are 5–20 days, 20–50 days, and 50–200 days. Exponential moving averages (EMAs) are usually more suitable for spotting moving average crossings. ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/john-murphys-10-laws-of-technical-trading#learn_the_turns) 7\. Learn the Turns **Track oscillators.** Oscillators help identify overbought and oversold markets. While moving averages confirm a market trend change, oscillators often help warn us that a market has rallied or fallen too far and will soon turn. The [Relative Strength Index (RSI)](https://chartschool.stockcharts.com/table-of-contents/technical-indicators-and-overlays/technical-indicators/relative-strength-index-rsi) and [the Stochastics Oscillator](https://chartschool.stockcharts.com/table-of-contents/technical-indicators-and-overlays/technical-indicators/stochastic-oscillator-fast-slow-and-full) are popular oscillators. They both work on a scale of 0 to 100. With the RSI, readings over 70 are overbought, while readings below 30 are oversold. The overbought and oversold values for Stochastics are 80 and 20. Most traders use 14 days or weeks for Stochastics and either 9 or 14 days or weeks for RSI. Oscillator divergences often warn of market turns. These tools work best in a trading market range. Weekly signals can be used as filters for daily signals. Daily signals can be used as filters for intra-day charts. ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/john-murphys-10-laws-of-technical-trading#know_the_warning_signs) 8\. Know the Warning Signs **Trade the MACD indicator.** The [Moving Average Convergence Divergence (MACD) indicator](https://chartschool.stockcharts.com/table-of-contents/technical-indicators-and-overlays/technical-indicators/macd-moving-average-convergence-divergence-oscillator) (developed by Gerald Appel) combines a moving average crossover system with the overbought/oversold elements of an oscillator. A buy signal occurs when the faster line crosses above the slower and both lines are below zero. A sell signal takes place when the faster line crosses below the slower from above the zero line. Weekly signals take precedence over daily signals. A MACD histogram plots the difference between the two lines and gives even earlier warnings of trend changes. It's called a “histogram” because vertical bars are used to show the difference between the two lines on the chart. ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/john-murphys-10-laws-of-technical-trading#trend_or_not_a_trend) 9\. Trend or Not a Trend **Use the ADX indicator.** The [Average Directional Movement Index (ADX) line](https://chartschool.stockcharts.com/table-of-contents/technical-indicators-and-overlays/technical-indicators/average-directional-index-adx) helps determine whether a market is in a trending or trading phase. It measures the degree of trend or direction in the market. A rising ADX line suggests the presence of a strong trend. A falling ADX line suggests the presence of a trading market and the absence of a trend. A rising ADX line favors moving averages; a falling ADX favors oscillators. By plotting the direction of the ADX line, the trader is able to determine which trading style and which set of indicators are most suitable for the current market environment. ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/john-murphys-10-laws-of-technical-trading#know_the_confirming_signs) 10\. Know the Confirming Signs **Don't ignore volume.** Volume is a very important confirming indicator. _Volume precedes price._ It's important to ensure that heavier volume is taking place in the direction of the prevailing trend. In an uptrend, heavier volume should be seen on up days. Rising volume confirms that new money is supporting the prevailing trend. Declining volume is often a warning that the trend is near completion. A solid price uptrend should always be accompanied by rising volume. ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/john-murphys-10-laws-of-technical-trading#section11) "11." **Keep at it.** Technical analysis is a skill that improves with experience and study. Always be a student and keep learning. \- John Murphy * * * 1) Leonardo Fibonacci was a thirteenth-century mathematician who “rediscovered” a precise and almost constant relationship between Hindu-Arabic numbers in a sequence (1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, etc. to infinity). The sum of any two consecutive numbers in this sequence equals the next higher number. After the first four, the ratio of any number in the sequence to its next higher number approaches .618. That ratio was known to the ancient Greek and Egyptian mathematicians as the “Golden Mean” which had critical applications in art, architecture and in nature. [PreviousOptions Trading Strategieschevron-left](https://chartschool.stockcharts.com/table-of-contents/overview/options-trading/options-trading-strategies) [NextJohn Murphy's "Charting Made Easy" eBookchevron-right](https://chartschool.stockcharts.com/table-of-contents/overview/john-murphys-charting-made-easy-ebook) Last updated 1 year ago Was this helpful? * [Introduction](https://chartschool.stockcharts.com/table-of-contents/overview/john-murphys-10-laws-of-technical-trading#introduction) * [1\. Map the Trends](https://chartschool.stockcharts.com/table-of-contents/overview/john-murphys-10-laws-of-technical-trading#map_the_trends) * [2\. Spot the Trend and Go With It](https://chartschool.stockcharts.com/table-of-contents/overview/john-murphys-10-laws-of-technical-trading#spot_the_trend_and_go_with_it) * [3\. Find the Low and High of It](https://chartschool.stockcharts.com/table-of-contents/overview/john-murphys-10-laws-of-technical-trading#find_the_low_and_high_of_it) * [4\. Know How Far to Backtrack](https://chartschool.stockcharts.com/table-of-contents/overview/john-murphys-10-laws-of-technical-trading#know_how_far_to_backtrack) * [5\. Draw the Line](https://chartschool.stockcharts.com/table-of-contents/overview/john-murphys-10-laws-of-technical-trading#draw_the_line) * [6\. Follow that Average](https://chartschool.stockcharts.com/table-of-contents/overview/john-murphys-10-laws-of-technical-trading#follow_that_average) * [7\. Learn the Turns](https://chartschool.stockcharts.com/table-of-contents/overview/john-murphys-10-laws-of-technical-trading#learn_the_turns) * [8\. Know the Warning Signs](https://chartschool.stockcharts.com/table-of-contents/overview/john-murphys-10-laws-of-technical-trading#know_the_warning_signs) * [9\. Trend or Not a Trend](https://chartschool.stockcharts.com/table-of-contents/overview/john-murphys-10-laws-of-technical-trading#trend_or_not_a_trend) * [10\. Know the Confirming Signs](https://chartschool.stockcharts.com/table-of-contents/overview/john-murphys-10-laws-of-technical-trading#know_the_confirming_signs) * ["11." Keep at it.](https://chartschool.stockcharts.com/table-of-contents/overview/john-murphys-10-laws-of-technical-trading#section11) Was this helpful? sun-brightdesktopmoon sun-brightdesktopmoon --- # John Murphy's "Charting Made Easy" eBook | ChartSchool | StockCharts.com [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/john-murphys-charting-made-easy-ebook#introduction) Introduction ---------------------------------------------------------------------------------------------------------------------------------------------- Chart analysis has become more popular than ever. One of the reasons for that is the availability of highly sophisticated, yet inexpensive, charting software. The average trader today has greater computer power than the major institutions had just a couple of decades ago. Another reason for the popularity of charting is the Internet. Easy access to Internet charting has produced a great democratization of technical information. Anyone can log onto the Internet today and see a dazzling array of visual market information. Much of that information is freely available at very low cost. Another revolutionary development for traders is the availability of _live_ market data. With the increased speed of market trends in recent years, and the popularity of short-term trading methods, easy access to live market data has become an indispensable weapon in the hands of technically oriented traders. Day-traders live and die with that minute-by-minute price data. And, it goes without saying, that the ability to spot and profit from those short-term market swings is one of the strong points of chart analysis. Sector rotation has been especially important in recent years. More than ever, it's important to be in the right sectors at the right time. During the second half of 1999, technology was the place to be and that was reflected in enormous gains in the Nasdaq market. Biotech and high-tech stocks were the clear market leaders. If you were in those groups, you did great. If you were anywhere else, you probably lost money. During the spring of 2000, however, a sharp sell off of biotech and technology stocks pushed the Nasdaq into a steep correction and caused a sudden rotation into previously ignored sectors of the blue chip market - like drugs, financials, and basic industry stocks - as money moved out of “new economy” stocks into “old economy” stocks. While the fundamental reasons for those sudden shifts in trends weren't clear at the time, they were easily spotted on the charts by traders who had access to live market information - and know how to chart and interpret it correctly. That last point is especially important because having access to charts and data is only helpful if the trader knows what to do with them. And that's the purpose of this booklet. It will introduce to you the more important aspects of chart analysis. Charts can be used by themselves or in combination with fundamental analysis. Charts can be used to time entry and exit points by themselves or in the implementation of fundamental strategies. Charts can also be used as an alerting device to warn the trader that something may be changing in the market's underlying fundamentals. Whichever way you choose to employ them, charts can be an extremely valuable tool - if you know how to use them. This booklet is a good place to start learning how. – John J. Murphy * * * [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/john-murphys-charting-made-easy-ebook#why_is_chart_analysis_so_important) Why is Chart Analysis So Important? ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Successful participation in the financial markets virtually demands some mastery of chart analysis. Consider the fact that all decisions in various markets are based, in one form or another, on a market forecast. Whether the market participant is a short-term trader or long-term investor, _price forecasting_ is usually the first, most important step in the decision-making process. To accomplish that task, there are two methods of forecasting available to the market analyst - the fundamental and the technical. _Fundamental analysis_ is based on the traditional study of supply and demand factors that cause market prices to rise or fall. In financial markets, the fundamentalist would look at such things as corporate earnings, trade deficits, and changes in the money supply. The intention of this approach is to arrive at an estimate of the intrinsic value of a market in order to determine if the market is over- or under-valued. _Technical or chart analysis_, by contrast, is based on the study of the market action itself. While fundamental analysis studies the reasons or causes for prices going up or down, _technical analysis studies the effect, the price movement itself_. That's where the study of price charts comes in. Chart analysis is extremely useful in the price-forecasting process. Charting can be used by itself with no fundamental input, or in conjunction with fundamental information. Price forecasting, however, is only the first step in the decision-making process. [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/john-murphys-charting-made-easy-ebook#market_timing) Market Timing ------------------------------------------------------------------------------------------------------------------------------------------------ The second, and often the more difficult, step is _market timing_. For short-term traders, minor price moves can have a dramatic impact on trading performance. Therefore, the precise timing of entry and exit points is an indispensable aspect of any market commitment. To put it bluntly, _timing is everything in the stock market_. For reasons that will soon become apparent, timing is almost purely technical in nature. This being the case, it can be seen that the application of charting principles becomes absolutely essential at some point in the decision-making process. Having established its value, let's take a look at charting theory itself. [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/john-murphys-charting-made-easy-ebook#what_is_chart_analysis) What is Chart Analysis? ------------------------------------------------------------------------------------------------------------------------------------------------------------------- Chart analysis (also called _technical analysis_) is the study of market action, using price charts, to forecast future price direction. _The cornerstone of the technical philosophy is the belief that all of the factors that influence market price - fundamental information, political events, natural disasters, and psychological factors - are quickly discounted in market activity_. In other words, the impact of these external factors will quickly show up in some form of price movement, either up or down. _Chart analysis, therefore, is simply a short-cut form of fundamental analysis._ Consider the following: A rising price reflects _bullish_ fundamentals, where demand exceeds supply; falling prices would mean that supply exceeds demand, identifying a _bearish_ fundamental situation. These shifts in the fundamental equation cause price changes, which are readily apparent on a price chart. The chartist is quickly able to profit from these price changes without necessarily knowing the specific reasons causing them. The chartist simply reasons that rising prices are indicative of a bullish fundamental situation and that falling prices reflect bearish fundamentals. Another advantage of chart analysis is that the market price itself is usually a leading indicator of the know fundamentals. Chart action, therefore, can alert a fundamental analyst to the fact that something important is happening beneath the surface and encourage closer market analysis. ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/john-murphys-charting-made-easy-ebook#charts_reveal_price_trends) Charts Reveal Price Trends Markets move in trends. The major value of price charts is that they reveal the existence of market trends and greatly facilitate the study of those trends. Most of the techniques used by chartists are for the purpose of identifying significant trends, to help determine the probable extent of those trends, and to identify as early as possible when they are changing direction. **Figure 2-1: Daily Bar Chart** _This daily chart of Intel is a good example of an uptrend over a six-month period. Charts facilitate the study of trends. Important trends persist once they are established._ [_Click here for a live version of the chart._arrow-up-right](https://stockcharts.com/h-sc/ui?s=_INTC&p=D&st=1999-07-15&en=2000-03-27&id=p46989376837) ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FurLj08HB63BmtBak5veh%252Ffigure2-1.png%3Falt%3Dmedia%26token%3D457fd3f8-a825-4641-9f98-254926ae4ebe&width=768&dpr=4&quality=100&sign=36aeb582&sv=2) **Figure 2-1: Daily Bar Chart** **Figure 2-2: Candlestick Chart** _A candlestick chart of Intel covering two months. The narrow wick is the day's range. The fatter portion is the area between the open and close. Open candles are positive; darker ones are negative._ [_Click here for a live version of the chart._arrow-up-right](https://stockcharts.com/h-sc/ui?s=_INTC&p=D&st=2000-01-20&en=2000-03-29&id=p45201229534&a=333163697) ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252Fu5QRymGS5w9XLGjNbD4Z%252Ffigure2-2.png%3Falt%3Dmedia%26token%3D68317ecd-7826-402d-802b-8836ec50b9a1&width=768&dpr=4&quality=100&sign=8cf19640&sv=2) **Figure 2-2: Candlestick Chart** * * * [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/john-murphys-charting-made-easy-ebook#types_of_charts_available) Types of Charts Available ------------------------------------------------------------------------------------------------------------------------------------------------------------------------ The most popular type of chart used by technical analysts is the _daily bar chart_. Each bar represents one day of trading. Japanese candlestick charts have become popular in recent years. _Candlestick charts_ are used in the same way as bar charts, but present a more visual representation of the day's trading. _Line Charts_ can also be employed (see Figure 2-3). The line chart simply connects each successive day's closing prices and is the simplest form of charting. _A line chart of Intel for an entire year. A single line connecting successive closing prices is the simplest form of charting._ [_Click here for a live version of the chart._arrow-up-right](https://stockcharts.com/h-sc/ui?s=INTC&p=D&st=1998-11-02&en=2000-03-27&id=p81483682483) ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FLIhxT6IV8OSEHgRX5Zz8%252Ffigure2-3.png%3Falt%3Dmedia%26token%3Dc2ab1a5e-94f1-4445-8454-0f421ccee402&width=768&dpr=4&quality=100&sign=ddc15f5f&sv=2) **Figure 2-2: Candlestick Chart** ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/john-murphys-charting-made-easy-ebook#any_time_dimension) Any Time Dimension All of the above chart types can be employed for _any time dimension_. The daily chart, which is the most popular time period, is used to study price trends for the past year. For longer range trend analysis going back five or ten years, weekly and monthly charts can be employed. For short-term (or day-trading) purposes, intraday charts are most useful. \[Intraday charts can be plotted for periods as short as 1-minute, 5-minute or 15-minute time periods.\] * * * [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/john-murphys-charting-made-easy-ebook#how_to_plot_the_daily_bar_chart) How to Plot the Daily Bar Chart ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ Price plotting is an extremely simple task. The daily bar chart has both a vertical and horizontal axis. The vertical axis (along the side of the chart) shows the price scale, while the horizontal axis (along the bottom of the chart) records calendar time. The first step in plotting a given day's price data is to locate the correct calendar day. This is accomplished simply by looking at the calendar dates along the bottom of the chart. Plot the high, low, and closing (settlement) prices for the market. A _vertical bar connects the high and low_ (the range). The _closing price_ is recorded with a horizontal tic to the right of the bar. (Chartists mark the _opening price_ with a tic to the left of the bar.) Each day simply move one step to the right. _Volume_ is recorded with a vertical bar along the bottom of the chart. **Figure 3-1: Construction of a Daily Bar Chart** _The construction of a daily bar chart is simple. The vertical bar is drawn from the day's high to the low. The tic to the left is the open; the tic to the right is the close. Volume bars are drawn along the bottom of the chart._ [_Click here for a live version of the chart._arrow-up-right](https://stockcharts.com/h-sc/ui?s=_IBM&p=D&st=2000-02-01&en=2000-03-22&id=p36151638864&a=332460704) ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FA4koAU7X8kiXXYp6wigf%252Ffigure3-1.png%3Falt%3Dmedia%26token%3Dfdee4f9b-2ea9-42e5-bc77-b8dec5625b9d&width=768&dpr=4&quality=100&sign=30a95c0a&sv=2) **Figure 3-1: Construction of a Daily Bar Chart** Two basic premises of chart analysis are that _markets trends_ and that _trends tend to persist_. Trend analysis is really what chart analysis is all about. Trends are characterized by a series of peaks and troughs. An _uptrend_ is a series of rising peaks and troughs. A _downtrend_ shows descending peaks and troughs. Finally, _trends_ are usually classified into three major categories: major, secondary, and minor. A _major_ trend lasts more than a year; a _secondary_ trend, from one to three months; and a _minor_ trend, usually a couple of weeks or less. * * * [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/john-murphys-charting-made-easy-ebook#support_and_resistance_trendlines_and_channels) Support and Resistance Trendlines and Channels ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ There are two terms that define the peaks and troughs on the chart. A previous trough usually forms a support level. _Support_ is a level _below the market_ where buying pressure exceeds selling pressure and a decline is halted. _Resistance_ is marked by a previous market peak. Resistance is a level _above the market_ where selling pressure exceeds buying pressure and a rally is halted. **Figure 4-1: Support and Resistance** _An uptrend is marked by rising peaks and troughs. Each peak is called resistance; each trough is called support. The uptrend is continued when a resistance peak is exceeded._ [_Click here for a live version of the chart._arrow-up-right](https://stockcharts.com/h-sc/ui?s=_HAL&p=D&st=1999-09-01&en=2000-04-28&id=p86896316944&a=333304143) ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252F5NCiwYOEeccfAJIXws1H%252Ffigure4-1.png%3Falt%3Dmedia%26token%3Dffff0a22-ddf4-4acc-9164-36c25cc4f819&width=768&dpr=4&quality=100&sign=91d7f453&sv=2) **Figure 4-1: Support and Resistance** _Support and resistance levels reverse roles once they are decisively broken._ That is to say, a broken support level under the market becomes a resistance level above the market. A broken resistance level over the market functions as support below the market. The more recently the support or resistance level has been formed, the more power it exerts on subsequent market action. This is because many of the trades that helped form those support and resistance levels have not been liquidated and are more likely to influence future trading decisions. **Figure 4-2: Role Reversal** _An example of role reversal. A broken resistance level usually becomes a new support level. In a downtrend, a broken support level becomes resistance._ [_Click here for a live version of the chart._arrow-up-right](https://stockcharts.com/h-sc/ui?s=XOM&p=D&st=2005-08-01&en=2006-10-31&id=p95281708788&a=333307101&listNum=2) ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FHWH39nz4ni0u7XEwzeFD%252Ffigure4-2.png%3Falt%3Dmedia%26token%3Df091ef8b-328f-4836-8a6d-7ec5ef98f734&width=768&dpr=4&quality=100&sign=e46f1cf&sv=2) **Figure 4-2: Role Reversal** The trendline is perhaps the simplest and most valuable tool available to the chartist. An _up trendline_ is a straight line drawn up and to the right, connecting successive rising market bottoms. The line is drawn in such a way that all of the price action is above the trendline. A _down trendline_ is drawn down and to the right, connecting the successive declining market highs. The line is drawn in such a way that all of the price action is below the trendline. An up trendline, for example, is drawn when at least two rising reaction lows (or troughs) are visible. However, while it takes two points to draw a trendline, _a third point is necessary to identify the line as a valid trend line_. If prices in an uptrend dip back down to the trendline a third time and bounce off it, a valid up trendline is confirmed. **Figure 4-3: Rising Trendline** _An example of a rising trendline. Up trendlines are drawn under rising lows. A valid trendline should be touched three times as shown here._ [_Click here for a live version of the chart._arrow-up-right](https://stockcharts.com/h-sc/ui?s=MSFT&p=D&st=1999-03-01&en=2000-03-03&id=p66274704886&a=333310137) ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FaK9sm39SBiuaT3XLdLO8%252Ffigure4-3.png%3Falt%3Dmedia%26token%3De775cf3c-fa3a-4c4b-becc-c70822573025&width=768&dpr=4&quality=100&sign=82851cd0&sv=2) **Figure 4-3: Rising Trendline** Trendlines have two major uses. They allow identification of support and resistance levels that can be used, while a market is trending, to initiate new positions. As a rule, the longer a trendline has been in effect and the more times it has been tested, the more significant it becomes. The violation of a trendline is often the best warning of a change in trend. _Channel lines_ are straight lines that are drawn parallel to basic trendlines. A rising channel line would be drawn above the price action and parallel to the basic trendline (which is below the price action). A declining channel line would be drawn below the price action and parallel to the down trendline (which is above the price action). Markets often trend within these channels. When this is the case, the chartist can use that knowledge to great advantage by knowing in advance where support and resistance are likely to function. **Figure 4-4: Channel Line** _An example of a channel line. During an uptrend, prices will often meet new selling along an upper channel line which is drawn parallel to the rising trendline._ [_Click here for a live version of the chart._arrow-up-right](https://stockcharts.com/h-sc/ui?s=CSCO&p=D&st=1999-01-01&en=1999-12-31&id=p03438216110&a=333311394) ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FQETdyLaGFSWpaJGM4f8F%252Ffigure4-4.png%3Falt%3Dmedia%26token%3D49f29644-adef-40f1-869a-b0c2f51c72ed&width=768&dpr=4&quality=100&sign=159fbd61&sv=2) **Figure 4-4: Channel Line** * * * [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/john-murphys-charting-made-easy-ebook#reversal_and_continuation_price_patterns) Reversal and Continuation Price Patterns ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ One of the most useful features of chart analysis is the presence of price patterns, which can be classified into different categories and which have predictive value. These patterns reveal the ongoing struggle between the forces of supply and demand, as seen in the relationship between the various support and resistance levels, and allow the chart reader to gauge which side is winning. Price patterns are broken down into two groups - reversal and continuation patterns. _Reversal_ patterns usually indicate that a trend reversal is taking place. _Continuation_ patterns usually represent temporary pauses in the existing trend. _Continuation patterns take less time to form than reversal patterns and usually result in resumption of the original trend._ ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/john-murphys-charting-made-easy-ebook#reversal_patterns) Reversal Patterns ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/john-murphys-charting-made-easy-ebook#the-head-and-shoulders) **The Head and Shoulders** The _head and shoulders_ is the best known and probably the most reliable of the reversal patterns. A head and shoulders top is characterized by three prominent market peaks. The middle peak, or the _head_, is higher than the two surrounding peaks (_the shoulders_). A trendline (_the neckline_) is drawn below the two intervening reaction lows. A close below the neckline completes the pattern and signals an important market reversal. **Figure 5-1: Head and Shoulders** _Example of a head and shoulders bottom on a daily chart of Alaska Air Group (ALK)._ [_Click here for a live version of the chart._arrow-up-right](https://stockcharts.com/h-sc/ui?s=ALK&p=D&st=1998-07-01&en=1999-02-26&id=p88206244808&a=333294482) ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FVM2IJaWSDWMuUrK6g57E%252Ffigure5-1.png%3Falt%3Dmedia%26token%3D16a3bdb0-c07b-4943-9998-f29ae3dd0688&width=768&dpr=4&quality=100&sign=33c402f2&sv=2) **Figure 5-1: Head and Shoulders Pattern** Price objectives or targets can be determined by measuring the shapes of the various price patterns. The measuring technique in a topping pattern is to measure the vertical distance from the top of the head to the neckline and to project the distance downward from the point where the neckline is broken. The head and shoulders bottom is the same as the top except that is turned upside down. ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/john-murphys-charting-made-easy-ebook#double-and-triple-tops-and-bottoms) **Double and Triple Tops and Bottoms** Another one of the reversal patterns, the _triple top or bottom_ is a variation of the head and shoulders. The only difference is that the three peaks or troughs in this pattern occur at about the same level. _Triple_ tops or bottoms and the _head and shoulders_ reversal pattern are interpreted in similar fashion and mean essentially the same thing. **Figure 5-2: Double Bottom Chart** _Example of a double bottom on the daily chart of General Electric (GE)._ [_Click here for a live version of the chart._arrow-up-right](https://stockcharts.com/h-sc/ui?s=_GE&p=D&st=2000-01-03&en=2000-03-31&id=p90069005193&a=331941780) ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FFeBg1UNiHRwmzJGNkXTM%252Ffigure5-2.png%3Falt%3Dmedia%26token%3D7dc7768e-140e-4426-aadc-aaf0c7e73f60&width=768&dpr=4&quality=100&sign=9ed98552&sv=2) **Figure 5-2: Double Bottom Chart** _Double tops and bottoms_ (also called M's and W's because of their shape) show _two_ prominent peaks or troughs instead of _three_. A _double top_ is identified by two prominent peaks. The inability of the second peak to move above the first peak is the first sign of weakness. When prices then decline and move under the middle trough, the double top is completed. The measuring technique for the double top is also based on the height of the pattern. The height of the pattern is measured and projected downward from the point where the trough is broken. The double bottom is the image of the double top. **Figure 5-3: Double Top Reversal Pattern** _Two prominent peaks can be seen on the chart for LMT, forming a double top reversal pattern._ [_Click here for a live version of the chart._arrow-up-right](https://stockcharts.com/h-sc/ui?s=LMT&p=D&st=2010-01-01&en=2010-07-01&id=p39710063775&a=333299572) ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252F2WFt7rMTiSucl7uXofUq%252Ffigure5-3.png%3Falt%3Dmedia%26token%3D2a76d0e4-0793-4949-a54f-2fb5566c9615&width=768&dpr=4&quality=100&sign=7e8cfa20&sv=2) **Figure 5-2: Double Bottom Reversal Pattern** * * * [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/john-murphys-charting-made-easy-ebook#saucers-and-spikes) **Saucers and Spikes** -------------------------------------------------------------------------------------------------------------------------------------------------------------- These two patterns aren't as common, but are seen enough to warrant discussion. The _spike_ top (also called a V-reversal) pictures a sudden change in trend. What distinguishes the _spike_ from the other reversal patterns is the absence of a transition period, which is sideways price action on the chart constituting topping or bottoming activity. This type of pattern marks a dramatic change in trend with little or no warning. The saucer, by contrast, reveals an unusually slow shift in trend. Most often seen at bottoms, the saucer pattern represents a slow and more gradual change in trend from down to up. The chart picture resembles a saucer or rounding bottom - hence its name. **Figure 5-4: Spike Tops and Bottoms** _Two examples of a stock changing direction with little or no warning._ [_Click here for a live version of the chart._arrow-up-right](https://stockcharts.com/h-sc/ui?s=ISLE&p=D&st=2012-02-01&en=2013-03-29&id=p22883278806&a=333313335) ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252F8ReBtfTBG4ZtcN9kT6Ck%252Ffigure5-4.png%3Falt%3Dmedia%26token%3D05f7d81c-c9a2-4b16-b919-f4ab18630f65&width=768&dpr=4&quality=100&sign=839bea83&sv=2) **Figure 5-4: Spike Tops and Bottoms** **Figure 5-5: Saucer Bottom** _Some bottoms are a slow, gradual process and have a rounding shape like a saucer. This saucer bottom is Advanced Micro Devices (AMD) took almost a year to form._ [_Click here for a live version of the chart._arrow-up-right](https://stockcharts.com/h-sc/ui?s=_AMD&p=D&st=1998-11-02&en=2000-04-28&id=p19214107013&a=332301581) ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FRRq0SGvqONuQdEvwrues%252Ffigure5-5.png%3Falt%3Dmedia%26token%3Dcda81c54-3b1f-47ea-a71e-649ad4092566&width=768&dpr=4&quality=100&sign=270397dc&sv=2) **Figure 5-5: Saucer Bottom** * * * [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/john-murphys-charting-made-easy-ebook#continuation_patterms) Continuation Patterms ---------------------------------------------------------------------------------------------------------------------------------------------------------------- ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/john-murphys-charting-made-easy-ebook#triangles) **Triangles** Instead of warning of market reversals, continuation patterns are usually resolved in the direction of the original trend. Triangles are among the most reliable of the continuation patterns. There are three types of triangles that have forecasting value - symmetrical, ascending, and descending triangles. Although these patterns sometimes mark price reversals, they usually just represent pauses in the prevailing trend. The symmetrical triangle (also called the _coil_) is distinguished by sideways activity with prices fluctuating between two converging trendlines. The upper line is declining and the lower line is rising. Such a pattern describes a situation where buying and selling pressure are in balance. Somewhere between the halfway and the three-quarters point in the pattern, measured in calendar time from the left of the pattern to the point where the two lines meet at the right (the _apex_), the pattern should be resolved by a breakout. In other words, prices will close beyond one of the two converging trendlines. **Figure 5-6: Symmetrical Triangle** _An example of a symmetrical triangle during the 1999 advance in Citigroup. The two lines converge, with the upper line falling and the lower line rising. Since this is a continuation pattern, the odds favored resumption of the bull trend._ [_Click here for a live version of the chart._arrow-up-right](https://stockcharts.com/h-sc/ui?s=C&p=D&st=1998-12-01&en=2000-03-31&id=p08389221940&a=332301780) ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FMRxxcWw554wZlzdHFMl7%252Ffigure5-6.png%3Falt%3Dmedia%26token%3D08735f9b-51eb-48dc-87a4-cdbe9179f488&width=768&dpr=4&quality=100&sign=2641b13e&sv=2) **Figure 5-6: Symmetrical Triangle Pattern** The _ascending triangle_ has a flat upper line and a rising lower line. Since buyers are more aggressive than sellers, this is usually a bullish pattern. **Figure 5-7: Ascending Triangle** _An example of an ascending triangle. The upper line is flat, while the lower line is rising. This is usually a bullish pattern and is completed when prices close above the upper line._ [_Click here for a live version of the chart._arrow-up-right](https://stockcharts.com/h-sc/ui?s=WAG&p=D&st=2000-03-01&en=2000-07-14&id=p73968289943&a=333314034) ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FFw80pO09blQneBWTnppl%252Ffigure5-7.png%3Falt%3Dmedia%26token%3D92bd8a96-c148-4373-9b58-5739b5a634df&width=768&dpr=4&quality=100&sign=b24603b&sv=2) **Figure 5-7: Ascending Triangle Pattern** * * * The _descending triangle_ has a declining upper line and a flat lower line. Since sellers are more aggressive than buyers, this is usually a bearish pattern. The measuring technique for all three triangles is the same. Measure the height of the triangle at the widest point to the left of the pattern and measure that vertical distance from the point where either trendline is broken. While the _ascending_ and _descending_ triangles have a built-in bias, the _symmetrical_ triangle is inherently neutral. Since it is usually a continuation pattern, however, the symmetrical triangle does have a forecasting value and implies that the prior trend will be resumed. * * * ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/john-murphys-charting-made-easy-ebook#flags-and-pennants) **Flags and Pennants** These two short-term continuation patterns mark brief pauses, or resting periods, during dynamic market trends. Both are usually preceded by a steep price move (called the pole). In an uptrend, the steep advance pauses to catch its breath and moves sideways for two or three weeks. Then the uptrend continues on its way. The names aptly describe their appearance. The _pennant_ is usually horizontal with two converging trendlines (like a small symmetrical triangle) The _flag_ resembles a parallelogram that tends to slope against the trend. In an uptrend, therefore, the bull flag has a downward slope; in a downtrend, the bear flag slopes upward. Both patterns are said to “fly at half mast,” meaning that they often occur near the middle of the trend, making the halfway point in the market move. **Figure 5-8: Pennant** _An example of a pennant forming during the ascent of Apple Computer during November 1999. The pennant looks like a small symmetrical triangle, but normally doesn't last for more than two or three weeks. The breaking of the upper line signals resumption of the uptrend._ [_Click here for a live version of the chart._arrow-up-right](https://stockcharts.com/h-sc/ui?s=_AAPL&p=D&st=1999-09-20&en=1999-12-31&id=p58457358242&a=332302068) ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252Fg53boWwSO2ujX9oovojs%252Ffigure5-8.png%3Falt%3Dmedia%26token%3D0e6e602b-ae7b-4ab8-b941-36fc4d994742&width=768&dpr=4&quality=100&sign=58e9b55c&sv=2) **Figure 5-8: Pennant** * * * **Figure 5-9: Flag** _An example of a bullish flag forming during December 2013. Bull Flags are short-term patterns that slope against the prevailing trend. The uptrend usually resumes after the upper line is broken._ [_Click here for a live version of the chart._arrow-up-right](https://stockcharts.com/h-sc/ui?s=DIA&p=D&yr=0&mn=6&dy=0&id=p39185132596&a=333315360) ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252F14xhsy73JxQVzMx3mbx5%252Ffigure5-9.png%3Falt%3Dmedia%26token%3D081d34ad-2243-4619-8761-6a00e79b3d2f&width=768&dpr=4&quality=100&sign=b5058f8b&sv=2) **Figure 5-9: Flag** * * * In addition to price patterns, there are several other formations that show up on the price charts and that provide the chartist with valuable insights. Among those formations are price gaps, key reversal days, and percentage retracements. ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/john-murphys-charting-made-easy-ebook#price_gaps) Price Gaps Gaps are simply areas on the bar chart where no trading has taken place. An upward gap occurs when the lowest price for one day is higher than the highest price of the preceding day. A downward gap means that the highest price for one day is lower than the lowest price of the preceding day. There are different types of gaps that appear at different stages of the trend. Being able to distinguish among them can provide useful and profitable market insights. Three types of gaps have forecasting value- breakaway, runaway and exhaustion gaps. **Figure 6-1: Price Gaps** _Example of price gaps._ [_Click here for a live version of the chart._arrow-up-right](https://stockcharts.com/h-sc/ui?s=$NDX&p=60&st=2007-09-12&en=2007-09-28&id=p54470417527&a=333518535) ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FnzBcIVBZc0uq7p19iCGu%252Ffigure6-1.png%3Falt%3Dmedia%26token%3Da80906c2-4ed2-4442-8aff-730d3f12cf29&width=768&dpr=4&quality=100&sign=bb7a6e50&sv=2) **Figure 6-1: Price Gaps** The _breakaway_ gap usually occurs upon completion of an important price pattern and signals a significant market move. A breakout above the neckline of a head and shoulders bottom, for example, often occurs on a breakaway gap. The _runaway_ gap usually occurs after the trend is well underway. It often appears about halfway through the move (which is why it is also called a _measuring_ gap since it gives some indication of how much of the move is left). During uptrends, the breakaway and runaway gaps usually provide support below the market on subsequent market dips; during downtrends, these two gaps act as resistance over the market on bounces. The _exhaustion_ gap occurs right at the end of the market move and represents a last gasp in the trend. Sometimes an exhaustion gap is followed within a few days by a breakaway gap in the other direction, leaving several days of price action isolation by two gaps. This market phenomenon is called the _island reversal_ and usually signals an important market turn. * * * ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/john-murphys-charting-made-easy-ebook#the_key_reversal_day) The Key Reversal Day Another price formation is the _key reversal day_. This minor pattern often warns of an impending change in trend. In an uptrend, prices usually open higher, then break sharply to the downside and close below the previous day's closing price. (A bottom reversal day opens lower and closes higher). The wider the day's range and the heavier the volume, the more significant the warning becomes and the more authority it carries. _Outside_ reversal days (where the high and low of the current day's range are both wider than the previous day's range) are considered more potent. The key reversal day is a relatively minor pattern taken on its own merits, but can assume major importance if other technical factors suggest that an important change in trend is imminent. **Figure 7-1: Key Reversal Days** _Examples of key reversal days. The two downside reversal days are identified by higher openings and lower closings on heavy volume. The bigger the price range, the more significant is the reversal signal._ [_Click here for a live version of the chart._arrow-up-right](https://stockcharts.com/h-sc/ui?s=_IBM&p=D&st=1999-11-01&en=2000-01-31&id=p47691190545&a=332305643) ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FcLBmEfVzWw5CzV48lGln%252Ffigure7-1.png%3Falt%3Dmedia%26token%3D77ffe8bb-1fda-4d2f-89d7-2e658a867453&width=768&dpr=4&quality=100&sign=98ab64a9&sv=2) **Figure 7-1: Key Reversal Days** * * * [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/john-murphys-charting-made-easy-ebook#percentage_retracements) Percentage Retracements -------------------------------------------------------------------------------------------------------------------------------------------------------------------- Market trends seldom take place in straight lines. Most trend pictures show a series of zig-zags with several corrections against the existing trend. These corrections usually fall into certain predictable percentage parameters. The best-known example of this is the _fifty-percent retracement_. That is to say, a secondary, or intermediate, correction against a major uptrend often retraces about half of the prior uptrend before the bull trend is again resumed. Bear market bounces often recover about half of the prior downtrend. A minimum retracement is usually about a _third_ of the prior trend. The _two-thirds_ point is considered the maximum retracement that is allowed if the prior trend is going to resume. A retracement beyond the two-thirds point usually warns of a trend reversal in progress. Chartists also place importance on retracements of 38% and 62% which are called Fibonacci retracements. [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/john-murphys-charting-made-easy-ebook#the_interpretation_of_volume) The Interpretation of Volume ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ Chartists employ a two-dimensional approach to market analysis that includes a study of price and volume. Of the two, price is the more important. However, _volume_ provides important secondary confirmation of the price action on the chart and often gives advance warning of an impending shift in trend. **Figure 9-1: Price and Volume** _An example of price and volume moving in harmony during an uptrend. The price advance during January 2000 saw heavy trading. The February correction was on light volume. The resumption of the uptrend was on heavier volume again. That's what should happen during an uptrend._ [_Click here for a live version of the chart._arrow-up-right](https://stockcharts.com/h-sc/ui?s=JDSU&p=D&st=1999-12-06&en=2000-03-09&id=p62180418407&a=332305947) ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FHbL8s2dYznXrLWlzB4iZ%252Ffigure9-1.png%3Falt%3Dmedia%26token%3Defb895c7-3610-456a-a69c-68c247820397&width=768&dpr=4&quality=100&sign=e7511df3&sv=2) **Figure 9-1: Price and Volume** Volume is the number of units traded during a given time period, which is usually a day. It is the number of common stock shares traded each day in the stock market. Volume can also be monitored on a weekly basis for longer-range analysis. When used in conjunction with the price action, volume tells us something about the strength or weakness of the current price trend. Volume measures the pressure behind a given price move. As a rule, _heavier volume (marked by larger vertical bars at the bottom of the chart) should be present in the direction of the prevailing price trend._ During an uptrend, heavier volume should be seen during rallies, with lighter volume (smaller volume bars) during downside corrections. In downtrends, the heavier volume should occur on price selloffs. Bear market bounces should take place on a lighter volume. ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/john-murphys-charting-made-easy-ebook#volume-is-an-important-part-of-price-patterns) **Volume Is an Important Part of Price Patterns** Volume also plays an important role in the formation and resolution of price patterns. Each of the price patterns described previously has its own volume pattern. As a rule, volume tends to diminish as price patterns form. The subsequent breakout that resolves the pattern takes on added significance if the price breakout is accompanied by heavier volume. Heavier volume accompanying the breaking of trendlines and support or resistance levels lends greater weight to price activity. **Figure 9-2: Volume User in a Price Pattern** _An example of volume used in a price pattern. The chart shows ADM breaking a “neckline” of a head and shoulders top. The breaking of the neckline coincided with a burst in trading activity- which is usually a negative sign for the stock._ [_Click here for a live version of the chart._arrow-up-right](https://stockcharts.com/h-sc/ui?s=ADM&p=D&st=1997-04-01&en=1999-08-31&id=p98825539941&a=333352351) ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FBwck5nY3pv7lfxmnO2Su%252Ffigure9-2.png%3Falt%3Dmedia%26token%3D322f026b-2563-4194-8779-77ff5a851b61&width=768&dpr=4&quality=100&sign=3e323ddb&sv=2) **Figure 9-2: Volume User in a Price Pattern** * * * ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/john-murphys-charting-made-easy-ebook#on-balance-volume-obv) **On Balance Volume (OBV)** Market analysts have several indicators to measure trading volume. One of the simplest, and most effective, is _on-balance volume_ (OBV). OBV plots a running cumulative total of upside versus downside volume. Each day that a market closes higher, that day's volume is added to the previous total. On each down day, the volume is subtracted from the total. Over time, the on-balance volume will start to trend upward or downward. If it trends upward, that tells the trader there's more upside than downside volume, which is a good sign. A falling OBV line is usually a bearish sign. #### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/john-murphys-charting-made-easy-ebook#plotting-obv) **Plotting OBV** _The OBV line is usually plotted along the bottom of the price chart_. The idea is to make sure the price line and the OBV line are trending in the same direction. If prices are rising, but the OBV line is _flat_ or _falling_, that means there may not be enough volume to support higher prices. In that case, the divergence between a rising price line and a flat or falling OBV line is a negative warning. **Figure 9-3: Price and OBV Lines** _An example of price and OBV lines not confirming each other. The March 2000 move to new highs by JDS Uniphase was accompanied by a flat OBV line. That was an early warning of a possible top._ [_Click here for a live version of the chart._arrow-up-right](https://stockcharts.com/h-sc/ui?s=JDSU&p=D&st=1999-11-01&en=2000-05-31&id=p82998282116&a=332335891) ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FWra09FsdOEDlNuMlVX3Y%252Ffigure9-3.png%3Falt%3Dmedia%26token%3D258965cb-083b-4b65-8821-b59ca2702861&width=768&dpr=4&quality=100&sign=6e027523&sv=2) **Figure 9-3: Price and OBV Lines** * * * ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/john-murphys-charting-made-easy-ebook#obv-breakouts) **OBV Breakouts** During periods of sideways price movement, when the market trend is in doubt, _the OBV line will sometimes break out first and give an early hint of future price direction_. An _upside breakout_ in the OBV line should catch the trader's eye and cause him or her to take a closer look at the market or stock in question. At market bottoms, an upside breakout in on-balance volume is sometimes an early warning of an emerging uptrend. **Figure 9-4: On-Balance Volume (OBV) Line** _An example of the OBV line giving a bullish warning. During the decline in the price of GE during the 1st quarter of 2000, the rising On-Balance Volume line hinted at the bottom._ [_Click here for a live version of the chart._arrow-up-right](https://stockcharts.com/h-sc/ui?s=GE&p=D&st=1999-11-01&en=2000-05-31&id=p30585450471&a=332336283) ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FjWXvZvLqwt1Hc7iUCAS0%252Ffigure9-4.png%3Falt%3Dmedia%26token%3D1f5247e4-9cbf-46b9-8d83-57255df2837f&width=768&dpr=4&quality=100&sign=649bf132&sv=2) **Figure 9-4: On-Balance Volume (OBV) Line** * * * ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/john-murphys-charting-made-easy-ebook#other-volume-indicators) **Other Volume Indicators** There are many other indicators that measure the trend of volume - with names like Accumulation Distribution, Chaikin Oscillator, Market Facilitation Index, and Money Flow. While they're more complex in their calculations, they all the same intent- to determine if the volume trend is confirming, or diverging from, the price trend. * * * [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/john-murphys-charting-made-easy-ebook#using_different_timeframes_for_short-_and_long-term_views) Using Different Timeframes for Short- and Long-Term Views ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Bar chart analysis is not limited to daily bar charts. Weekly and monthly charts provide a valuable long-term perspective on market history that cannot be obtained by using daily charts alone. The daily bar chart usually shows up to twelve months of price history for each market. _Weekly charts_ show almost five years of data, while the _monthly charts_ go back over 20 years. **Figure 10-1: Weekly Bar Chart** _A demonstration of the importance of long-term perspective achieved by a weekly chart going back several years. The 1st upside breakout exceeded highs set a year earlier, which might have been spotted on a daily chart. The 2nd breakout, however, exceeded a peak set three years earlier- and would have been missed on a daily chart._ [_Click here for a live version of the chart._arrow-up-right](https://stockcharts.com/h-sc/ui?s=AMD&p=D&st=1997-01-01&en=2000-04-28&id=p34768318697&a=332336492) ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FZlUsey3KLc8hAbNHshR1%252Ffigure10-1.png%3Falt%3Dmedia%26token%3D15962d00-8abe-4a3d-a55f-f4915afde3a4&width=768&dpr=4&quality=100&sign=3e6a73b&sv=2) **Figure 10-1: Weekly Bar Chart** * * * By studying these charts, the chartist gets a better idea of long-term trends, where historic support and resistance levels are located, and is able to obtain a clearer perspective on the more recent action revealed in the daily charts. These weekly and monthly charts lend themselves quite well to standard chart analysis described in the preceding pages. The view held by some market observers that chart analysis is useful only for short-term analysis and timing is simply not true. The principles of chart analysis can be used in any time dimension. ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/john-murphys-charting-made-easy-ebook#using-intraday-charts) **Using Intraday Charts** Daily and weekly charts are useful for intermediate- and long-term analysis. For short-term trading, however, _intraday charts_ are extremely valuable. Intraday charts usually show only a few days of trading activity. A 15-minute bar chart, for example, might show only three or four days of trading. A 1-minute or a 5- minute chart usually shows only one or two days of trading respectively, and is generally used for day-trading purposes. Fortunately, all of the chart principles described herein can also be applied to intraday charts. * * * **Figure 10-2: Intraday Chart** _Example of a 60-minute bar chart. Charting principles (like gaps, trendlines, and price formation) can be seen on these intraday charts and are extremely helpful for short-term trading._ [_Click here for a live version of the chart._arrow-up-right](https://stockcharts.com/h-sc/ui?s=SPY&p=60&st=2013-08-22&en=2013-10-03&id=p24995180431&a=333530999) ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FmBAZFP9X4oUcQE8k9FtP%252Ffigure10-2.png%3Falt%3Dmedia%26token%3Da2696d60-5cac-492b-81ab-9174cfa85e58&width=768&dpr=4&quality=100&sign=377df140&sv=2) **Figure 10-2: Intraday Chart** * * * ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/john-murphys-charting-made-easy-ebook#going-from-the-long-term-to-the-short-term) **Going From the Long Term to the Short Term** As indispensable as the daily bar charts are to market timing and analysis, a thorough chart analysis should begin with the monthly and weekly charts- and in that order. The purpose of that approach is to provide the analyst with the necessary long-term view as a starting point. Once that is obtained on the 20- year monthly chart, the 5-year weekly chart should be consulted. Only then should the daily chart be studied. In other words, the proper order to follow is to begin with a solid overview and then gradually shorten the time horizon. (For even more microscopic market analysis, the study of the daily chart can be followed by the scrutiny of intraday charts). * * * [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/john-murphys-charting-made-easy-ebook#using_a_top-down_market_approach) Using a Top-Down Market Approach -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- The idea of beginning one's analysis with a broader view and gradually narrowing one's focus has another important application in the field of market analysis. That has to do with utilizing a “top-down” approach to analyzing the stock market. This approach utilizes a three-step approach to finding winning stocks. It starts with an overall market view to determine whether the stock market is moving up or down, and whether this is a good time to be investing in the market. It then breaks the stock market down into market sectors and industry groups to determine which parts of the stock market look the strongest. Finally, it seeks out leading stocks in those leading sectors and groups. ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/john-murphys-charting-made-easy-ebook#the-first-step-the-major-market-averages) **THE FIRST STEP: The Major Market Averages** The intent of the first step in the “top-down” approach is to determine the trend of the overall market. The presence of a bull market (a rising trend) is considered a good time to invest funds in the stock market. The presence of a bear market (a falling trend) might suggest a more cautious approach to the stock market. In the past, it was possible to look at one of several major market averages to gauge the market's trend. That was because most major averages usually trended in the same direction. That hasn't always been the case in recent history, however. For that reason, it's important to have some familiarity with the major market averages, and to know what each one actually measures. ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/john-murphys-charting-made-easy-ebook#different-averages-measure-different-things) **Different Averages Measure Different Things** The traditional blue chip averages- like the Dow Jones Industrial Average, the NYSE Composite Index, and the S&P 500- generally give the best measure of the major market trend. The Nasdaq Composite Index, by contrast, is heavily influenced by technology stocks. While the Nasdaq is a good barometer of trends in the technology sector, it's less useful as a measure of the overall market trend. The Russell 2000 Index measures the performance of smaller stocks. For that reason, it's used mainly to gauge the performance of that sector of the market. The Russell is less useful as a measure of the broader markets which is comprised of larger stocks. Since most of these markets are readily available in the financial press and on the Internet, it's usually a good idea to keep an eye on all of them. The strongest signals about market directions are given when all or most of the major market averages are trending in the same direction. **Figure 11-1: Major Market Average** _The best way to determine the trend of the stock market is to chart one of the major market averages. This example shows that the NYSE Composite Index has been rising several years._ [_Click here for a live version of the chart._arrow-up-right](https://stockcharts.com/h-sc/ui?s=$NYA&p=W&st=1996-01-01&en=2000-01-31&id=p04228884731&a=332463557) ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252F1C1xqdfQWVUm1lmoAnZH%252Ffigure11-1.png%3Falt%3Dmedia%26token%3D1259264b-c224-4bd7-8575-a6eb66559262&width=768&dpr=4&quality=100&sign=cd6b3858&sv=2) **Figure 11-1: Major Market Average** * * * ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/john-murphys-charting-made-easy-ebook#the-second-step-sectors-and-industry-groups) **THE SECOND STEP: Sectors and Industry Groups** The stock market is divided into _market sectors_ which are sub-divided further into _industry groups_. There are ten market sectors, which include Basic Materials, Consumer Cyclicals, Consumer Non-Cyclicals, Energy, Financial, Healthcare, Industrial, Technology, Telecommunications, and Utilities. Each of those sectors can have as many as a dozen or more industry groups. For example, some groups in the Technology sector are Computers, the Internet, Networkers, Office Equipment, and Semiconductors. The Financial sector includes Banks, Insurance, and Securities Brokers. The recommended way to approach this group is to start with the smaller number of market sectors. Look for the ones that seem to be the strongest. During most of 1999 and into the early part of 2000, for example, technology stocks represented the strongest market sector. Once you've isolated the preferred sector, you can then look for the strongest industry groups in that sector. Two leading candidates during the period of time just described were Internet and Semiconductor stocks. The idea is to be in the strongest industry groups within the strongest market sectors. **Figure 11-2: Strong Industry Group** _An example of a strong industry group. During the first quarter of 2000, semiconductor stocks were the strongest group in a strong technology sector._ [_Click here for a live version of the chart._arrow-up-right](https://stockcharts.com/h-sc/ui?s=$SOX&p=D&st=1999-10-01&en=2000-04-28&id=p02373839621&a=332336520) ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FUh3KLjHv1QjVXjNTYrid%252Ffigure11-2.png%3Falt%3Dmedia%26token%3D8cfe3250-b123-4f94-a6ad-66cd81fd9a9f&width=768&dpr=4&quality=100&sign=65d13d81&sv=2) **Figure 11-2: Strong Industry Group** For many investors, the search can stop there. The choice to be in a market sector or industry group can easily be implemented through the use of mutual funds that specialize in specific market sectors or industry groups. A wide range of Exchange Traded Funds (ETFs) that trade throughout the trading day are even more suitable for sector rotation purposes * * * ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/john-murphys-charting-made-easy-ebook#the-third-step-individual-stocks) **THE THIRD STEP: Individual Stocks** For those investors who deal in individual stocks, this is the third step in the “top-down” market approach. Having isolated an industry group that has strong upside potential, the trader can then look within that group for winning stocks. It's been estimated that as much as 50% of a stock's direction is determined by the direction of its industry group. If you've already found a winning group, your work is half done. Another advantage of limiting your stock search to winning sectors and groups is that it narrows the search considerably. There are as many as 5,000 stocks that an investor can choose from. It's pretty tough doing a market analysis of so many markets. Some sort of screening process is required. That's where the three-step process comes in. By narrowing your stock search to a small number of industry groups, the number of stocks you have to study is dramatically reduced. You also have the added comfort of knowing that each stock you look at is already part of a winning group. **Figure 11-3: Individual Stocks** _Intel was one of the strongest semiconductor stocks during the first three months of 2000. Having started the search in a strong semiconductor group, the search for a winning stock is made a lot easier._ [_Click here for a live version of the chart._arrow-up-right](https://stockcharts.com/h-sc/ui?s=_INTC&p=D&st=1999-10-20&en=2000-04-07&id=p54902273721&a=332336563) ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252F8fj5Q1oyxPyePCDjq5SJ%252Ffigure11-3.png%3Falt%3Dmedia%26token%3D6994036d-3141-4460-9036-2586935a88d1&width=768&dpr=4&quality=100&sign=fa873300&sv=2) **Figure 11-3: Individual Stocks** * * * [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/john-murphys-charting-made-easy-ebook#moving_averages) Moving Averages ---------------------------------------------------------------------------------------------------------------------------------------------------- In the realm of technical indicators, _moving averages_ are extremely popular with market technicians and with good reason. Moving averages smooth the price action and make it easier to spot the underlying trends. Precise trend signals can be obtained from the interaction between a price and an average or between two or more averages themselves. Since the moving average is constructed by averaging several days' closing prices, however, it tends to lag behind the price action. The shorter the average (meaning the fewer days used in its calculation), the more sensitive it is to price changes and the closer it trails the price action. A longer average (with more days included in its calculation) tracks the price action from a greater distance and is less responsive to trend changes. The moving average is easily quantified and lends itself especially well to historical testing. Mainly for those reasons, it is the mainstay of most mechanical trend-following systems. ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/john-murphys-charting-made-easy-ebook#popular-moving-averages) **Popular Moving Averages** In stock market analysis, the most popular moving average lengths are 50 and 200 days. \[On weekly charts, those daily values are converted into 10- and 40-week averages.\] During an uptrend, prices should stay above the 50-day average. Minor pullbacks often bounce off that average, which acts as a support level. A decisive close beneath the 50-day average is usually one of the first signs that a stock is entering a more severe correction. In many cases, the breaking of the 50-day average signals a further decline down to the 200-day average. If a market is in a normal bull market correction, it should find new support around its 200-day average. \[For short-term trading purposes, traders will employ a 20-day average to spot short-term trend changes\]. ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/john-murphys-charting-made-easy-ebook#bollinger-bands) **Bollinger Bands** These are trading bands plotted two standard deviations above and below a 20-day moving average. When a market touches (or exceeds) one of the trading bands, the market is considered to be over-extended. Prices will often pull back to the moving average line. **Moving Average Convergence Divergence (MACD)** The MACD is a popular trading system. On your computer screen, you'll see two weighted moving averages (weighted moving averages give greater weight to the more recent price action). Trading signals are given when the two lines cross. * * * [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/john-murphys-charting-made-easy-ebook#oscillators) Oscillators -------------------------------------------------------------------------------------------------------------------------------------------- _Oscillators_ are used to identify _overbought_ and _oversold_ market conditions. The oscillator is plotted on the bottom of the price chart and fluctuates within a horizontal band. When the oscillator line reaches the upper limit of the band, a market is said to be overbought and vulnerable to a short-term setback. When the line is at the bottom of the range, the market is oversold and probably due for a rally. The oscillator helps to measure market extremes and tells the chartists when a market advance or decline has become over-extended. ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/john-murphys-charting-made-easy-ebook#relative-strength-index-rsi) **Relative Strength Index (RSI)** This is one of the most popular oscillators used by technical traders. The _RSI scale_ is plotted from 0 to 100 with horizontal lines drawn at the 70 and 30 levels. An RSI reading above 70 is considered to be overbought. An RSI reading below 30 is considered to be oversold. The most popular time periods for the RSI are 9 and 14 days. **Figure 13-1: RSI Oscillator** _A 9-day RSI oscillator applied to the Dow Industrials. RSI readings over 70 often coincide with short-term pullbacks. Readings below 30 often identify market bottoms._ [_Click here for a live version of the chart._arrow-up-right](https://stockcharts.com/h-sc/ui?s=$INDU&p=D&st=1999-05-03&en=2000-05-31&id=p01776202611&a=332336572) ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252F4mz0SExNt3y94SMp0Boe%252Ffigure13-1.png%3Falt%3Dmedia%26token%3Dda402b32-e9d7-467e-9294-4fea0b8648ab&width=768&dpr=4&quality=100&sign=d3406469&sv=2) **Figure 13-1: RSI Oscillator** [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/john-murphys-charting-made-easy-ebook#stochastics) **Stochastics** ------------------------------------------------------------------------------------------------------------------------------------------------ This oscillator is also plotted on a scale from 0 to 100. However, the upper and lower lines (marking the overbought and oversold levels) are at the 80 and 20 levels. In other words, readings above 80 are overbought, while readings below 20 are oversold. One added feature of Stochastics is that there are two oscillator lines instead of one. (The slower line is usually a 3-day moving average of the faster line). Trading signals are given when the two lines cross. A buy signal is given when the faster line crosses above the slower line from below 20. A sell signal is given when the faster line crosses beneath the slower line from above 80. The time period used by most chart analysts is fourteen days. **Figure 13-2: Stochastics Oscillator** _The 14-day stochastics oscillator applied to the S&P 500. The last two bottoms in the S&P were marked by oversold stochastic readings below 20. Readings over 80 coincided with several short-term peaks._ [_Click here for a live version of the chart._arrow-up-right](https://stockcharts.com/h-sc/ui?s=$SPX&p=D&st=1999-05-03&en=2000-05-31&id=p85609631365&a=332336598) ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FHlgX8wYKdMtSFghdyN2c%252Ffigure13-2.png%3Falt%3Dmedia%26token%3D54854e84-44e3-41c5-846c-3805d416b2d6&width=768&dpr=4&quality=100&sign=d3c0f075&sv=2) **Figure 13-2: Stochastics Oscillator** * * * ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/john-murphys-charting-made-easy-ebook#any-time-dimension) **Any Time Dimension** As is the case with most technical indicators, these oscillators can be employed in _any time dimension_. That means they can be used on weekly, daily and intraday charts. It's a good idea to use the same time span in all time dimensions. When plotting the stochastics lines, for example, use 14 weeks on the weekly chart, 14 days on the daily chart, and 14 hours on an hourly chart, etc. Another reason for keeping the same numbers is that computers allow you to switch back and forth between weekly, daily and intraday charts with a keystroke. Using the same time spans in all time dimensions makes your work a lot easier. * * * [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/john-murphys-charting-made-easy-ebook#ratios_and_relative_strength) Ratios and Relative Strength ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ _Technical analysis can be applied to ratio charts_. Trendlines and moving averages, for example, can help measure trends on ratios and can alert the user to changes in those trends. A close monitoring of the ratio charts can add a valuable dimension to market analysis. ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/john-murphys-charting-made-easy-ebook#sector-ratios) **Sector Ratios** Chapter 11 recommended using a “top-down” market approach to find winning sectors, industry groups, and individual stocks. That is done by applying _ratio analysis_ to determine each market's _relative strength_. When choosing industry groups, for example, the common technique is to divide an industry index (like the Semiconductor Index) by a market benchmark like the S&P 500. When the ratio line is rising, that means the industry is outperforming the general market. When the ratio is falling, that industry is lagging behind the rest of the market. The idea is to concentrate your attention on groups with rising ratios and avoid those groups with falling ratios. That way you'll be buying only those industry groups that are showing superior relative strength. ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/john-murphys-charting-made-easy-ebook#stock-ratios) **Stock Ratios** Once you've identified a winning group, you can apply _ratio analysis_ to the stocks in that group. _Simply divide the individual stocks in the group by the group index itself_. The stocks with rising ratio lines are the strongest stocks in the group. The idea here is to find the stocks in the group that are showing the greatest relative strength. That way you'll be buying the strongest stocks in the strongest groups. ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/john-murphys-charting-made-easy-ebook#market-ratios) **Market Ratios** Ratio analysis can also be used to compare major market averages. By dividing the Nasdaq Composite Index by the S&P 500, for example, you can determine if technology stocks are leading or lagging the rest of the market. You can use the Russell 2000 versus the S&P to gauge the _relative strength_ (or weakness) of smaller stocks. * * * **Figure 14-1: Ratios and Relative Strength** _The rising Nasdaq/S&P 500 ratio shows remarkable relative strength in the technology sector during the last quarter of 1999 and the first quarter of 2000. The breaking of the up trendlines, however, signaled new relative weakness in technology. Ratio charts are a good way to spot sector rotations within the stock market._ [_Click here for a live version of the chart._arrow-up-right](https://stockcharts.com/h-sc/ui?s=$COMPQ:$SPX&p=D&st=1999-09-27&en=2000-04-10&id=p68083874531&a=332336770) ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FpeICZoFC3c9LRNkkivYh%252Ffigure14-1.png%3Falt%3Dmedia%26token%3Dec0da93b-1eed-419f-aeab-1ac5f91f6ae7&width=768&dpr=4&quality=100&sign=ee23ea56&sv=2) **Figure 14-1: Ratios and Relative Strength** * * * [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/john-murphys-charting-made-easy-ebook#options) Options ------------------------------------------------------------------------------------------------------------------------------------ _Options_ give the holder the right, but not the obligation, to purchase (in the case of a _call_) or sell (in the case of a _put_) an underlying market entity at a specific price within a specified period of time. In its simplest application, a trader who is bullish on a market can simply purchase a _call_; a trader who is bearish can simply purchase a _put_. The main advantage in options trading is _limited risk_. The option trader pays a _premium_ to purchase the option. If the market doesn't move as expected, the option simply expires. The maximum loss the option trader can suffer is the size of the premium. There are countless option strategies that can be utilized by option traders. However, most option strategies require a market view. In other words, the option trader must first determine whether the market price of the underlying market contract is going to rise, fall, or stay relatively flat. This is because the major factor influencing the value of an option is the performance of its underlying market. In determining an appropriate option strategy, it's important to remember that _the principles of market analysis are not applied to the option itself, but to the underlying market_. Therefore, it can be seen that the principles of chart analysis covered in the preceding pages and their application to the financial markets play an important role in options trading. ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/john-murphys-charting-made-easy-ebook#option-put-call-ratio) **Option Put/Call Ratio** Trading activity in the options markets is used to generate a popular stock market sentiment indicator–called the _put/call ratio_. This ratio is actually a ratio of _put_ volume divided by the _call_ volume. It is generally applied to the S&P 100 (OEX) index option traded on the Chicago Board Options Exchange (CBOE) or the CBOE Equity put/call ratio, which uses option volume in individual stocks. ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/john-murphys-charting-made-easy-ebook#contrary-indicator) **Contrary Indicator** The S&P 100 or the CBOE Equity put/call ratio is a _contrary indicator_. In other words, a high put/call ratio is considered bullish for the market (because it shows too much bearish sentiment). In the same way, a low put/call ratio (which betrays strong bullish sentiment) is considered bearish for the market. The reasoning behind the put/call ratio being used as a contrary indicator is based on the idea that option traders get too bullish near market tops and too bearish near market bottoms. ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/john-murphys-charting-made-easy-ebook#cboe-volatility-index-vix) **CBOE Volatility Index (VIX)** CBOE Volatility (VIX) Index: This contrary indicator is based on the volatility of the S&P 500. Since it is a contrary indicator, a rising VIX implies greater volatility and growing concern about downside correction in the stock market. By contrast, a falling VIX implies less volatility and more confidence in the market. The VIX usually trades in a band between 20 and 40. Dips below 20 are usually associated with an over-extended stock market. Moves above 40 are usually associated with market bottoms. * * * [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/john-murphys-charting-made-easy-ebook#the_principle_of_confirmation) The Principle of Confirmation -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- The principle of confirmation holds that the more technical evidence supporting a given analysis, the stronger the conclusion becomes. In the study of an individual market, for example, all of the technical signs should be pointing in the same direction. If some signs are pointing up and the others down, be suspicious. Consult other stocks in the same group. A bullish analysis in a stock would be less than convincing if the other stocks in its group were trending lower. Since stocks in the same group tend to move together, make sure that the other stocks agree with the one being studied. Look at the various technical indicators to see if they agree. Are the chart patterns being confirmed by the volume? Do the moving averages and oscillators confirm the chart analysis? What do the weekly and monthly charts show? While it is seldom that all of these technical factors will point in the same direction, it pays to have as many of them in your corner as possible. * * * [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/john-murphys-charting-made-easy-ebook#summary_and_conclusion) Summary and Conclusion ------------------------------------------------------------------------------------------------------------------------------------------------------------------ We have provided here an introduction to technical analysis as it is applied to the financial markets. We've discussed briefly the major tools utilized by the chartists, including: basic chart analysis, the study of volume, moving averages, oscillators, ratios, weekly, and intraday charts. The successful trader learns how to combine all these elements into one coherent theory of market analysis. The many software and Internet-based products available on the market today also provide powerful tools that make charting and technical analysis much easier –and far more accessible to general investors–than ever before. For example, many software and Internet-based products include a full suite of technical analysis tools that allow you to create charts easily, have instant access to historical data, and have the ability to create, backtest and optimize self-designed trading systems without any programming knowledge or experience. Technical analysis provides an excellent vehicle for _market forecasting_, either with or without fundamental input. Where technical analysis becomes absolutely essential, however, is in the area of _market timing_. Market timing is purely technical in nature, so successful participation in the markets dictates some application of technical analysis. It's not necessary to be an expert chartist to benefit from chart analysis. However, chart analysis will go a long way in keeping the trader on the right side of the market and in helping to pinpoint market entry and exit points, which are so vital to trading success. Whether the participant is a day trader or a long-term investor, it's to his or her advantage to learn about chart analysis. * * * [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/john-murphys-charting-made-easy-ebook#acknowledgement) Acknowledgement ---------------------------------------------------------------------------------------------------------------------------------------------------- _From the book “Charting Made Easy” copyright © 2000. Used by arrangement with John Wiley & Sons. Inc._ [PreviousJohn Murphy's 10 Laws of Technical Tradingchevron-left](https://chartschool.stockcharts.com/table-of-contents/overview/john-murphys-10-laws-of-technical-trading) [NextTechnical Analysis 101chevron-right](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101) Last updated 1 year ago Was this helpful? * [Introduction](https://chartschool.stockcharts.com/table-of-contents/overview/john-murphys-charting-made-easy-ebook#introduction) * [Why is Chart Analysis So Important?](https://chartschool.stockcharts.com/table-of-contents/overview/john-murphys-charting-made-easy-ebook#why_is_chart_analysis_so_important) * [Market Timing](https://chartschool.stockcharts.com/table-of-contents/overview/john-murphys-charting-made-easy-ebook#market_timing) * [What is Chart Analysis?](https://chartschool.stockcharts.com/table-of-contents/overview/john-murphys-charting-made-easy-ebook#what_is_chart_analysis) * [Charts Reveal Price Trends](https://chartschool.stockcharts.com/table-of-contents/overview/john-murphys-charting-made-easy-ebook#charts_reveal_price_trends) * [Types of Charts Available](https://chartschool.stockcharts.com/table-of-contents/overview/john-murphys-charting-made-easy-ebook#types_of_charts_available) * [Any Time Dimension](https://chartschool.stockcharts.com/table-of-contents/overview/john-murphys-charting-made-easy-ebook#any_time_dimension) * [How to Plot the Daily Bar Chart](https://chartschool.stockcharts.com/table-of-contents/overview/john-murphys-charting-made-easy-ebook#how_to_plot_the_daily_bar_chart) * [Support and Resistance Trendlines and Channels](https://chartschool.stockcharts.com/table-of-contents/overview/john-murphys-charting-made-easy-ebook#support_and_resistance_trendlines_and_channels) * [Reversal and Continuation Price Patterns](https://chartschool.stockcharts.com/table-of-contents/overview/john-murphys-charting-made-easy-ebook#reversal_and_continuation_price_patterns) * [Reversal Patterns](https://chartschool.stockcharts.com/table-of-contents/overview/john-murphys-charting-made-easy-ebook#reversal_patterns) * [The Head and Shoulders](https://chartschool.stockcharts.com/table-of-contents/overview/john-murphys-charting-made-easy-ebook#the-head-and-shoulders) * [Double and Triple Tops and Bottoms](https://chartschool.stockcharts.com/table-of-contents/overview/john-murphys-charting-made-easy-ebook#double-and-triple-tops-and-bottoms) * [Saucers and Spikes](https://chartschool.stockcharts.com/table-of-contents/overview/john-murphys-charting-made-easy-ebook#saucers-and-spikes) * [Continuation Patterms](https://chartschool.stockcharts.com/table-of-contents/overview/john-murphys-charting-made-easy-ebook#continuation_patterms) * [Triangles](https://chartschool.stockcharts.com/table-of-contents/overview/john-murphys-charting-made-easy-ebook#triangles) * [Flags and Pennants](https://chartschool.stockcharts.com/table-of-contents/overview/john-murphys-charting-made-easy-ebook#flags-and-pennants) * [Price Gaps](https://chartschool.stockcharts.com/table-of-contents/overview/john-murphys-charting-made-easy-ebook#price_gaps) * [The Key Reversal Day](https://chartschool.stockcharts.com/table-of-contents/overview/john-murphys-charting-made-easy-ebook#the_key_reversal_day) * [Percentage Retracements](https://chartschool.stockcharts.com/table-of-contents/overview/john-murphys-charting-made-easy-ebook#percentage_retracements) * [The Interpretation of Volume](https://chartschool.stockcharts.com/table-of-contents/overview/john-murphys-charting-made-easy-ebook#the_interpretation_of_volume) * [Volume Is an Important Part of Price Patterns](https://chartschool.stockcharts.com/table-of-contents/overview/john-murphys-charting-made-easy-ebook#volume-is-an-important-part-of-price-patterns) * [On Balance Volume (OBV)](https://chartschool.stockcharts.com/table-of-contents/overview/john-murphys-charting-made-easy-ebook#on-balance-volume-obv) * [OBV Breakouts](https://chartschool.stockcharts.com/table-of-contents/overview/john-murphys-charting-made-easy-ebook#obv-breakouts) * [Other Volume Indicators](https://chartschool.stockcharts.com/table-of-contents/overview/john-murphys-charting-made-easy-ebook#other-volume-indicators) * [Using Different Timeframes for Short- and Long-Term Views](https://chartschool.stockcharts.com/table-of-contents/overview/john-murphys-charting-made-easy-ebook#using_different_timeframes_for_short-_and_long-term_views) * [Using Intraday Charts](https://chartschool.stockcharts.com/table-of-contents/overview/john-murphys-charting-made-easy-ebook#using-intraday-charts) * [Going From the Long Term to the Short Term](https://chartschool.stockcharts.com/table-of-contents/overview/john-murphys-charting-made-easy-ebook#going-from-the-long-term-to-the-short-term) * [Using a Top-Down Market Approach](https://chartschool.stockcharts.com/table-of-contents/overview/john-murphys-charting-made-easy-ebook#using_a_top-down_market_approach) * [THE FIRST STEP: The Major Market Averages](https://chartschool.stockcharts.com/table-of-contents/overview/john-murphys-charting-made-easy-ebook#the-first-step-the-major-market-averages) * [Different Averages Measure Different Things](https://chartschool.stockcharts.com/table-of-contents/overview/john-murphys-charting-made-easy-ebook#different-averages-measure-different-things) * [THE SECOND STEP: Sectors and Industry Groups](https://chartschool.stockcharts.com/table-of-contents/overview/john-murphys-charting-made-easy-ebook#the-second-step-sectors-and-industry-groups) * [THE THIRD STEP: Individual Stocks](https://chartschool.stockcharts.com/table-of-contents/overview/john-murphys-charting-made-easy-ebook#the-third-step-individual-stocks) * [Moving Averages](https://chartschool.stockcharts.com/table-of-contents/overview/john-murphys-charting-made-easy-ebook#moving_averages) * [Popular Moving Averages](https://chartschool.stockcharts.com/table-of-contents/overview/john-murphys-charting-made-easy-ebook#popular-moving-averages) * [Bollinger Bands](https://chartschool.stockcharts.com/table-of-contents/overview/john-murphys-charting-made-easy-ebook#bollinger-bands) * [Oscillators](https://chartschool.stockcharts.com/table-of-contents/overview/john-murphys-charting-made-easy-ebook#oscillators) * [Relative Strength Index (RSI)](https://chartschool.stockcharts.com/table-of-contents/overview/john-murphys-charting-made-easy-ebook#relative-strength-index-rsi) * [Stochastics](https://chartschool.stockcharts.com/table-of-contents/overview/john-murphys-charting-made-easy-ebook#stochastics) * [Any Time Dimension](https://chartschool.stockcharts.com/table-of-contents/overview/john-murphys-charting-made-easy-ebook#any-time-dimension) * [Ratios and Relative Strength](https://chartschool.stockcharts.com/table-of-contents/overview/john-murphys-charting-made-easy-ebook#ratios_and_relative_strength) * [Sector Ratios](https://chartschool.stockcharts.com/table-of-contents/overview/john-murphys-charting-made-easy-ebook#sector-ratios) * [Stock Ratios](https://chartschool.stockcharts.com/table-of-contents/overview/john-murphys-charting-made-easy-ebook#stock-ratios) * [Market Ratios](https://chartschool.stockcharts.com/table-of-contents/overview/john-murphys-charting-made-easy-ebook#market-ratios) * [Options](https://chartschool.stockcharts.com/table-of-contents/overview/john-murphys-charting-made-easy-ebook#options) * [Option Put/Call Ratio](https://chartschool.stockcharts.com/table-of-contents/overview/john-murphys-charting-made-easy-ebook#option-put-call-ratio) * [Contrary Indicator](https://chartschool.stockcharts.com/table-of-contents/overview/john-murphys-charting-made-easy-ebook#contrary-indicator) * [CBOE Volatility Index (VIX)](https://chartschool.stockcharts.com/table-of-contents/overview/john-murphys-charting-made-easy-ebook#cboe-volatility-index-vix) * [The Principle of Confirmation](https://chartschool.stockcharts.com/table-of-contents/overview/john-murphys-charting-made-easy-ebook#the_principle_of_confirmation) * [Summary and Conclusion](https://chartschool.stockcharts.com/table-of-contents/overview/john-murphys-charting-made-easy-ebook#summary_and_conclusion) * [Acknowledgement](https://chartschool.stockcharts.com/table-of-contents/overview/john-murphys-charting-made-easy-ebook#acknowledgement) Was this helpful? sun-brightdesktopmoon sun-brightdesktopmoon --- # Technical Analysis 101 | ChartSchool | StockCharts.com Below, you'll find a series of articles about the basics of technical analysis. If you are new to charting, these articles will give you the “big picture” behind the charts on our site. If you are an “old hand,” these articles will help ensure you haven't strayed too far from the basics. Enjoy! ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101#part-1-what-exactly-is-technical-analysis) Part 1 – [What exactly is Technical Analysis?](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-1) ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101#part-2-why-does-ta-work-and-how-it-is-commonly-misused) Part 2 – [Why does TA work and how it is commonly misused?](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-2) ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101#part-3-the-important-assumptions-that-ta-makes-about-financial-data) Part **3** – [The important assumptions that TA makes about financial data](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-3) ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101#part-4-all-about-line-and-ohlc-bar-charts) Part **4** – [All about Line and OHLC bar charts](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-4) ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101#part-5-the-basics-of-candlestick-charts) Part **5** – [The basics of candlestick charts](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-5) ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101#part-6-how-charts-are-scaled-how-volume-works-and-how-to-create-candlevolume-charts) Part **6** – [How charts are scaled, how volume works, and how to create CandleVolume charts](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-6) ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101#part-7-support-and-resistance) Part **7** – [Support and Resistance](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-7) ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101#part-8-trend-line-analysis) Part **8** – [Trend line analysis](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-8) ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101#part-9-price-channels) Part **9** – [Price channels](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-9) ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101#part-10-using-volume-to-confirm-trend-changing-signals) Part **10** – [Using volume to confirm trend-changing signals](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-10) ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101#part-11-basics-of-price-patterns) Part **11** – [Basics of Price Patterns](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-11) ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101#part-12-using-volume-to-confirm-price-patterns) Part **12** – [Using volume to confirm Price patterns](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-12) ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101#part-13-the-infamous-head-and-shoulders-reversal-pattern) Part **13** – [The (infamous) Head and Shoulders Reversal pattern](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-13) ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101#part-14-using-fibonacci-percentages-to-find-support-and-resistance-levels) Part **14** – [Using Fibonacci percentages to find Support and Resistance levels](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-14) ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101#part-15-price-gap-analysis) Part **15** – [Price gap analysis](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-15) ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101#part-16-candlestick-chart-pattern-basics) Part **16** – [Candlestick chart pattern basics](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-16) ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101#part-17-comparison-charting) Part **17** – [Comparison charting](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-17) [PreviousJohn Murphy's "Charting Made Easy" eBookchevron-left](https://chartschool.stockcharts.com/table-of-contents/overview/john-murphys-charting-made-easy-ebook) [NextTA 101 – Part 1chevron-right](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-1) Last updated 3 months ago Was this helpful? * [Part 1 – What exactly is Technical Analysis?](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101#part-1-what-exactly-is-technical-analysis) * [Part 2 – Why does TA work and how it is commonly misused?](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101#part-2-why-does-ta-work-and-how-it-is-commonly-misused) * [Part 3 – The important assumptions that TA makes about financial data](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101#part-3-the-important-assumptions-that-ta-makes-about-financial-data) * [Part 4 – All about Line and OHLC bar charts](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101#part-4-all-about-line-and-ohlc-bar-charts) * [Part 5 – The basics of candlestick charts](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101#part-5-the-basics-of-candlestick-charts) * [Part 6 – How charts are scaled, how volume works, and how to create CandleVolume charts](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101#part-6-how-charts-are-scaled-how-volume-works-and-how-to-create-candlevolume-charts) * [Part 7 – Support and Resistance](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101#part-7-support-and-resistance) * [Part 8 – Trend line analysis](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101#part-8-trend-line-analysis) * [Part 9 – Price channels](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101#part-9-price-channels) * [Part 10 – Using volume to confirm trend-changing signals](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101#part-10-using-volume-to-confirm-trend-changing-signals) * [Part 11 – Basics of Price Patterns](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101#part-11-basics-of-price-patterns) * [Part 12 – Using volume to confirm Price patterns](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101#part-12-using-volume-to-confirm-price-patterns) * [Part 13 – The (infamous) Head and Shoulders Reversal pattern](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101#part-13-the-infamous-head-and-shoulders-reversal-pattern) * [Part 14 – Using Fibonacci percentages to find Support and Resistance levels](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101#part-14-using-fibonacci-percentages-to-find-support-and-resistance-levels) * [Part 15 – Price gap analysis](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101#part-15-price-gap-analysis) * [Part 16 – Candlestick chart pattern basics](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101#part-16-candlestick-chart-pattern-basics) * [Part 17 – Comparison charting](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101#part-17-comparison-charting) Was this helpful? sun-brightdesktopmoon sun-brightdesktopmoon --- # TA 101 – Part 1 | ChartSchool | StockCharts.com _This is the first part of a series of articles about technical analysis from a new course we're developing. If you are new to charting, these articles will give you the “big picture” behind the charts on our site. If you are an “old hand,” these articles will help ensure you haven't “strayed too far” from the basics. Enjoy!_ circle-check **Tip.** See the entire series [Technical Analysis 101](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101) [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-1#defining_technical_analysis) Defining Technical Analysis --------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Technical analysis is the study of price and volume changes over time. Technical analysis usually involves using financial charts to help study these changes. Any person who analyzes financial charts can be called a Technical Analyst. Despite being surrounded by data, charts, raw numbers, mathematical formulas, etc., technical analysts study human behavior, specifically the crowd's reaction to fear and greed. Investors who have any interest in a particular stock are considered to be “the market” for that particular stock, and the emotional state of those investors determines the price of that stock. If more investors feel the stock will rise, it will! If more feel that the stock will fall, then it will. Thus, a stock's price change over time is the most accurate record of the emotional state — fear and greed — of the market for that stock, and thus, technical analysis is, at its core, a study of crowd behavior. [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-1#weathering_the_market) "Weathering" the Market ----------------------------------------------------------------------------------------------------------------------------------------------------------------- When was the last time you saw a 100% accurate weather forecast for your area? Chances are that at least some of the weather predictions your local weather person tells you won't come to pass. In many cases, most of the predictions are wrong. So why do we keep listening to weather forecasts? Weather forecasts are helpful because they help us prepare for what is likely. If the forecast calls for rain, we bring our umbrellas when we go out. If sunshine is predicted, we bring our sunglasses. We know that we might not need these things, but more than likely we will and we like to be prepared. Technical analysis is very similar to weather forecasting. Good technical analysts know that T/A can prepare you for what is likely to happen but, just like many weather forecasts, things can change in unpredictable ways. Here are some other ways that technical analysis is like weather forecasting: * Weather forecasters measure temperature and air pressure and then use that data to determine more about the factors that cause weather changes - i.e., fronts, high pressure, low pressure, etc. Technical analysts use price and volume to determine more about the factors that cause market changes - i.e., fear and greed, trends, reversals, support, etc. * Despite huge quantities of weather data at their disposal, weather forecasters still use their experience and intuition when creating each forecast. Technical analysis also draws heavily from the experience and intuition of the person doing the analysis (you!). * Accurate weather forecasting requires local knowledge and experience. A forecaster from Florida that moves to Alaska will need time to become familiar with Alaska's weather patterns. Similarly, technical analysis requires experience and knowledge about the kinds of markets being charted - stocks are different from commodities, which are different from mutual funds, large stocks are different from small stocks, etc. * In the early days of weather forecasting, charlatans tried to convince people that they could somehow control the weather or that their predictions were always accurate. Unfortunately, even today, people are making similar claims about technical analysis. * Weather forecasts tend to be most accurate when things aren't changing. If it has been sunny for the past three days and no big weather systems are approaching, chances are it will be sunny again today. Technical analysis also works well when conditions aren't changing dramatically. Both disciplines have more trouble with predicting exactly when big changes will occur. * Both weather forecasting and technical analysis work well for the “mid-sized view.” While predicting the weather for a large city is possible, predicting things for a city block is very hard. Similarly, second-by-second technical analysis can be extremely tricky; daily and weekly analysis is more reliable. Conversely, predicting weather for the country as a whole (i.e., “It will be sunny in the US today”) and predicting the market as a whole (i.e., “This year stocks will go up”) are too broad to be useful. It is easy to lose perspective on what technical analysis can and cannot do. Remember this comparison with weather forecasting to keep yourself aware of its benefits and limitations. [PreviousTechnical Analysis 101chevron-left](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101) [NextTA 101 – Part 2chevron-right](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-2) Last updated 1 year ago Was this helpful? * [Defining Technical Analysis](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-1#defining_technical_analysis) * ["Weathering" the Market](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-1#weathering_the_market) Was this helpful? sun-brightdesktopmoon sun-brightdesktopmoon --- # TA 101 – Part 4 | ChartSchool | StockCharts.com _This is the fourth part of a series of articles about technical analysis from a new course we're developing. If you are new to charting, these articles will give you the “big picture” behind the charts on our site. If you are an “old hand”, these articles will help ensure you haven't “strayed too far” from the basics. Enjoy!_ circle-check **Tip.** See the entire series [Technical Analysis 101](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101) [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-4#line_charts) Line Charts ------------------------------------------------------------------------------------------------------------------------------------------- Line charts are created by plotting a line between the closing prices for each period set on the chart. On a daily chart, a line is plotted between the daily closing prices. Line charts are useful to help visualize the direction of prices. The extent of rallies and reactions in trends can also be quickly deduced. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FIV8gZv4hWZbGDfY5xdOf%252Fta101_part04a.png%3Falt%3Dmedia%26token%3Df4a990d3-7125-4277-9169-0bfd358c66b3&width=768&dpr=4&quality=100&sign=6f6cead0&sv=2) Line chart showing higher highs and lower lows A five-month price SharpChart of Apple, Inc. (AAPL) is plotted above in a line format. Higher highs and lows are annotated with green dashes and lower highs and lows with red dashes. Between March and mid-May 2008, the direction of prices is readily apparent with higher highs and lows. After mid-May 2008, prices began to make lower highs and lows. A line chart is plotted by default when only end-of-day (closing) prices are available for a symbol. Examples of such symbols include all mutual funds and some market indices. However, weekly and monthly price bars can be charted for ticker symbols with only end-of-day (EOD) quotes. [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-4#ohlc_charts) OHLC Charts ------------------------------------------------------------------------------------------------------------------------------------------- Open-High-Low-Close (OHLC) bar charts provide volatility information that line charts lack. The attributes of an OHLC bar are shown below. The chartist can evaluate volatility by the height of the bars and the conviction of the buyers and sellers by the price range between the open and close marks. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252F6CYEHURjvgSSYzoEKZb2%252Fta101_part04b.png%3Falt%3Dmedia%26token%3D3cc02984-ba6d-46c3-b2a6-6604610f6cdd&width=768&dpr=4&quality=100&sign=4ec70211&sv=2) Illustration of an Open-High-Low-Close (OHLC) chart For the left price bar, the CLOSE mark is above the OPEN mark indicating price ended higher for the day, known as an up day. This price bar is considered bullish. Bullish sentiment is present when greed for gain exceeds fear of loss and prices move higher. With the price bar on the right, the OPEN is higher than the CLOSE indicating price ended lower for the day, known as a down day. This is a bearish price bar. Bearish sentiment is present when fear of loss is greater than greed for gain and prices move lower. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252F1N733hNrlant7fo6LSHU%252Fta101_part04c.png%3Falt%3Dmedia%26token%3Dbc70a441-92bc-4444-a178-a4c5363cd2af&width=768&dpr=4&quality=100&sign=b121d3bc&sv=2) SharpChart of AAPL illustrating the OHLC format The SharpChart of AAPL above illustrates the OHLC format. Notice how intraday price swings pass through the red and green reference marks made at the closing price levels on the previous Line chart. This illustrates why line charts are useful for visualizing price direction. [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-4#ohlc_bar_colors) OHLC Bar Colors --------------------------------------------------------------------------------------------------------------------------------------------------- ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252F9319CuwV6SuIbFA58jUk%252Fta101_part04d.png%3Falt%3Dmedia%26token%3D33c1fd7b-a88c-4053-b45a-8e8050410938&width=768&dpr=4&quality=100&sign=754b9050&sv=2) Illustration showing bar colors of an OHLC chart When the 'Color Prices' option is selected on the Chart Attributes workbench, the price bars will be colored black or red, depending on how a price bar's closing price relates to the previous day's closing price. If the closing price is higher than the previous day's closing price, the price bar will be black. If the closing price is lower than the previous day's, the price bar will be red. With this convention, it is possible to have a black price bar with the close being lower than the open. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FamODCvoeutDYdRvVU6dh%252Fta101_part04e.png%3Falt%3Dmedia%26token%3De7de9410-4a02-429b-b58c-0a87f86051e6&width=768&dpr=4&quality=100&sign=2b249ebc&sv=2) Example of colored OHLC price bars are shown in the AAPL SharpChart Colored OHLC price bars are shown in the AAPL SharpChart above. As discussed earlier, the color of the price bar is only based on the previous day's closing price, not the current day's opening price. _Up day_ and _down day_ price bars are usually black and red respectively, but that is not always the case as shown in the chart above. _In part 5 we'll get into the specifics of candlestick charts._ [PreviousTA 101 – Part 3chevron-left](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-3) [NextTA 101 – Part 5chevron-right](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-5) Last updated 1 year ago Was this helpful? * [Line Charts](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-4#line_charts) * [OHLC Charts](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-4#ohlc_charts) * [OHLC Bar Colors](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-4#ohlc_bar_colors) Was this helpful? sun-brightdesktopmoon sun-brightdesktopmoon --- # TA 101 – Part 2 | ChartSchool | StockCharts.com _This is the second part of a series of articles about technical analysis from a new course we're developing. If you are new to charting, these articles will give you the “big picture” behind the charts on our site. If you are an “old hand,” these articles will help ensure you haven't “strayed too far” from the basics. Enjoy!_ circle-check **Tip.** See the entire series [Technical Analysis 101](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101) [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-2#the_value_of_technical_analysis) The Value of Technical Analysis ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- The reason technical analysis has value is that directional price moves are often sustained for a period of time, allowing analysts to detect and profit from the change in price. Even though a technical analyst has many math-based tools to analyze price and volume movement, the process is ultimately an art in the study of human behavior. Just as a meteorologist can never guarantee a weather forecast, a technical analyst can never be perfectly certain of future price movements since human behavior is involved. ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-2#figuring_out_the_what_and_when) Figuring out the what and when... All investors are faced with three basic questions about their investments. What to invest in, when to buy, and when to sell. Technical analysis provides a framework for investors to methodically select equities and pick times to buy and sell. Emotion, the investor's nemesis, is greatly reduced in these decisions since the investor can develop a list of “what and when” rules to follow. Rather than “buying and hoping for the best”, technical analysts always know how much risk they are taking and know when to “get out while the getting is good”. ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-2#only_price_and_volume_only) Only price and volume only... Only historical price and volume data is used for technical analysis. The underlying premise of technical analysis is that all known information such as what a company does, its financial results, analyst's ratings, management performance, politics, news, etc. are reflected in the historical price and volume data. This is a powerful concept since it is impossible to gauge how these factors may influence future price separately. It is important to understand that technical analysis can only be used to determine the likely direction of future prices. It cannot anticipate news events or how investors will respond to them. [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-2#the_goal_of_technical_analysis) The Goal of Technical Analysis --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- The chart below displays a historical price chart for Analog Devices, Inc. (ADI) for one year. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FpnOvWWRzWZSnEIUNqh1Y%252Fta101_part02a.png%3Falt%3Dmedia%26token%3D6dd26452-4e71-4bf1-a0a9-13c075ebca0f&width=768&dpr=4&quality=100&sign=b39199a4&sv=2) Historical one year price chart for Analog Devices, Inc. (ADI) Notice how the stock price can move up, down, or sideways for months. Technical analysis uses methodologies to help indicate when prices are beginning to change direction. The goal of a technical analyst is to buy an equity when the price chart indicates prices are beginning to move up and then sell when the price chart indicates prices are beginning to move sideways or down. [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-2#why_technical_analysis_works) Why Technical Analysis Works ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Technical analysis works because price and volume often reveal the collective psychology (the “fear/greed balance”) of a market's participants. Technical charts can reveal changes in the fear/greed balance soon after those changes occur and that provides opportunities for profitable trades. Technical analysts work to identify charts where the fear/greed balance has recently changed in a predictable manner. They then place trades to try and profit from that change. Once they have bought a stock, technical analysts monitor price and volume for sell signals. Done correctly, trades based on technical analysis carry a higher-than-average chance of success; however, disciplined money management techniques must still be used to guard against unforeseen price movements. [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-2#misuse_of_technical_analysis) Misuse of Technical Analysis ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------- While the basics of technical analysis are easy to learn, applying them correctly and successfully isn't easy. Because of this many people have lost money using technical analysis techniques and then concluded that chart analysis has no value. In addition, unfortunately, many unsuspecting investors have purchased technical “systems” that promise outlandish returns for little effort. By the time the buyer figures out that the system doesn't work, their money is long gone. Technical analysis is just like any other money-making occupation - it takes time and energy and it involves risk. Anybody who says otherwise shouldn't be trusted. Here are ways technical analysis has been misused in the past: ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-2#the_holy_grail_mentality) The Holy Grail mentality... One of the most common misconceptions about technical analysis is that a trading system (a set of buy and sell rules) can be devised that provides consistent profits with little to no risk. There are several reasons that a “perfect system” cannot be sustained. Firstly, the market is made up of people with free will and guided by fear and greed. A perfect system requires prices to consistently move in predictable patterns. This will never be possible when people are involved. Secondly, many financial institutions monitor the market for patterns of systematic trading. Once detected, the financial institution can take advantage of the system (investing with or against it) which eventually compromises and defeats the “perfect system”. And finally, what motivation could someone have to share a “perfect system” at any price? Such a system would be invaluable to one person but worthless (for the second reason) if too many people or even one institution discovered it. ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-2#just_tell_me_what_to_buy) Just tell me what to buy... Investment charlatans and gurus have always been offering advice on how to profit in the market. These are the people who take financial advantage of new and uninformed investors by promising quick and profitable investment success. Claims of ultra-high rates of return or knowledge of future events for substantial fees are the best ways to identify such schemers. Although a real guru is a spiritual guide or teacher, the title “Market Guru” is gladly accepted by advisers who have developed notoriety with fortuitous calls of major market changes or unusual approaches to investing. Today's TV media and the Internet enthrone new market gurus on a regular basis. There are precious few true market gurus like Warren Buffet who have proven their market savvy over decades. Most market gurus can only provide profitable guidance as long as the market is favoring their investment philosophy. As the market changes, new market gurus will emerge as their philosophies' agree with the new market dynamics. ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-2#technical_analysis_lets_me_control_the_market) Technical Analysis lets me control the market... While few people consciously believe that they can control a stock's price directly, subconsciously, chart analysis can give new investors a false sense of control, which will cause them to lose objectivity: “My stock just broke below my trend line today, but it will come back tomorrow since that is a really good trend line!” The opposite response is just as damaging: “My stock broke my trend line! T/A is worthless!” Both responses are driven by emotion, something that technical analysis strives to eliminate. _In Part 3, we'll take a critical look at the assumptions that technical analysis makes about the markets._ [PreviousTA 101 – Part 1chevron-left](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-1) [NextTA 101 – Part 3chevron-right](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-3) Last updated 1 year ago Was this helpful? * [The Value of Technical Analysis](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-2#the_value_of_technical_analysis) * [Figuring out the what and when...](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-2#figuring_out_the_what_and_when) * [Only price and volume only...](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-2#only_price_and_volume_only) * [The Goal of Technical Analysis](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-2#the_goal_of_technical_analysis) * [Why Technical Analysis Works](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-2#why_technical_analysis_works) * [Misuse of Technical Analysis](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-2#misuse_of_technical_analysis) * [The Holy Grail mentality...](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-2#the_holy_grail_mentality) * [Just tell me what to buy...](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-2#just_tell_me_what_to_buy) * [Technical Analysis lets me control the market...](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-2#technical_analysis_lets_me_control_the_market) Was this helpful? sun-brightdesktopmoon sun-brightdesktopmoon --- # TA 101 – Part 3 | ChartSchool | StockCharts.com _This is the third part of a series of articles about technical analysis from a new course we're developing. If you are new to charting, these articles will give you the “big picture” behind the charts on our site. If you are an “old hand”, these articles will help ensure you haven't “strayed too far” from the basics. Enjoy!_ circle-check **Tip.** See the entire series [Technical Analysis 101](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101) [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-3#chart_data) Chart Data ----------------------------------------------------------------------------------------------------------------------------------------- Charts are created from data such as price data and index data. ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-3#price_data) Price Data Exchanges record the price and number of shares for each stock transaction, which is called tick data. Tick data is compiled over different periods of time to construct price bar data. Price bars show the beginning, highest, lowest, and ending prices for a chosen period. Individual price bar time periods can range from one minute to one year. Daily, weekly, and 60-minute price bars are other common examples. Price bars less than a day long are known as intraday price bars. They range from one minute to one hour and are typically used in technical analysis by day traders who hold positions for minutes or hours. A daily price bar is constructed of all the transactions during a full trading day. Investors who hold positions for days or years most often use daily price bars in technical analysis. The number of shares traded in each transaction is called volume. Volume is recorded as tick data just like price. Volume tick data is added together to construct volume bars and are then charted with their corresponding price bars for technical analysis. ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-3#index_data) Index Data Data for hundreds of indices, published by financial service companies and the major exchanges, are provided to StockCharts.com through third party data providers. Indices are not tradable financial instruments. Indices represent domestic and foreign market averages, industries, commodities, currencies, bonds and many other price, volume, and breadth measurements of market activity. Examples of market indices include the Dow Jones Industrial Average ($INDU), NYSE Healthcare Index ($NYP) and the New Zealand Dollar ($NZD). The financial service companies are responsible for the accuracy of the indices they publish. Breadth indices measure how many issues move within a particular market index. Breadth indices give analysts insight into investor sentiment. Examples of breadth indices include NASDAQ Advance-Decline Issues ($NAAD), NYSE Advance-Decline Volume ($NYUD) and AMEX Issues Unchanged ($AMADU). [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-3#key_assumptions_of_technical_analysis) Key Assumptions of Technical Analysis ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- There are three things that you must verify are true about a security before you can apply standard chart and/or indicator analysis to the security's chart. These three key assumptions are: ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-3#high_liquidity) High Liquidity Liquidity is essentially volume. It means that shares have the ability to trade quickly without dramatically affecting prices. If someone buys 100 shares of Microsoft today, that trade by itself will have almost no effect on the price of the stock. Why? Because MSFT is extremely liquid with lots of buyers and selling at any given moment. Low Liquidity is a trap that many amateur investors can fall into. When you buy a stock with low liquidity, you probably won't get it at the price you were quoted because there are no sellers at that price. The broker has to raise the price - often significantly - before a seller can be found. Similarly, when you sell a low liquidity stock, the broker will need to lower the price significantly to find a buyer. In addition, these thinly-traded stocks are often very low priced - often less than 1 cent - and that means that their price can be manipulated by someone with lots of resources (and lots of time). None of this is illegal or hidden or “wrong” in any way. It is just that the principles upon which Technical Analysis is based assume that only normal market forces move a stock's price - not the manipulation or issues with trading volumes that low liquidity stocks can have. ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-3#no_artificial_price_changes) No Artificial Price Changes Similar to the reason for high liquidity, prices cannot be changed by forces other than the fear and greed that drives the market. Anything else that changes prices is considered “artificial” and needs to be eliminated before standard technical analysis techniques can be applied. So what is an example of an “artificial” price change? Splits, dividends, and distributions are the most common “culprits.” When a stock splits, let's say 2-for-1, the market participants don't really care. They get double the shares at half the price - a net-zero transaction that doesn't change their opinion of the stock one way or the other. However, consider what happens to the stock's chart. It now has a huge (50%) gap down on it. If you didn't know about the split, you'd be very worried about the stock. And, because technical indicators are dumb, they would all give bearish “sell” signals at that point. For this reason, the effects of these “artificial” price changes must be removed from the data before standard technical analysis techniques can be used. Ironically, this is done by adjusting all of the data prior to the split downwards, thus eliminating the gap on the chart. ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-3#no_extreme_news) No Extreme News Technical Analysis cannot predict extreme events such as, for example, a company's CEO dying unexpectedly or the huge tragedy of 9/11. When “extreme news” happens, technicians have to wait patiently until the chart settles down and starts to reflect the “new normal” that results from such news. This is not to say that charts are useless when one or more of these three things occur. It means that the philosophical underpinnings of the signals and chart patterns that traditional technical analysis uses are gone in those cases. Standard technical signals and predictions cannot be accurately used in those circumstances. [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-3#chart_construction) Chart Construction --------------------------------------------------------------------------------------------------------------------------------------------------------- The security's price data is displayed on a price chart: a graph which shows how price and volume changes with time. This visual representation of price data is very helpful when using technical analysis techniques. Price charts on StockCharts.com are called SharpCharts (Time-independent charting methods like Point & Figure charting will be discussed in detail later). ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FFhWxbBI32FB5q2Z11hOT%252Fta101_part03a.png%3Falt%3Dmedia%26token%3Da94c9953-9cff-4af5-8c86-c3c54e1dca14&width=768&dpr=4&quality=100&sign=26133baf&sv=2) Chart showing sections of a SharpChart The example above illustrates the layout of a typical SharpChart. Price data, volume data and technical indicators are displayed on a SharpChart. A technical indicator is a mathematical expression of price and/or volume which can provide insight into future price movements. We will talk more about technical indicators later. Price data and overlays are plotted in the Price Plot Area. Overlays are technical indicators that are normally expressed in terms of price. Non-price values of overlays are displayed on the left axis as shown above. Technical indicators that cannot be expressed in terms of price are normally plotted in the Indicator Panels. Although only a single Indicator Panel is shown above, SharpCharts can be created with multiple Indicator Panels displayed above and below the Price Plot Area. Additional date/time axes can be added between the Indicator Panels if needed. The legend for both the Price Plot Area and Indicator Panel contain the information used to create the SharpChart. _In Part 4, we'll get into the specifics of line charts, OHLC Bar charts, and candlestick charts._ [PreviousTA 101 – Part 2chevron-left](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-2) [NextTA 101 – Part 4chevron-right](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-4) Last updated 1 year ago Was this helpful? * [Chart Data](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-3#chart_data) * [Price Data](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-3#price_data) * [Index Data](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-3#index_data) * [Key Assumptions of Technical Analysis](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-3#key_assumptions_of_technical_analysis) * [High Liquidity](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-3#high_liquidity) * [No Artificial Price Changes](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-3#no_artificial_price_changes) * [No Extreme News](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-3#no_extreme_news) * [Chart Construction](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-3#chart_construction) Was this helpful? sun-brightdesktopmoon sun-brightdesktopmoon --- # TA 101 – Part 5 | ChartSchool | StockCharts.com _This is the fifth part of a series of articles about technical analysis from a new course we're developing. If you are new to charting, these articles will give you the “big picture” behind the charts on our site. If you are an “old hand”, these articles will help ensure you haven't “strayed too far” from the basics. Enjoy!_ circle-check **Tip.** See the entire series [Technical Analysis 101](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101) [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-5#candlestick_charts) Candlestick Charts --------------------------------------------------------------------------------------------------------------------------------------------------------- Compared to traditional OHLC bar charts, many traders consider candlestick charts more visually appealing and easier to interpret. Each candlestick provides an easy-to-decipher picture of price action. An analyst can quickly understand the relationship between the opening and closing price as well as the high and low price. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252Fj6PUPgacUBIvpzhObFKH%252Fta101_part05a.png%3Falt%3Dmedia%26token%3Dc24fba67-c1e5-4bc2-ab75-e74c29d41497&width=768&dpr=4&quality=100&sign=1408f1d6&sv=2) The graphic above shows how candlesticks are constructed. Candlesticks with hollow bodies indicate buying pressure and filled bodies indicate selling pressure. Long upper or lower shadows form when the market moves significantly in a particular direction during the day and then reverses before the end of the day. As a result, long lower shadows can infer bullishness while long upper shadows can infer a bearish market. [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-5#candlestick_colors) Candlestick Colors --------------------------------------------------------------------------------------------------------------------------------------------------------- ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FQ0KJMIVvNxEwcWREWgbO%252Fta101_part05b.png%3Falt%3Dmedia%26token%3De2796163-0b21-4196-b5ec-0aa042d6ed7b&width=768&dpr=4&quality=100&sign=4b1b96c4&sv=2) When the 'Color Prices' option is selected on the Chart Attributes workbench, the Candlestick's outline and body will be colored black or red, depending on the candlestick's opening and closing prices and the previous day's closing price. If the closing price is higher than the opening price, the body will be displayed hollow. If the closing price is lower than the opening price, the body will be filled red with the following exception; if the closing price is higher than the previous day's closing price, the body will then be filled black. The candlestick's shadows and body outline are colored black or red depending on the closing price compared to the previous day's closing price. If the closing price is higher than the previous day's, the candlestick's shadows and body outline will be colored black. If the closing price is lower than the previous day's, however, the candlestick's shadows and body outline will be red. Market psychology is reflected in each of these candlestick formations in the following ways. **Up Day, Higher Close:** Typically results from expectations of higher prices (greed) out weighing expectations of lower prices (fear). The length of the candlestick body shown indicates especially strong buying. **Down Day, Lower Close:** Expectations of lower prices (fear) are stronger than those of higher prices (greed). As with the first candlestick, a longer candlestick body infers greater urgency of investors to sell their shares. **Down Day, Higher Close:** A rare candlestick, this one begins with an opening gap up in price from the previous day's closing price but closes down for the day. A gap is defined as a price range where no trading takes place and is the result of a significant change in demand (gap up) or supply (gap down) before trading begins for the day. In this case, heavy buying at the beginning of the day reversed but still closed higher than the previous day. This is a bearish sign when it occurs well into an upward price move. **Up Day, Lower Close:** Another rare candlestick, this one begins with an opening gap down in price from the previous day's closing price but closes up for the day. This price action can be considered bullish during a downward price move since initial strong selling in the day becomes exhausted and buyers push the price higher at close. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252Fe7PzJIK8DjhFAupycHJV%252Fta101_part05c.png%3Falt%3Dmedia%26token%3Da96191dd-05fb-4dae-a97f-e5ce11b321ec&width=768&dpr=4&quality=100&sign=507f59af&sv=2) The SharpChart AAPL above illustrates the candlestick format. The up and down days are readily apparent with the use of candlestick charting. When the balance between buyers and sellers change, candlesticks often form recognizable patterns signaling the change. These candlestick patterns will be discussed in a later article. Below, you can see how the three types of charts compare visually: ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FZAtRIGQWFzsfLgSvL0KI%252Fta101_part05d.png%3Falt%3Dmedia%26token%3D270f119d-f506-46c0-9927-f7682ebae368&width=768&dpr=4&quality=100&sign=5360f6ef&sv=2) ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252Fhu1Koj4CNtVvL3LB2V38%252Fta101_part05e.png%3Falt%3Dmedia%26token%3D915b1711-4508-462b-8137-5355f2d3760f&width=768&dpr=4&quality=100&sign=603465e0&sv=2) ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252F8oqKQx7McGYSeeU5q2O1%252Fta101_part05f.png%3Falt%3Dmedia%26token%3Db36bc339-fbd3-487f-bb71-04e81615c408&width=768&dpr=4&quality=100&sign=db68deb0&sv=2) _In part 6, we'll get into chart scaling, volume, and CandleVolume charts._ [PreviousTA 101 – Part 4chevron-left](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-4) [NextTA 101 – Part 6chevron-right](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-6) Last updated 1 year ago Was this helpful? * [Candlestick Charts](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-5#candlestick_charts) * [Candlestick Colors](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-5#candlestick_colors) Was this helpful? sun-brightdesktopmoon sun-brightdesktopmoon --- # Arthur Hill on Goals, Style and Strategy | ChartSchool | StockCharts.com Before investing or trading, it is important to develop a strategy or game plan that is consistent with your goals and style. The ultimate goal is to make money (win), but there are many different methods to go about it. As with many aspects of trading, many sports offer a good analogy. A football team with goals geared towards ball control and low-scoring games might adopt a conservative style that focuses on the run. Teams that want to score often and score quickly are more likely to pursue an aggressive style geared towards passing. Teams are usually aware of their goal and style before they develop a game plan. Investors and traders can also benefit by keeping in mind their goals and style when developing a strategy. [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/arthur-hill-on-goals-style-and-strategy#goals) Goals ---------------------------------------------------------------------------------------------------------------------------------- First and foremost are goals. The first set of questions regarding goals should center on risk and return. One cannot consider return without weighing risk. It is akin to counting your chickens before they hatch. Risk and return are highly correlated. The higher the potential return, the higher the potential risk. At one end of the spectrum are US Treasury bonds, which offer the lowest risk (so-called risk-free rate) and a guaranteed return. For stocks, the highest potential returns (and risk) center around growth industries with stock prices that exhibit high [volatility](https://chartschool.stockcharts.com/table-of-contents/glossary/glossary-v#volatility) and high price multiples (PE, Price/Sales, Price/Hope). The lowest potential returns (and risk) come from stocks in mature industries with stock prices that exhibit relatively low volatility and low price multiples. [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/arthur-hill-on-goals-style-and-strategy#style) Style ---------------------------------------------------------------------------------------------------------------------------------- After your goals have been established, it is time to develop or choose a style that is consistent with achieving those goals. The expected return and desired risk will affect your trading or investing style. If your goal is income and safety, buying or selling at extreme levels (overbought/oversold) is an unlikely style. If your goals center on quick profits, high returns, and high risk, then bottom-picking strategies and gap trading may be your style. Styles range from aggressive day traders looking to scalp quarter- to half-point gains to investors looking to capitalize on long-term macroeconomic trends. In between, there are a whole host of possible combinations including swing traders, position traders, aggressive growth investors, value investors and contrarians. Swing traders might look for 1-5 day trades, position traders for 1-8 week trades, and value investors for 1-2 year trades. Your style will depend not only on your goals, but also on your level of commitment. Day traders are likely to pursue an aggressive style with high activity levels. The goals would be focused on quick trades, small profits, and very tight stop-loss levels. Intraday charts would be used to provide timely entry and exit points. A high level of commitment, focus and energy would be required. On the other hand, position traders are likely to use daily end-of-day charts and pursue 1-8 week price movements. The goal would be focused on short to intermediate price movements and the level of commitment, while still substantial, would be less than a day trader. Make sure your level of commitment jibes with your trading style. The more trading involved, the higher the level of commitment. [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/arthur-hill-on-goals-style-and-strategy#strategy) Strategy ---------------------------------------------------------------------------------------------------------------------------------------- Once the goals have been set and the preferred style adopted, it is time to develop a strategy. This strategy would be based on your return/risk preferences, trading/investing style, and commitment level. Because there are many potential trading and investing strategies, I will focus on one hypothetical strategy as an example. **GOAL** First, the goal would be a 20-30% annual return. This is relatively high and would involve a correspondingly high level of risk. Because of the associated risk, I would only allot a small percentage (5-10%) of my portfolio to this strategy. The remaining portion would go towards a more conservative approach. **STYLE** Although I like to follow the market throughout the day, I cannot commit to day trading and the use of intraday charts. I would pursue a position trading style and look for 1-8 week price movements based on end-of-day charts. Indicators will be limited to three, with price action (candlesticks) and chart patterns carrying the most influence. Part of this style would involve a strict money management scheme that would limit losses by imposing a stop-loss immediately after a trade is initiated. An exit strategy must be in place before the trade is initiated. Should the trade become a winner, the exit strategy would be revised to lock in gains. The maximum allowed per trade would be 5% of my total trading capital. If my total portfolio were 300,000, then I might allocate 21,000 (7%) to the trading portfolio. Of these 21,000, the maximum allowed per trade would be 1050 (21,000 \* 5%). **STRATEGY** The trading strategy is to go long stocks that are near [support](https://chartschool.stockcharts.com/table-of-contents/glossary/glossary-s#support) levels and short stocks near [resistance](https://chartschool.stockcharts.com/table-of-contents/glossary/glossary-r#resistance) levels. To maintain prudence, I would only seek long positions in stocks with weekly (long-term) bull trends and short positions in stocks with weekly (long-term) bear trends. In addition, I would look for stocks starting to show positive (or negative) [divergences](https://chartschool.stockcharts.com/table-of-contents/glossary/glossary-d#divergence) in key momentum indicators and signs of accumulation (or distribution). My indicator arsenal would consist of two momentum indicators ([PPO](https://chartschool.stockcharts.com/table-of-contents/glossary/glossary-p#percentage_price_oscillator_ppo) and Slow [Stochastic Oscillator](https://chartschool.stockcharts.com/table-of-contents/glossary/glossary-s#stochastic_oscillator) ) and one volume indicator ([Accumulation/Distribution Line](https://chartschool.stockcharts.com/table-of-contents/glossary/glossary-a#accumulation_distribution_line) ). Even though the PPO and the Slow Stochastic Oscillator are momentum oscillators, one is geared towards the direction of momentum (PPO) and the other towards identifying overbought and oversold levels (Slow Stochastic Oscillator). As triggers, I would use key [candlestick patterns](https://chartschool.stockcharts.com/table-of-contents/chart-analysis/candlestick-charts/introduction-to-candlesticks) , price reversals, and [gaps](https://chartschool.stockcharts.com/table-of-contents/glossary/glossary-g#gap) to enter a trade. This is just one hypothetical strategy that combines goals with style and commitment. Some people have different portfolios that represent different goals, styles, and strategies. While this can become confusing and time-consuming, separate portfolios ensure that investment activities pursue a different strategy than trading activities. For instance, you may pursue an aggressive (high-risk) strategy for trading with a small portion of your portfolio and a relatively conservative (capital preservation) strategy for investing with the bulk of your portfolio. If a small percentage (~5-10%) is earmarked for trading and the bulk (~90-95%) for investing, the equity swings should be lower and the emotional strains less. However, if too much of a portfolio (~50-60%) is at risk through aggressive trading, the equity swings and the emotional strain could be large. [PreviousCognitive Biaseschevron-left](https://chartschool.stockcharts.com/table-of-contents/overview/cognitive-biases) [NextArthur Hill on Moving Average Crossoverschevron-right](https://chartschool.stockcharts.com/table-of-contents/overview/arthur-hill-on-moving-average-crossovers) Last updated 1 year ago Was this helpful? * [Goals](https://chartschool.stockcharts.com/table-of-contents/overview/arthur-hill-on-goals-style-and-strategy#goals) * [Style](https://chartschool.stockcharts.com/table-of-contents/overview/arthur-hill-on-goals-style-and-strategy#style) * [Strategy](https://chartschool.stockcharts.com/table-of-contents/overview/arthur-hill-on-goals-style-and-strategy#strategy) Was this helpful? sun-brightdesktopmoon sun-brightdesktopmoon --- # TA 101 – Part 8 | ChartSchool | StockCharts.com _This is the eighth part of a series of articles about technical analysis from a new course we're developing. If you are new to charting, these articles will give you the “big picture” behind the charts on our site. If you are an “old hand”, these articles will help ensure you haven't “strayed too far” from the basics. Enjoy!_ circle-check **Tip.** See the entire series [Technical Analysis 101](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101) [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-8#trend_psychology) Trend Psychology ----------------------------------------------------------------------------------------------------------------------------------------------------- The psychology of fear and greed of market participants ultimately determines the direction of prices in a market. Prices rise with greed (demand) and fall with fear (supply). A price **trend** is simply a sustained directional price move. It can be thought of as a _tilted_ support/resistance zone. A trend will continue as long as either fear or greed is in control of a market. Trends fade or change direction as the balance of fear and greed changes. The extent of fear and greed in a market can be seen by how quickly prices are trending down or up. [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-8#trending) Trending ------------------------------------------------------------------------------------------------------------------------------------- As stated earlier, a trend is a sustained, directional price move. Rising peaks and troughs constitute an **uptrend**; falling peaks and troughs constitute a **downtrend**. A **trading range** is characterized by horizontal peaks and troughs. Trends are generally classified into major (longer than six months), intermediate (one to six months), or minor (less than a month). Long term investors are most interested with identifying long-term trends where short-term investors are more interested in minor and intermediate trends. The following SharpChart shows examples of the different types and categories of trends. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252F8H9IWwqKacAyNAuwW8RW%252Fta101_part08a.png%3Falt%3Dmedia%26token%3D58305578-4d9f-4c32-83cb-0388ddb8175c&width=768&dpr=4&quality=100&sign=744c1071&sv=2) [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-8#trend_lines) Trend lines ------------------------------------------------------------------------------------------------------------------------------------------- A **trend line** is a straight line that connects two or more low or high price points and then extends into the future to act as a line of support or resistance. The first two points establish the trend line while additional points validate it. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FV5bzAS03XHMTk9WynDfI%252Fta101_part08b.png%3Falt%3Dmedia%26token%3D06ed509b-e531-4107-95e8-131edabcebc2&width=768&dpr=4&quality=100&sign=18c08cd6&sv=2) The following SharpChart contains a real example of how an uptrend line is drawn with a trend change. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FFCdimTUcDiH67UvWYHsE%252Fta101_part08c.png%3Falt%3Dmedia%26token%3D8ab36f5f-a57d-4875-b811-963daaa44adb&width=768&dpr=4&quality=100&sign=b667bd3&sv=2) An **uptrend line** has a positive slope and is formed by connecting two or more low points. Uptrend lines act as support. As long as prices remain above the trend line, the uptrend is considered intact. A break below the uptrend line indicates that demand has weakened and a change in trend could be imminent. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252Fdk9aQfb1v2IMQwWznFRe%252Fta101_part08d.png%3Falt%3Dmedia%26token%3D895b4644-1486-4ae6-b183-121c101ee673&width=768&dpr=4&quality=100&sign=3236d933&sv=2) A **downtrend line** has a negative slope and is formed by connecting two or more high points. Downtrend lines act as resistance. As long as prices remain below the downtrend line, the downtrend is intact. A break above the downtrend line indicates that supply is decreasing and that a change of trend could be imminent. _In part 9 we'll look at trend channels and trend changes._ [PreviousTA 101 – Part 7chevron-left](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-7) [NextTA 101 – Part 9chevron-right](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-9) Last updated 1 year ago Was this helpful? * [Trend Psychology](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-8#trend_psychology) * [Trending](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-8#trending) * [Trend lines](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-8#trend_lines) Was this helpful? sun-brightdesktopmoon sun-brightdesktopmoon --- # TA 101 – Part 12 | ChartSchool | StockCharts.com _This is the twelfth part of a series of articles about technical analysis from a new course we're developing. If you are new to charting, these articles will give you the “big picture” behind the charts on our site. If you are an “old hand”, these articles will help ensure you haven't “strayed too far” from the basics. Enjoy!_ circle-check **Tip.** See the entire series [Technical Analysis 101](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101) [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-12#volume_confirmation_of_price_patterns) Volume Confirmation of Price Patterns ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ When identifying potential price patterns on a chart, it is crucial to try and verify that the market psychology behind the price pattern is really happening at that point on the chart. One of the best ways to do that is to use volume to confirm things. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FkVNHI3hXUSwR7iZVEKDL%252Fta101_part12a.png%3Falt%3Dmedia%26token%3Dd070e320-3509-498d-99c1-00e85a9e7b7c&width=768&dpr=4&quality=100&sign=14ae03f3&sv=2) In the case of a rectangle pattern, volume should be decreasing while the rectangle is forming. There may be volume spikes whenever prices get near the top or bottom of the pattern, but in general, as a rectangle pattern continues to develop, volume should decrease. Volume will probably spike up heavily immediately after the breakout as people realize that the support or resistance line has been broken. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FpNhrfIqElNAWuKZKiEg7%252Fta101_part12b.png%3Falt%3Dmedia%26token%3D079646e3-db57-4eda-a84b-b9485d3af1e8&width=768&dpr=4&quality=100&sign=44637f86&sv=2) Triangle patterns should have a similar volume pattern - decreasing volume while the triangle is forming with a sharp increase in volume once a breakout is achieved. Again, the diagrams above are idealized - the real-world is much messier. Consider this example: ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252F8PC4LZl610iyf037jui3%252Fta101_part12c.png%3Falt%3Dmedia%26token%3Df3ec6701-a98c-4a8d-91bc-fdbec7dd7a79&width=768&dpr=4&quality=100&sign=70784c5e&sv=2) Notice that EWG didn't have a smooth decrease in volume but instead had several mini-spikes that corresponded to changes in direction of the “coil.” The key, however, is that each mini-spike was smaller than the previous one (with the exception of October 30, but that was early in the coil's formation). Once that downward volume trend was well established, a big spike above that trend line would signal the breakout - just like on December 6. [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-12#consolidation_continuation_patterns_vs_reversal_patterns) Consolidation / Continuation Patterns vs. Reversal Patterns ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- So far, the two price patterns we've looked at - Rectangles and Triangles - are examples of _Consolidation Patterns_, also known as _Continuation Patterns_. They are called that because, in general, after the pattern completes, prices will usually continue whatever trend they were in prior to the pattern forming. In order words, if prices are in an uptrend prior to a rectangle pattern forming, prices will usually resume the uptrend once the rectangle pattern finishes. Basically, consolidation patterns are places where the bulls and the bears have another short-term argument about the stock, but it is a half-hearted one. The bigger picture doesn't really change. Next, we are going to start looking at _Reversal Patterns_. These are where the fireworks occur. If consolidation patterns are skirmishes, reversal patterns are the big battles. When reversal patterns start to appear, the current trend is in real danger and lots of people start to pay attention. _In part 13 we'll look at the granddaddy of all reversal patterns - the Head and Shoulders reversal._ [PreviousTA 101 – Part 11chevron-left](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-11) [NextTA 101 – Part 13chevron-right](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-13) Last updated 1 year ago Was this helpful? * [Volume Confirmation of Price Patterns](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-12#volume_confirmation_of_price_patterns) * [Consolidation / Continuation Patterns vs. Reversal Patterns](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-12#consolidation_continuation_patterns_vs_reversal_patterns) Was this helpful? sun-brightdesktopmoon sun-brightdesktopmoon --- # TA 101 – Part 7 | ChartSchool | StockCharts.com _This is the seventh part of a series of articles about technical analysis from a new course we're developing. If you are new to charting, these articles will give you the “big picture” behind the charts on our site. If you are an “old hand”, these articles will help ensure you haven't “strayed too far” from the basics. Enjoy!_ circle-check **Tip.** See the entire series [Technical Analysis 101](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101) [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-7#chart_analysis_-_support_and_resistance) Chart Analysis - Support and Resistance --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Prices are driven by two of humanity's strongest emotions: Fear and Greed. When more investors are fearful that a stock will fall, it does! It will continue to decline until the balance between Fear and Greed is re-established. The same is true for greed and rising prices. This phenomenon is referred to as _Market Psychology._ _**Support**_ is the price level where “greedy” buyers enter the market to prevent prices from declining further. Support can develop at a specific price or, more commonly, in a price zone. Areas of support can exist for many months at a time. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252F1XiNSCj0fXn87TZVYGDL%252Fta101_part07a.png%3Falt%3Dmedia%26token%3Dcb368251-c544-4ab0-ba64-899f6b69f967&width=768&dpr=4&quality=100&sign=939be4da&sv=2) The diagram above illustrates how market psychology causes the previous area of price support to turn into resistance. After breaking support, traders who bought in the zone of support are now holding losses and, in order to break even, want to sell as soon as prices approach their original purchase prices. The _**Volume by Price**_ overlay (volume traded in incremental price ranges) in the following SharpChart of Dover Corp. illustrates how strong support at 24 later became significant resistance as greed turned into fear. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FZ8L6pfIdX58W9PcQn5Hz%252Fta101_part07b.png%3Falt%3Dmedia%26token%3D5b893eb6-3645-465e-ad5f-f7350ae4f106&width=768&dpr=4&quality=100&sign=deb0bd9a&sv=2) The concept of _**resistance**_ is opposite of the support as discussed above. Resistance is the price level where “fearful” sellers suddenly come into the market and prevent prices from advancing further. Like support, resistance can develop at a specific price or in a price zone and can be held for months at a time. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FmnE3HPbH2AyiokfkKTa5%252Fta101_part07c.png%3Falt%3Dmedia%26token%3Dab214733-5f0f-4ef5-8554-11f6c499d20f&width=768&dpr=4&quality=100&sign=b364ef09&sv=2) If resistance is broken, market psychology causes the previous area of price resistance to turn into support. The diagram above illustrates this market behavior. Stock holders who sold in the zone of resistance are now regretting selling and want to buy as soon as prices approach the level they sold at earlier. Prices that seemed too high before now look like a bargain. The following SharpChart of Parker Hannifin Corp. illustrates resistance later becoming support. Notice how Volume by Price indicates the potential number of previous sellers willing to buy again if given the opportunity. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FqwjFcN2DVOiJGKjVCeGP%252Fta101_part07d.png%3Falt%3Dmedia%26token%3D429f5724-6e25-4601-8f1c-293b7c10058e&width=768&dpr=4&quality=100&sign=8deac36e&sv=2) _In part 8 we'll discuss trend line analysis and trend channels._ [PreviousTA 101 – Part 6chevron-left](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-6) [NextTA 101 – Part 8chevron-right](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-8) Last updated 1 year ago Was this helpful? Was this helpful? sun-brightdesktopmoon sun-brightdesktopmoon --- # TA 101 – Part 6 | ChartSchool | StockCharts.com _This is the sixth part of a series of articles about technical analysis from a new course we're developing. If you are new to charting, these articles will give you the “big picture” behind the charts on our site. If you are an “old hand”, these articles will help ensure you haven't “strayed too far” from the basics. Enjoy!_ circle-check **Tip.** See the entire series [Technical Analysis 101](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101) [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-6#chart_scaling) Chart Scaling ----------------------------------------------------------------------------------------------------------------------------------------------- Charts are created with one of two different kinds of vertical price scales. An arithmetic scale evenly spaces price along the right side of the chart. Arithmetic chart spacing between $10 and $20 is half as tall as the spacing between $20 and $40. A log scale evenly spaces price in percentage terms. Chart spacing between $10 and $20 has the exact same chart spacing as between $20 and $40 since they represent the same percentage increase. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252Fi5PgPIJvM8lN3vyIcYD9%252Fta101_part06a.png%3Falt%3Dmedia%26token%3D43bbec96-9082-41ee-920e-cc6fb3cdaff0&width=768&dpr=4&quality=100&sign=f9c017e3&sv=2) ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FTkDO2YH0euf8lOlskunT%252Fta101_part06b.png%3Falt%3Dmedia%26token%3D4f98cc49-f12b-4a69-a3fd-ee7e4b3a6b80&width=768&dpr=4&quality=100&sign=23ac002a&sv=2) The SharpCharts above illustrate the differences between the two scaling methods. On the arithmetic scale, three different trend lines were required to keep pace with the price advance. On the log scale, the trend line fits the price trend during the entire rally. Log scaling should be the first scaling choice when using trend lines, especially over long timeframes. [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-6#volume) Volume --------------------------------------------------------------------------------------------------------------------------------- StockCharts.com provides several ways to plot volume data on a chart. The following price and volume SharpChart of AAPL illustrates how volume is typically plotted. Volume can be plotted in an 'indicator panel' above or below the 'price plot area' or in the price plot area as an 'overlay.' ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FAf8PfwDYfXHxO0PccumY%252Fta101_part06c.png%3Falt%3Dmedia%26token%3Dbc2e18aa-0b7d-46c4-9049-abe9de2e7be3&width=768&dpr=4&quality=100&sign=270d9f21&sv=2) When the 'Color Volume' option is used, the volume bars are shown as black for up days and red for down days. Color volume bars allow the chartist to quickly see where heavy or weak buying and selling activity is happening. [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-6#candlevolume_charts) CandleVolume Charts ----------------------------------------------------------------------------------------------------------------------------------------------------------- CandleVolume charts are similar to candlestick charts except that each candle's width is proportional to its corresponding volume value. This charting style allows one to visualize the volume activity “in” rather than “below” price moves. Depending on the style of analysis, volume bars could be omitted to simplify the chart. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FejkOXfUZ0KfEgVBBe5Zo%252Fta101_part06d.png%3Falt%3Dmedia%26token%3D4150fe42-c235-4565-969c-083f61193666&width=768&dpr=4&quality=100&sign=aad8fb2a&sv=2) The time axis for these charts is not uniformly spaced as candlestick bar widths vary with volume values. As a result, trend line analysis using CandleVolume charts should always be confirmed with a standard candlestick or OHLC chart. The SharpChart of AAPL above shows how volume bars correlate to the candlestick widths. _That wraps up our look at how charts are constructed. In part 7 we're going to start to talk about how charts are analyzed - starting with Support and Resistance analysis._ [PreviousTA 101 – Part 5chevron-left](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-5) [NextTA 101 – Part 7chevron-right](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-7) Last updated 1 year ago Was this helpful? * [Chart Scaling](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-6#chart_scaling) * [Volume](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-6#volume) * [CandleVolume Charts](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-6#candlevolume_charts) Was this helpful? sun-brightdesktopmoon sun-brightdesktopmoon --- # TA 101 – Part 10 | ChartSchool | StockCharts.com _This is the tenth part of a series of articles about technical analysis from a new course we're developing. If you are new to charting, these articles will give you the “big picture” behind the charts on our site. If you are an “old hand”, these articles will help ensure you haven't “strayed too far” from the basics. Enjoy!_ circle-check Tip. See the entire series [Technical Analysis 101](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101) [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-10#volume_confirmation) Volume Confirmation ------------------------------------------------------------------------------------------------------------------------------------------------------------ In an uptrend, volume should expand as the prices move higher and contract as the prices pull back. As long as this pattern continues, volume is confirming the uptrend. The opposite is true for downtrends. Volume should expand as prices decline and contract during rallies to confirm a downtrend. Negative divergences can occur if new price highs in an uptrend take place on declining volume. This type of volume activity is an indication of diminishing buying pressure. If the volume also begins to pick up on price pull backs, prices may begin consolidating or reversing into a downtrend. The same concept is true for positive divergences in downtrends. If volume begins to contract on new price lows but expands during rallies, prices may begin consolidating or reversing into an uptrend. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252F5bjoEelc00XlpvTY4Bgu%252Fta101_part10a.png%3Falt%3Dmedia%26token%3Da52754b5-2a32-4b92-bfad-dc5c5b432849&width=768&dpr=4&quality=100&sign=e8f80359&sv=2) _This is the end of our section on trends and trend lines. In part 11 we'll dive into some of the fundamental price patterns that result from when two trend lines are in effect at the same time._ [PreviousTA 101 – Part 9chevron-left](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-9) [NextTA 101 – Part 11chevron-right](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-11) Last updated 1 year ago Was this helpful? Was this helpful? sun-brightdesktopmoon sun-brightdesktopmoon --- # Irrational Exuberance | ChartSchool | StockCharts.com [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/irrational-exuberance#introduction) Introduction ------------------------------------------------------------------------------------------------------------------------------ In his 2006 book _**Irrational Exuberance**_, Robert Shiller argues that high stock market valuations in 2000 and 2005 were unjustified. The text opens with Shiller examining the historic valuations (based on PE ratios) in the two periods, which were well above those seen at prior peaks in 1901, 1929 and 1966. This book, however, is not about valuation. Instead, the author identifies a series of factors that brought about these speculative excesses, focusing on 12 factors that facilitated big market moves from 1995 to 2000 and from 2002 to 2005. Shiller then goes on to explain the mechanisms that amplified these factors. The book also covers cultural and psychological influences that further contribute to irrational decision-making when it comes to making investments. Shiller, after explaining the human instinct to rationalize this irrational behavior, then offers some solutions to prevent future speculative bubbles. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FxsuSrQC145h7vRU85Nd9%252Firex-1-spx.png%3Falt%3Dmedia%26token%3D0159faed-7101-41c5-8982-66f18b697531&width=768&dpr=4&quality=100&sign=e156d74a&sv=2) Example of Irrational Exuberance on Chart of S&P 500 Index Taking its title from Alan Greenspan's famous description of the stock market in 1996, _Irrational Exuberance_ was first published in 2000 and coincided with the Nasdaq peak that same year. Needless to say, the timing was most prophetic. The second edition was published in 2005 with the S&P 500 up some 50% from its 2002 low. This advance continued another 30% before the financial crisis triggered a massive decline in 2008. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2Fschool.stockcharts.com%2Flib%2Fexe%2Ffetch.php%3Fmedia%3Doverview%3Airrational_exuberance%3Airex-2-peratio.png&width=768&dpr=4&quality=100&sign=5f5c7788&sv=2) Irrational Exuberance ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FXnXKXdPTk6BOsfz9AGxA%252Firex-2-peratio.png%3Falt%3Dmedia%26token%3Dbcd7e9a9-774d-486c-849f-46e3e4c8510b&width=768&dpr=4&quality=100&sign=2291dbd7&sv=2) Price Earnings Ratio Chart [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/irrational-exuberance#ties_with_technical_analysis) Ties with Technical Analysis -------------------------------------------------------------------------------------------------------------------------------------------------------------- Many of the theories put forth in this book fall into the realm of behavioral finance or behavioral economics. Behavioral finance is considered a branch of technical analysis. (In fact, _Irrational Exuberance_ was required reading for the Chartered Market Technician (CMT) exam in 2011.) Behavioral finance is an attempt to understand the behavior of investors and institutions when investing in stocks, bonds, real estate, tulips or other securities. What prompts individuals to buy or sell a security? How do investors handle risk or loss? Why do speculative bubbles appear and then burst? Is there such thing as the dumb money and the smart money? Shiller sheds light on the investing process by highlighting the key factors that led to Irrational Exuberance in the late 1990s. [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/irrational-exuberance#structural_factors) Structural Factors ------------------------------------------------------------------------------------------------------------------------------------------ Shiller identifies 12 structural factors that contributed to the unprecedented rise in stock prices from 1995 to 2000. Even after the big decline into the 2002 lows, valuations were again at relatively high levels a few years later. **1\. The capitalist explosion and the ownership society encouraged stock investing.** Societies built on communism and socialism opened up to capitalistic ways; Russia and China come to mind over the last 20 years. George W. Bush promoted the ownership society by advocating property and stocks for all. Corporate downsizing and the decline of labor unions prompted people to take their destiny into their own hands and spawned the entrepreneurial spirit. Corporations tied salaries to performance with stock options. **2\. Cultural and political changes favor business success.** There has been a significant rise in materialistic values over the years. Shiller reports that more people viewed money as important to success in the mid-90s than in the mid-70s. Society viewed successful businessmen more favorably than scientists or artists. The 1995 Republican Congress proposed cutting the capital gains tax and it was cut in 1997. Further cuts were proposed soon thereafter. These tax cuts, as well as the anticipation of future capital gains tax cuts, provided incentives to buy stocks. **3\. New information technology appeared to herald a new era.** The first cell phones appeared in the early 1980s, which is when the great bull market started. The Internet came of age in the mid-1990s and grew rapidly the next five years. Investors viewed this Internet revolution as a game changer that justified the stock market boom. **4\. Monetary policy and the Greenspan put took perceived risk out of the equation.** The Fed did nothing to stop the surging stock market from 1995 to 1999. Interest rates did not increase until August 1999. In addition to letting the bubble grow, the Fed indicated that it would be there to pick up the pieces should anything go wrong, just like in 1987 and 1998. Having the Fed on standby in the event of a market crash was like owning a put option. **5\. The perceived effects of the baby boomer generation.** There was indeed a baby boom after World War II and this boom resulted in a large number of people aged 35-55 in 2000. However, Shiller argues with data that there is no correlation between a baby boom and a surging stock market. Instead, Shiller argues that, as with the Internet, the public perceptions of the baby boom influence help inflate the stock market. **6\. The 1990's surge in business media undoubtedly contributed to interest in the stock market.** Not much explanation is needed here. Newspapers created big glossy business sections to attract readers. Good stories replaced hard news. Increased media exposure led to more advertising, which fed the public appetite for stocks. The media continued to pour it on, with the investment show _Mad Money_ debuting in 2005. **7\. Analysts' estimates were routinely over-optimistic in the late 1990s.** Shiller notes that Zachs reported sell recommendations on 9.1% of stocks in 1989 and just 1% of stocks in late 1999. Analysts were hesitant to issue sell recommendations because many firms also had investment banking ties with the company. Analysts also did not want to offend the company because they might then be cut off from earnings guidance or key information. **8\. Defined-Contribution Pension Plans grew and replaced many Defined-Benefit Plans.** Among other things, the decline in unions and big manufacturing industries (autos) contributed to this trend. More people also wanted control over their retirement funds. Those with Defined-Benefit Plans must make their own investment choices and this increases the exposure to stocks. **9\. The number of mutual funds surged**. From 1982 to 1998, the number of mutual funds grew tenfold (340 to 3513). At one point, there were more mutual funds than stocks listed on the NYSE. Mutual funds became a regular part of 401K's. Money moving into these mutual funds from 401K's and individual investors found its way into the stock market to feed the bubble. Shiller also notes that widespread advertising compounded this growth and increased public awareness to new levels. **10\. Benign inflation created the illusion of wealth and prosperity.** After runaway inflation in the 1970s, the inflation outlook steadily improved from 1982. Shiller's research found that the public associates inflation with economic prosperity and social welfare. Such perceptions promote positive expectations for the economy and the stock market. **11\. The explosion of trading volume kept the bid in the bubble.** Increased interest in the stock market and a dramatic decline in commissions facilitated a surge in trading volume on the exchanges. The growth in online trading also facilitated increased interest and made it easy to trade more frequently. **12\. There was an increase in gambling over the years.** Government sanctioned gambling (lotteries) and commercial gambling grew in popularity over the years. Poker players became stars. Lottery jackpots were heavily promoted. Slick adverts portrayed gambling as sophisticated and increased one's propensity to take risks. Online gambling facilitated growth as well. [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/irrational-exuberance#amplification_mechanisms) Amplification Mechanisms ------------------------------------------------------------------------------------------------------------------------------------------------------ As if the structural factors listed above were not enough, Shiller argues that amplification mechanisms intensified the effects. First, there was a change in investor attitudes toward stocks. By the late 1990s stocks were considered a long-term investment that could not go wrong. Jeremy Siegel first published _Stocks for the Long Run_ in 1994. Subsequent editions have appeared in 1998, 2002 and 2007. Stocks indeed performed well from 1995 until 2000, when the S&P 500 peaked around 1550. The S&P 500 then went on a 10-year stretch of underperformance. In fact, the S&P 500 was trading below its 2000 level in early 2011. This means 11 years of negative returns for buy-and-hold investors that bought in 2000. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252F8BaGFhM5ujrGmjQAk86v%252Firex-5-longrun.png%3Falt%3Dmedia%26token%3D70e77390-8a65-48b5-b916-d0026d56c245&width=768&dpr=4&quality=100&sign=e71fbf93&sv=2) Image of the book "Stocks for the Long Run" Second, as inferred above, Shiller asserts that public attention to the stock market hit new levels in the 1990s. This heightened awareness made more money available for stocks. The media fed this infatuation with increased coverage. Dinner party conversations invariably turned to the stock market. Stock tips and advice were also readily shared among acquaintances. Third, the consistent rise in stock prices provided a feedback loop that kept public attention on stocks. As the media reported the rise in the stock market, new money found its way into the stock market and pushed prices even higher. Higher prices led to more news and more news led to more investment money. A feedback loop evolved where price increases were feeding more price increases. Shiller calls these mechanisms naturally occurring Ponzi schemes because they feed on the perception of prior success. [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/irrational-exuberance#cultural_factors) Cultural Factors -------------------------------------------------------------------------------------------------------------------------------------- The news media and new-era thinking are among the cultural factors cited by Shiller. Yes, the media seems to keep popping up in the book. Maybe that is why technical analysts only look at price charts! The speculative bubble was clearly aided and abetted by the news media. Newspapers, television, radio and Internet media compete for public attention. Sensational stories with sound bites are more likely to attract attention than drab analysis with numbers and facts. Despite an inattention to detail, the news media was always there with specific reasons for a stock market move. The media always found the perfect excuse or news event to justify the move - after the fact. It is kind of like a solution in search of a problem. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252F4nDwWTVRkEAqLOravuiA%252Firex-6-nytimes.png%3Falt%3Dmedia%26token%3Dc2b71f4a-ab58-4f27-b07e-ee02120ca89f&width=768&dpr=4&quality=100&sign=37e4045e&sv=2) Front Page of the New York Times, October 19th, 1987 Shiller notes that news of price changes is influential on investor behavior. In his survey after the crash on October 19th, 1987, Shiller listed all the recent news events that seemed relevant and asked respondents to rate the stories. News of the October 14th price decline was also included in this list. At the time, this was the single largest one-day point decline in the Dow Industrials. Surprisingly, the stories relating to the past price declines were deemed the most significant news events. In Shiller's words: _Thus it appears that the stock market crash had substantially to do with a psychological feedback loop among the general investing public from price declines to selling and thus to further price declines, along the lines of a negative bubble. The crash apparently had nothing particularly to do with any news story other than that of the crash itself, but rather with theories about other investors' reasons for selling and about their psychology._ New era economic thinking was also cited by Shiller as a cultural factor that contributed to the stock market bubble. New era thinking is not new. Stock market advances in the late 1800s, 1920s and 1960s were also facilitated by new era thinking. At the 1901 peak, new era thinking centered around railroads, big industrial trusts and the age of optimism. The roaring 20s were marked by the electrical age for big cities and the widening use of autos. The 1960s were punctuated by a baby boom, the proliferation of television and low inflation. And finally, the 1990s saw the Internet boom, low inflation, the new economy and the alleged end of the business cycle. [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/irrational-exuberance#psychological_factors) Psychological Factors ------------------------------------------------------------------------------------------------------------------------------------------------ Shiller asserts that there is a human tendency towards “overconfidence in one's beliefs,” and that people often rely on intuition when making investment decisions. The decision process is not based on carefully considered facts backed by numbers and evidence. Instead, investors make investment decisions based on the opinion of others, stemming from the need to conform. Investors make decisions based on “good stories” or stories that seem logical. Because people get their information from the same sources, there is little or no evidence of independent behavior. Instead, individuals getting the same information react the same way to produce a herd mentality. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FgpDca8ECm2ljDe6zNC2a%252Firex-7-excel.png%3Falt%3Dmedia%26token%3D3ff42dd9-f398-4ff9-9337-330ebab6a117&width=768&dpr=4&quality=100&sign=777647c1&sv=2) Comic of Irrational Exuberance [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/irrational-exuberance#conclusion_and_critiques) Conclusion and Critiques ------------------------------------------------------------------------------------------------------------------------------------------------------ Shiller identified several credible factors that influenced investment decisions during the bubble years. Many of these factors exist today and his analysis provides food for thought when considering behavioral finance. Not all factors or influences are listed here. Shiller offers more factors and detailed evidence in the book. After examining efficient markets, random walks, bubbles and investor attitudes, Shiller also offers several remedies to contain _“speculative volatility in a free society”._ Behavioral finance can help us understand what is happening, but understanding may not help with making money in the stock market. While the first edition coincided with the stock market peak in 2000, the stock market rose another 30% after the second edition was published in February 2005. There is an argument to be made for historical valuations, but markets can remain irrational a lot longer than traders can remain solvent. In other words, one would have left a lot of money on the table by selling in early 2005 or one would have gone broke shorting stocks in early 2005. To his credit, Shiller does provide evidence of past mispricing in the stock market. It can and does happen. Furthermore, who is to say how much a stock is actually worth? The value of any asset is only what someone is willing to pay for it. Valuations are set every day as stocks change hands on Wall Street. Just as prices trend, valuations also trend from overvaluation to undervaluation. Sometimes these trends get extreme on both sides. Stocks were severely overvalued in early 2000 and severely undervalued in March 2009. It would appear that some sort of timing mechanism is needed to avoid the big declines and participate in the big advances. Hmm … sounds like **technical analysis!** [PreviousTA 101 – Part 17chevron-left](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-17) [NextCognitive Biaseschevron-right](https://chartschool.stockcharts.com/table-of-contents/overview/cognitive-biases) Last updated 1 year ago Was this helpful? * [Introduction](https://chartschool.stockcharts.com/table-of-contents/overview/irrational-exuberance#introduction) * [Ties with Technical Analysis](https://chartschool.stockcharts.com/table-of-contents/overview/irrational-exuberance#ties_with_technical_analysis) * [Structural Factors](https://chartschool.stockcharts.com/table-of-contents/overview/irrational-exuberance#structural_factors) * [Amplification Mechanisms](https://chartschool.stockcharts.com/table-of-contents/overview/irrational-exuberance#amplification_mechanisms) * [Cultural Factors](https://chartschool.stockcharts.com/table-of-contents/overview/irrational-exuberance#cultural_factors) * [Psychological Factors](https://chartschool.stockcharts.com/table-of-contents/overview/irrational-exuberance#psychological_factors) * [Conclusion and Critiques](https://chartschool.stockcharts.com/table-of-contents/overview/irrational-exuberance#conclusion_and_critiques) Was this helpful? sun-brightdesktopmoon sun-brightdesktopmoon --- # Cognitive Biases | ChartSchool | StockCharts.com Central to the fields of both psychology and behavioral finance, **cognitive biases** describe the innate tendencies of the human mind to think, judge, and behave in irrational ways that often violate sensible logic, sound reason or good judgment. The average human – and the average investor – is largely unaware of these inherent psychological inefficiencies, despite the frequency with which they arise in our daily lives and the regularity with which we fall victim to them. While the complete list of cognitive biases is extensive, this article focuses on eleven of the most common tendencies, chosen for both their prevalence in human nature and their relevance to investing in the financial markets. The purpose of this article is to educate you on these psychological predispositions so that you can better recognize and overcome them in your own decision making. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FNRBDmUHCZes26PuA80jo%252Fcognitive_biases_table.png%3Falt%3Dmedia%26token%3Db9672149-bbe4-40aa-a455-3a1b4b9c84c4&width=768&dpr=4&quality=100&sign=aa7af02&sv=2) * * * [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/cognitive-biases#anchoring) Anchoring ------------------------------------------------------------------------------------------------------------------- Also referred to as _focalism_, **anchoring** is the tendency to be over-influenced by the earliest information presented to us when making decisions, thereby allowing oneself to be driven to a decision or conclusion that is biased towards that initial piece of information. This earliest piece of information is known as the “anchor,” the standard off of which all other alternatives are judged. Thus, subsequent decisions are made not on their own, but rather by adjusting away from the anchor. For example, in price negotiations over a used car, the first price offered by the salesman sets the anchor point, from which all subsequent offers are based. By offering an initial price of, say, $30,000, a used-car salesman anchors the customer to that price, implementing a bias towards the $30,000 level in the subconscious of the other party. Even if the $30,000 offer is significantly above the true value of the car, all offers below that level appear more reasonable and the customer is likely to end up paying a higher price than he or she originally intended. While the used car example may seem somewhat harmless, psychologists have captured the effects of the anchoring bias in other more significant settings. For example, researchers have shown that court decisions of judges can be swayed significantly by anchoring effects. In one setting, judges were presented with details of a court case and asked to award damages to the appropriate party. Some of the judges were provided with a low anchor (a low damage estimate) while others were provided no anchor. On average, damages awarded by judges who were given the low anchor were 29% less than those awarded by the non-anchored judges. In a similar study, judges were provided details of a case and asked to determine the duration of an appropriate prison sentence. The anchor given to the judges was set by rolling two dice on the table directly front of them. Even when the anchor was set completely randomly in this fashion and its source was witnessed by the judges, the study showed that their sentencing decisions were still subject to the anchoring effect and biased when a high dice number was rolled. In a financial market setting, anchoring is at play anytime the estimates or expectations of another party are allowed to influence your own judgments. For example, if a price target for a stock that you are considering is set by a particularly vocal Wall Street analyst at $200.00, your own estimates for that security’s potential price movement can be easily swayed towards that figure, potentially blurring your clarity of thought, inflating your expectations and dragging you into a poor decision. * * * [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/cognitive-biases#loss_aversion_and_the_endowment_effect) Loss Aversion and the Endowment Effect ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------- First demonstrated by prominent psychologists Amos Tversky and Daniel Kahneman, the concept of **loss aversion** refers to the human tendency to strongly prefer decisions that allow us to avoid losses over those that allow us to acquire gains. Loss aversion implies, for example, that the pain one will suffer from a _loss_ of $500 is significantly greater than the satisfaction they will receive from a _gain_ of $500. Many studies on loss aversion commonly suggest that the human perception of loss is twice as powerful as that of gain. This forms the basis of what is known as _Prospect Theory_, a behavioral economics concept that describes the way in which people choose between probabilistic alternatives that involve risk. At its core, Prospect Theory shows that a loss is perceived as more significant than an equivalent gain. When graphed, the Prospect Theory value function developed by Tversky and Kahneman forms the following curve, the asymmetrical shape of which demonstrates the unequal valuing of identical gains and losses: ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FahBNeX0uPjxihdZk3oU3%252Fprospect_theory.png%3Falt%3Dmedia%26token%3D854f9205-fda4-4290-8db7-a8abab8e9abd&width=768&dpr=4&quality=100&sign=3855784c&sv=2) Illustration of Loss Aversion Loss aversion is discussed at great length not only in psychological studies of how humans make decisions, but also in the field of economics. In economics, loss aversion is a core concept at work when considering how individuals act in scenarios that involve risk. Because individuals prefer avoiding losses to achieving gains, loss aversion drives us to be risk-averse when evaluating outcomes that involve similar gains and losses. Loss aversion was first proposed by Kahneman and his colleagues in 1990 as an explanation for a strongly related concept known as the **endowment effect**. The endowment effect describes the human tendency to place greater value on a good that we own than that which we place on an identical good that we do not own. Together, loss aversion and the endowment effect lead to a violation of the basic economic principle known as the Coase Theorem, which says that “the allocation of resources will be independent of the assignment of property rights when costless trades are possible”. Research has shown that even when a trade involves no cost, ownership still creates disparities in perceived value between parties due to the endowment effect. For example, researchers have demonstrated the endowment effect by distributing a coffee mug to each participant in a study and then offering them the opportunity to sell or trade the mug for an alternative good (in this case, pens) of equal value. On average, the compensation that the participants required to part with the mug _(their willingness to accept)_ was nearly twice as high as the amount they were willing to pay for the mug _(their willingness to pay)_. In just a few short minutes, those participants who received a mug had ascribed ownership to the object, raising their perception of its value. Another famous study on the endowment effect found that participants' hypothetical selling price for NCAA Final Four basketball tickets was an average of 14 times greater than participants' hypothetical purchase price. Even when entirely imaginary, ownership (endowment) of the tickets fosters greater perceived value of them. Relating the concepts of loss aversion and the endowment effect back to the financial markets, it is easy to see how these tendencies can influence an investor. Loss aversion has a distinct impact on our risk tolerance both before and after executing a trade. Combined with other cognitive biases, our tendency to steer away from loss can lead to denial as losses build in a poor position, for example, causing us to ignore weakening positions in an attempt to diminish their emotional impact. Similarly, if the endowment effect leads us to ascribe greater value to a security simply because we feel a sense of ownership over it, then that emotional attachment can lead to clouded judgment when the time comes to sell. * * * [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/cognitive-biases#the_framing_effect) The Framing Effect ------------------------------------------------------------------------------------------------------------------------------------- The **framing effect** describes our tendency to react to, judge, or interpret the exact same information in distinctly different ways depending on how it is presented to us, or “framed” (most commonly, whether the information is framed as a loss or as a gain). Building off of the previously discussed concepts of loss aversion and Prospect Theory, people tend to avoid risk when information is presented in a positive frame but seek risk when information is presented in a negative frame. The most commonly cited example of this is a 1981 Tversky and Kahneman study that asked participants to choose between two treatments, A and B, for 600 people affected by a deadly disease. Treatment A was predicted to result in a guaranteed total of 400 deaths, while treatment B had a 33% chance that no one would die but a 66% chance that everyone would die. The same two alternatives were then presented to the study's participants either under a positive frame (how many peoples' lives would be saved) or under a negative frame (how many people would die). ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252Fi0IIN4a5TobuiqFfY0cN%252Fframing_effects.png%3Falt%3Dmedia%26token%3Deb233739-7064-4f46-8e33-2d61b0c88522&width=768&dpr=4&quality=100&sign=1143c748&sv=2) Table illustrating Framing Bias When the alternatives were framed positively, 72% of participants chose Treatment A (“saves 200 lives”). When the exact same alternatives were framed negatively, however, only 22% of participants chose Treatment A (now presented as “400 people will die”). Saving 200 of the 600 lives is the exact same outcome as letting 400 of the 600 die, but the manner in which this identical treatment option was framed resulted in a massive decrease in the number of participants who chose it. Under the positive frame, the majority of participants avoided risk by choosing the treatment that resulted in a sure saving of 200 lives. Under the negative frame, however, the majority of participants sought the riskier alternative treatment that offered a 33% chance of saving all 600 lives. Another famous example that demonstrates the impact of framing is a study that found 93% of PhD students registered for classes early when a penalty fee for late registration was emphasized, but only 67% did so when the same number was presented as a discount for early registration. It is no secret that investors in the financial markets are under a constant barrage of information from all different sides - bullish, bearish, and everything in between. The exact same information can be framed by multiple sources in many different ways, biasing your interpretation of it. As you filter the stream of news and financial data that comes your way, consider the manner in which those numbers, statistics or reports are framed and think about the impact that their presentation has on the opinions they lead you to form. * * * [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/cognitive-biases#confirmation_bias) Confirmation Bias ----------------------------------------------------------------------------------------------------------------------------------- **Confirmation bias** is the tendency to overweight, favor, seek out, exaggerate or more readily recall information or alternatives in a way that confirms our preconceived beliefs, hypotheses or desires, while simultaneously undervaluing, ignoring or otherwise giving disproportionately less consideration to information or alternatives that do not confirm our preconceived beliefs, hypotheses or desires. This inherent flaw in our cognitive reasoning leads to misconstrued interpretations of information, errors in judgment, and poor decision making. The effects of confirmation bias have been shown to be much stronger for emotionally-charged issues or beliefs that are deeply entrenched. In addition to overvaluing information that confirms our preexisting beliefs, confirmation bias also includes our tendency to interpret ambiguous evidence as supporting existing positions, even if no true relationship exists. In short, this concept says that individuals are biased towards information that confirms their existing beliefs and biased against information that disproves their existing beliefs, leading to overconfidence in our opinions and our decisions even in the face of strong contrary evidence. As an investor in the financial markets, it can be difficult to maintain a separation between informed estimates or expectations and emotional judgments based on hopes or desires. By causing us to overweight information that confirms such hopes or desires, confirmation bias can affect our abilities to make sound assessments and form well-reasoned opinions about, for example, a stock's upside potential. Awareness of our natural biases towards confirming information and, perhaps more importantly, our biases against disproving information is the first step in combating the unwanted effects of confirmation bias. * * * [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/cognitive-biases#hindsight_bias_and_the_availability_heuristic) Hindsight Bias and the Availability Heuristic ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- **Hindsight bias** describes our inclination, after an event has occurred, to see the event as having been predictable, even if there had been little to no objective basis for predicting it. This is the psychological tendency that causes us, after witnessing or experiencing the outcome of even an entirely unforeseeable event, to exclaim “I knew it all along!” The discovery of hindsight bias emerged during the early 1970s as the field of psychology witnessed an expansion of investigations into heuristics and biases, largely led by Amos Tversky and Daniel Kahneman. Along with the uncovering of tendencies such as the hindsight bias came the discovery of the **availability heuristic**, a common mental shortcut that causes individuals to rely on immediate information or examples that come to mind first when evaluating a specific topic, concept, method or decision. According to the cognitive reasoning behind the availability heuristic, if something can be recalled, it must be important, or at least more so than alternatives that are not as readily recalled. As a result, individuals tend to more heavily weight recent or immediately-recalled information, creating a bias towards the latest news, events, experiences or memories. * * * [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/cognitive-biases#the_sunk_cost_fallacy) The Sunk Cost Fallacy ------------------------------------------------------------------------------------------------------------------------------------------- The **sunk cost fallacy** rests on the economic concept of a sunk cost: a cost that has already been incurred and cannot be recovered. While theoretical economics says that only future (prospective) costs are relevant to an investment decision and that rational economic actors therefore should not let sunk costs influence their decisions, the findings of psychological and behavioral finance research show that sunk costs do in fact affect real-world human decision making. Because of our tendencies towards Loss Aversion and other cognitive biases, we fall victim to the sunk cost fallacy, which describes our irrational belief that sunk costs should be considered a legitimate factor in our forward decision making when, in fact, their consideration often leads us towards inefficient outcomes. For example, let's say a gentleman named Fred is concerned about his weight and decides to go on a diet. As part of his cleanse, he empties his fridge of all tasty temptations. When he comes across an unopened tub of ice cream, however, he falls victim to the Sunk Cost Fallacy. Even though the $15.00 Fred spent on the ice cream is a sunk cost that has already been incurred and cannot be recovered, Fred convinces himself that he cannot let the ice cream go to waste because he previously spent his hard-earned dollars to buy it. Eating a full tub of ice cream is in no way in line with his current weight-loss objectives, as the calories he will take in by consuming it are many times the daily total target of his new diet. Still, despite the adverse consequences for his health goals, Fred is swayed into eating the ice cream because of the Sunk Cost Fallacy. In an investment setting, the consequences of the sunk cost fallacy can be much more severe than some unwanted calories. As the share price of a security falls, investors often begin to employ the logic that _“I've already lost $XXX, it's too late to sell now.”_ As prices keep falling further and losses grow, the investor's commitment to the sunk cost continues to escalate. _“Now I’ve lost $XXXXX, there's no way I can sell now. It has to come back eventually. I'll just hold on to it.”_ Improper or irrational considerations of sunk costs can lead to poor decisions that continue to spiral out of control, simply because of an incorrect perception of an expense that is irrecoverable. * * * [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/cognitive-biases#the_gambler_s_fallacy) The Gambler's Fallacy ------------------------------------------------------------------------------------------------------------------------------------------- The **gambler's fallacy**, also known as the _Monte Carlo Fallacy_, is the mistaken tendency to believe that, if something happens more frequently than “normal” during a period of time, it must happen less frequently in the future, or that, if something happens less frequently than “normal” during a period of time, it must happen more frequently in the future. This tendency presumably arises out of an ingrained human desire for nature to be constantly balanced or averaged. In situations where the event being observed or measured is truly random (such as the flip of a coin), this belief, although appealing to the human mind, is false. The gambler's fallacy is, rather obviously, most strongly associated with gambling, where such errors in judgment and decision making are common. It can, however, arise in many practical situations, including investing. Winning and losing trades are in many ways similar to the flip of a coin and thus subject to the same psychological biases. If an investor has a series of losing trades, for example, he or she can begin to erroneously believe that, since the statistics feel unbalanced, his or her probability of making a profitable trade increases. In reality, the probability of his or her next trade being profitable is unaffected by previous losses. * * * [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/cognitive-biases#the_hot-hand_fallacy) The Hot-Hand Fallacy ----------------------------------------------------------------------------------------------------------------------------------------- The **hot-hand fallacy** is the mistaken belief that an individual who has experienced success with a random event has a greater chance of continuing that success in subsequent attempts. This cognitive bias is most frequently applied to gambling (where individuals in games such as blackjack believe that the luck they have randomly stumbled upon is actually a “hot hand” and will continue indefinitely) and sports such as basketball (where “hot” shooters see a spike in confidence after making multiple shots in a row, fueling a belief that the trend will continue throughout the rest of the game). While previous success at a skill-based athletic task, such as making a shot in basketball, _can_ change the psychological behavior and future success rate of a player, researchers continue to find little evidence for a true “hot hand” in practice. Similar to what was discussed with the gambler's fallacy, individuals often have trouble processing or believing statistically-acceptable deviations from the average, causing them to assume that forces other than normal statistics must be at play. As an investor, a series of winning trades can induce risky overconfidence one’s “hot hand” of the moment, leading to errors in judgment and poor decision making. * * * [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/cognitive-biases#the_money_illusion) The Money Illusion ------------------------------------------------------------------------------------------------------------------------------------- In economics and behavioral finance, the **money illusion** describes the tendency to think of currency in nominal terms rather than in real terms. In other words, humans commonly consider money in terms of its numerical or face value (nominal value) instead of considering it in terms of its real purchasing power (real value). Because modern currencies have no intrinsic value, the real purchasing power of money is the only true (and rational) metric by which it should be judged. Still, humans often struggle to do so because, derived from all the complex underlying value systems in both domestic and international economies, the real value of money is constantly changing. In the financial markets, many average investors commonly ignore the real value of their currency when valuing their investments or interpreting their appreciation, leading to incorrect perceptions of value and past performance. * * * [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/cognitive-biases#about_the_author) About the Author --------------------------------------------------------------------------------------------------------------------------------- _**Grayson Roze**_ _is the author of_ _**"**_[_**Trading for Dummies**_arrow-up-right](https://store.stockcharts.com/products/options-trading-for-dummies?_pos=1&_sid=bc0674b45&_ss=r) _**"**_ _(Wiley, 2017) and_ [_**"Tensile Trading: The 10 Essential Stages of Stock Market Mastery"**_arrow-up-right](https://store.stockcharts.com/products/tensile-trading-1) _(Wiley, 2016). He currently serves as the Business Manager for StockCharts.com. Grayson also speaks regularly at various investment seminars throughout the country, including to organizations such as the American Association of Individual Investors (AAII) and the Market Technicians Association (MTA). He is the co-founder of Stock Market Mastery, which provides functional investment education to individuals through multiple mediums, including live courses, books and DVDs (visit_ [_**"StockMarketMastery.com"**_arrow-up-right](http://stockmarketmastery.com/) _to learn more). Grayson holds a Bachelor's degree from Swarthmore College, where he studied Economics and Psychology._ [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/cognitive-biases#further_study) Further Study --------------------------------------------------------------------------------------------------------------------------- [**Investing with the Trend**arrow-up-right](https://store.stockcharts.com/products/investing-with-the-trend?_pos=1&_sid=07e5267e3&_ss=r) Gregory L. Morris [**Investment Psychology Explained**arrow-up-right](https://store.stockcharts.com/products/investment-psychology-explained?_pos=1&_sid=8ca3e0f16&_ss=r) Martin J. Pring [PreviousIrrational Exuberancechevron-left](https://chartschool.stockcharts.com/table-of-contents/overview/irrational-exuberance) [NextArthur Hill on Goals, Style and Strategychevron-right](https://chartschool.stockcharts.com/table-of-contents/overview/arthur-hill-on-goals-style-and-strategy) Last updated 1 year ago Was this helpful? * [Anchoring](https://chartschool.stockcharts.com/table-of-contents/overview/cognitive-biases#anchoring) * [Loss Aversion and the Endowment Effect](https://chartschool.stockcharts.com/table-of-contents/overview/cognitive-biases#loss_aversion_and_the_endowment_effect) * [The Framing Effect](https://chartschool.stockcharts.com/table-of-contents/overview/cognitive-biases#the_framing_effect) * [Confirmation Bias](https://chartschool.stockcharts.com/table-of-contents/overview/cognitive-biases#confirmation_bias) * [Hindsight Bias and the Availability Heuristic](https://chartschool.stockcharts.com/table-of-contents/overview/cognitive-biases#hindsight_bias_and_the_availability_heuristic) * [The Sunk Cost Fallacy](https://chartschool.stockcharts.com/table-of-contents/overview/cognitive-biases#the_sunk_cost_fallacy) * [The Gambler's Fallacy](https://chartschool.stockcharts.com/table-of-contents/overview/cognitive-biases#the_gambler_s_fallacy) * [The Hot-Hand Fallacy](https://chartschool.stockcharts.com/table-of-contents/overview/cognitive-biases#the_hot-hand_fallacy) * [The Money Illusion](https://chartschool.stockcharts.com/table-of-contents/overview/cognitive-biases#the_money_illusion) * [About the Author](https://chartschool.stockcharts.com/table-of-contents/overview/cognitive-biases#about_the_author) * [Further Study](https://chartschool.stockcharts.com/table-of-contents/overview/cognitive-biases#further_study) Was this helpful? sun-brightdesktopmoon sun-brightdesktopmoon --- # TA 101 – Part 15 | ChartSchool | StockCharts.com _This is the fifteenth part of a series of articles about technical analysis from a new course we're developing. If you are new to charting, these articles will give you the “big picture” behind the charts on our site. If you are an “old hand,” these articles will help ensure you haven't “strayed too far” from the basics. Enjoy!_ circle-check **Tip.** See the entire series [Technical Analysis 101](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101) [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-15#gaps) Gaps ------------------------------------------------------------------------------------------------------------------------------ Price charts often have blank spaces known as **gaps**. They represent times when no shares were traded within a particular price range. Gaps result from extraordinary buying or selling interest developing when the market is closed. When the market opens, the price is raised or lowered enough to satisfy all of the buying or selling orders. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FwjsNkSybDhEVjZNyrMdg%252Fta101_part15a.png%3Falt%3Dmedia%26token%3Dc989a340-525e-406f-9896-d6988f252ac7&width=768&dpr=4&quality=100&sign=4025eb17&sv=2) For an **up gap** to form, the low price after market close on the day of the up gap must be higher than the high price of the previous day. Up gaps are generally considered bullish. A **down gap** is just the opposite of an up gap; the high price of the down gap day after market close must be lower than the low price of the previous day. Down gaps are usually considered bearish. Up and down gaps can form on daily, weekly or monthly charts and are considered significant when accompanied with higher than average volume. A price chart with gaps almost every day is typical for very lightly traded securities and should be avoided. Prices often gap up or down at market open and then close the gap before market close. Such temporary intraday gaps should not be considered as having anything more significance than normal market volatility. Many investors mistakenly believe that gaps influence future prices to the point of eventually filling the gap. Instances where gaps close within a few days of forming can be significant. However, gaps have little to no influence on price action weeks or months after forming. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FXmr7qOnSyilg3ZBmrmP5%252Fta101_part15b.png%3Falt%3Dmedia%26token%3D79bfc139-fb62-4d52-8183-4e956f3a9ca5&width=768&dpr=4&quality=100&sign=1652551a&sv=2) **Breakaway gaps** signal a change in market psychology about the future prospect of a security, especially when accompanied by above average volume. A bullish breakaway gap forms when a security gaps up after an extended decline, extended base or a consolidation period. A bearish breakaway gap forms when a security gaps down after an extended advance, an extended top or a consolidation period. **Common gaps** occur within a trading range or shortly after a sharp move as a reaction. These gaps do not reflect a change in market psychology, but rather represent price volatility or temporary imbalance of supply and demand. For instance, if a security has declined 20% in a week and gaps up, it would be considered a common gap and not likely to signify a change in trend. Or, if a trading range develops between $20 and $30, and a gap forms in the middle, it is probably a common gap. **Continuation gaps** form near the middle of a short or intermediate trend in the same direction. These gaps signal a continuation of the preceding trend. Continuation gaps are also known as measuring or runaway gaps. These gaps can be triggered by news events that bring more market attention to a security. **Exhaustion gaps** occur in the direction of extended trends. For an exhaustion gap to be considered valid, prices should reverse soon after the gap and close the gap. In the later stages of a trend, the extent of the trend becomes widely reported; eventually causing a surge in trading that cannot be sustained. These events often mark the end of the trend. _In part 16 we'll take a look at Candlestick Chart Patterns_ [PreviousTA 101 – Part 14chevron-left](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-14) [NextTA 101 – Part 16chevron-right](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-16) Last updated 1 year ago Was this helpful? Was this helpful? sun-brightdesktopmoon sun-brightdesktopmoon --- # TA 101 – Part 9 | ChartSchool | StockCharts.com _This is the ninth part of a series of articles about technical analysis from a new course we're developing. If you are new to charting, these articles will give you the “big picture” behind the charts on our site. If you are an “old hand,” these articles will help ensure you haven't “strayed too far” from the basics. Enjoy!_ circle-check Tip. See the entire series [Technical Analysis 101](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101) [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-9#price_channels) Price Channels ------------------------------------------------------------------------------------------------------------------------------------------------- Trending prices often form a channel where prices can be bounded above and below by parallel trend lines. When trend channels form, it is helpful to draw the top and bottom trend lines and monitor how well prices stay within the channel. If prices in an uptrend fail to reach the upper channel line, the uptrend may be weakening and getting ready to reverse. Also, if prices suddenly break above the upper channel line, the uptrend may be either beginning to exhaust itself and reverse direction or be starting a new, steeper trend. Similar behavior also happens in downtrend price channels. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252F8ZCJzVkFLVKNnVaUKEYx%252Fta101_part09a.png%3Falt%3Dmedia%26token%3D827612fa-7241-489c-ba0a-1b3b1f99e64b&width=768&dpr=4&quality=100&sign=98c5d813&sv=2) [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-9#trend_changes) Trend Changes ----------------------------------------------------------------------------------------------------------------------------------------------- Trending prices can only go three directions: continue in the direction of the trend, change to a trading range, or reverse the direction of the trend. Trend changes are most easily recognized by watching the price peaks and troughs. An uptrend makes higher price peaks and troughs. A downtrend makes lower price peaks and troughs. In a trading range, price peaks and troughs are roughly equal over time. A change in uptrend begins when a new price peak is similar to or lower than the previous price peak. The change is confirmed when the next price trough is similar to or lower than the last price trough. Changes in downtrends and price ranges occur in the same way. New price peaks or troughs break the pattern of prior ones, with the next peak or trough confirming the change. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FvqRnpgnmBsHZz2CtxBWR%252Fta101_part09b.png%3Falt%3Dmedia%26token%3D1a4dd4d0-ce38-4b05-8b2d-87acd62fe347&width=768&dpr=4&quality=100&sign=31152971&sv=2) [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-9#price_and_volume_data_adjustments) Price and Volume Data Adjustments --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- When a company pays out a dividend or a fund makes a distribution, it can affect the price of the underlying security. For example, after a company pays out dividends (ex-dividend date), the price of the stock drops by the dividend amount. Because of the change, price and volume data adjustments are necessary for technical indicators to be valid. Technical analysts generally view charts with adjusted price data. In the **Classic SharpCharts Workbench**, if you'd like to view unadjusted price data, type an underscore symbol before the ticker symbol, i.e. \_TSLA. If you're using the **New SharpCharts Workbench**, and you want to view unadjusted price data on your chart, uncheck the **Adjust For Dividends** box (click the settings icon). ![You can view charts with data unadjusted for dividends and distributions in StockCharts.com](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FGyRTzrpJQoMbvRtD3mez%252Fta101-part9-chart.png%3Falt%3Dmedia%26token%3D4ae48c3d-b97f-4923-8660-7876a30c1682&width=768&dpr=4&quality=100&sign=c60f58a0&sv=2) Uncheck the Adjust For Dividends box to view charts with data unadjusted for dividends and distributions. _In part 10 we'll look at how volume can confirm trend-change signals._ [PreviousTA 101 – Part 8chevron-left](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-8) [NextTA 101 – Part 10chevron-right](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-10) Last updated 1 year ago Was this helpful? * [Price Channels](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-9#price_channels) * [Trend Changes](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-9#trend_changes) * [Price and Volume Data Adjustments](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-9#price_and_volume_data_adjustments) Was this helpful? sun-brightdesktopmoon sun-brightdesktopmoon --- # Stage 2: Business of Investing | ChartSchool | StockCharts.com The essence of Stage 2 is that it requires an emotional and mental paradigm shift. It’s fine to view your investing as a hobby, but now I challenge you to embrace the mentality of a _professional_ investor. Treat investing like a business. * * * [Tensile Trading: Stage #2 Finding Probability Points: Investing like a Business arrow-up-right](https://stockcharts.com/articles/journal/2013/08/tensile-trading-stage-2-finding-probability-points-investing-like-a-business.html) We investors are always searching for extra “probability points” which will increase the likelihood of us trading... [Olympic Caliber Investing arrow-up-right](https://stockcharts.com/articles/journal/2012/07/olympic-caliber-investing.html) I’ve been teaching college extension classes for over ten years, and I invariably see a disproportionate percentage... [My "Perfect" World arrow-up-right](https://stockcharts.com/articles/journal/2012/09/my-perfect-world.html) Trading the stock market is not the blood sport that many in the press portray it to be. That sentiment is... [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/the-traders-journal-by-gatis-roze/stage-2-business-of-investing#wisdom-fundamentals-professionals) Wisdom, Fundamentals, Professionals -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- [Gerald Loeb's Timeless Wisdom (1899-1974) arrow-up-right](https://stockcharts.com/articles/journal/2013/05/gerald-loebs-timeless-wisdom-1899-1974.html) I’m sure you’ve heard the expression, “the more things change, the more they stay the same.” Gerald Loeb used... [The 10 Essential Fundamentals for Both Car Enthusiasts and Investors arrow-up-right](https://stockcharts.com/articles/journal/2013/05/the-10-essential-fundamentals-for-both-car-enthusiasts-and-investors.html) To make a broad generalization, European cars lust after curvy roads. American cars are more about the power... [Two Traders Talk: Candid Insights Over Lunch arrow-up-right](https://stockcharts.com/articles/journal/2014/04/two-traders-talk-candid-insights-over-lunch.html) Trading the markets is basically a solo adventure, and since the markets here in Seattle close at 1:00 PM... [What a Professional Investor Learned from 4 Professional Race Car Drivers arrow-up-right](https://stockcharts.com/articles/journal/2013/07/what-a-professional-investor-learned-from-4-professional-race-car-drivers.html) I just spent a couple of days in Utah at Ford’s Performance Racing School being tutored by four highly accomplished... [Investorship, like Citizenship, Must Have Parameters arrow-up-right](https://stockcharts.com/articles/journal/2016/07/investorship-like-citizenship-must-have-parameters.html) “Friends don’t let friends drink and drive.” We have all been exposed to this public service advertisement... [Your Survival and Success As An Investor Depends On This arrow-up-right](https://stockcharts.com/articles/journal/2016/02/your-survival-and-success-as-an-investor-depends-on-this.html) “The way to pick an investor’s pocket is through the ear.” – Jason Zweig There is a direct correlation between an... [7 Reasons Why Investing/Trading is the Best Pastime in the World arrow-up-right](https://stockcharts.com/articles/journal/2016/05/7-reasons-why-investingtrading-is-the-best-pastime-in-the-world.html) Trading the stock market is not the blood sport that many in the press portray it to be. That sentiment is... [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/the-traders-journal-by-gatis-roze/stage-2-business-of-investing#vacations-and-boundaries) Vacations and Boundaries ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ [The World's Greatest Hobby: Trading in Hawaiiarrow-up-right](https://stockcharts.com/articles/journal/2012/05/the-worlds-greatest-hobby-trading-in-hawaii.html) I’m sitting on the lanai of a condo here at the Mauna Kea on the Big Island of Hawaii watching the sun peek above... [5 Rules for a Great Vacation arrow-up-right](https://stockcharts.com/articles/journal/2013/08/5-rules-for-a-great-vacation.html) What do screensavers look like for people who actually live in Hawaii? That’s a question I’ll ask next time I... [Ten Holiday Vacation Lessons from This Trader's Experience arrow-up-right](https://stockcharts.com/articles/journal/2016/12/ten-holiday-vacation-lessons-from-this-traders-experience.html) At this time of year, it’s one distraction wave after another. Admit it. Your investing efforts take a...AM [Get Inspired, Get Profitable, Get a Vacation arrow-up-right](https://stockcharts.com/articles/journal/2017/08/get-inspired-get-profitable-get-a-vacation.html) It’s been my experience as a full-time trader over the decades that investing muscles need to take a vacation... [Do Investors Love Their Children Too? arrow-up-right](https://stockcharts.com/articles/journal/2017/09/do-investors-love-their-children-too.html) The Public Relations industry has crisis simulation firms that actually come into corporations and compress a... [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/the-traders-journal-by-gatis-roze/stage-2-business-of-investing#conferences-and-networking) Conferences and Networking ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- [Why I Go To Investment Conferences arrow-up-right](https://stockcharts.com/articles/journal/2013/10/why-i-go-to-investment-conferences.html) I’m off to a conference this week for the International Federation of Technical Analysts (IFTA). Why am I... [Key Take-Aways from the 67th CFA Annual Conference: Part I arrow-up-right](https://stockcharts.com/articles/journal/2014/05/key-take-aways-from-the-67th-cfa-annual-conference-part-i.html) During my investment life, I’ve attended well over 100 different conferences and seminars. The Chartered... [Key Take-Aways from the 67th CFA Annual Conference Part II arrow-up-right](https://stockcharts.com/articles/journal/2014/05/key-take-aways-from-the-67th-cfa-annual-conference-part-ii.html) In a previous blog, I labeled the four-day Global Chartered Financial Analysts event in Seattle as the ‘gold... [How I Get Re-Energized as an Investor arrow-up-right](https://stockcharts.com/articles/journal/2014/08/how-i-get-re-energized-as-an-investor.html) Donald Trump was quoted as saying “Get going. Move forward. Aim high. Plan a takeoff. Change your... [How to Invest with Your Own Pit Crew arrow-up-right](https://stockcharts.com/articles/journal/2014/08/how-to-invest-with-your-own-pit-crew.html) You wouldn’t ever try to change the tires on a moving car, would you? You wouldn’t go to a dentist who hadn’t... [After 17 years, A Financial Journalist Discloses His "Top Investing Lesson" arrow-up-right](https://stockcharts.com/articles/journal/2017/02/after-17-years-a-financial-journalist-discloses-his-top-investing-lesson.html) After seventeen years writing an investment column for USA Today, Matt Krantz is joining a money management firm and... [Climb a Mountain, Beat The Market: What The Mountaineers "Essential 10 Checklist" Can Teach You About Investing arrow-up-right](https://stockcharts.com/articles/journal/2019/06/climb-a-mountain-beat-the-market-what-the-mountaineers-essential-10-checklist-can-teach-you-about-investing.html) The mountaineers “Essential 10 Checklist” is seared into the memory of every serious hiker and climber. Why? Because... [PreviousStage 1: Money Managementchevron-left](https://chartschool.stockcharts.com/table-of-contents/overview/the-traders-journal-by-gatis-roze/stage-1-money-management) [NextStage 3: The Investor Selfchevron-right](https://chartschool.stockcharts.com/table-of-contents/overview/the-traders-journal-by-gatis-roze/stage-3-the-investor-self) Last updated 1 year ago Was this helpful? * [Wisdom, Fundamentals, Professionals](https://chartschool.stockcharts.com/table-of-contents/overview/the-traders-journal-by-gatis-roze/stage-2-business-of-investing#wisdom-fundamentals-professionals) * [Vacations and Boundaries](https://chartschool.stockcharts.com/table-of-contents/overview/the-traders-journal-by-gatis-roze/stage-2-business-of-investing#vacations-and-boundaries) * [Conferences and Networking](https://chartschool.stockcharts.com/table-of-contents/overview/the-traders-journal-by-gatis-roze/stage-2-business-of-investing#conferences-and-networking) Was this helpful? sun-brightdesktopmoon sun-brightdesktopmoon --- # Arthur Hill on Moving Average Crossovers | ChartSchool | StockCharts.com [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/arthur-hill-on-moving-average-crossovers#moving_average_crossovers) Moving Average Crossovers --------------------------------------------------------------------------------------------------------------------------------------------------------------------------- A popular use for [moving averages](https://chartschool.stockcharts.com/table-of-contents/glossary/glossary-m#moving_average_ma) is to develop simple trading systems based on moving average crossovers. A trading system using two moving averages would give a buy signal when the shorter (faster) moving average crosses above the longer (slower) moving average. A sell signal would be given when the shorter moving average crosses below the longer moving average. The speed of the systems and the number of signals generated will depend on the length of the moving averages. Shorter moving average systems will be faster, generate more signals, and be nimble for early entry. However, they will generate more false signals than systems with longer moving averages. ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/arthur-hill-on-moving-average-crossovers#some_examples) Some Examples In Apple, Inc.'s (AAPL) daily chart below, a 30/100 [exponential moving average](https://chartschool.stockcharts.com/table-of-contents/technical-indicators-and-overlays/technical-overlays/moving-averages-simple-and-exponential) (EMA) crossover generated buy and sell signals. ![Chart of Apple stock showing how exponential moving average crossovers and the PPO indicator can be used to generate buy and sell signals](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FChRgH1R7pkHAOsWHezly%252Fmovavg_aapl.png%3Falt%3Dmedia%26token%3D76267c9a-ef40-4b53-932e-43c21bb427dd&width=768&dpr=4&quality=100&sign=17eb4580&sv=2) Applying exponential moving averages and Percentage Price Oscillator to generate buy and sell signals. A buy signal is generated when the 30-day EMA moves above the 100-day EMA. A sell signal is in force when the 30-day EMA falls below the 100-day EMA. A 30/100 differential plot is shown below the price chart using the [Percentage Price Oscillator](https://chartschool.stockcharts.com/table-of-contents/technical-indicators-and-overlays/technical-indicators/percentage-price-oscillator-ppo) (PPO) set to (30,100,1). The 30-day EMA is greater than the 100-day EMA when the differential is positive. When negative, the 30-day EMA is less than the 100-day EMA. As with all trend-following systems, the signals work well when the stock develops a strong trend but are ineffective when the stock is in a trading range. The one generated in Nov 2023 was a good entry point for a long position. However, the exit signal based on the moving average crossover generated on March 2024 would have given back some profits. In the example below, a 20/60 EMA crossover system generated several buy and sell signals. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FNku99ACK1uZYub8ymFvp%252Fmov-avg-crossovers-f2.png%3Falt%3Dmedia%26token%3D5bceabaa-3e87-4afe-ae83-0338eefb4d79&width=768&dpr=4&quality=100&sign=1f5ec68e&sv=2) The plot below the price is the 20/60 EMA differential, shown as a percent and displayed using the PPO set at (20,60,1). The dashed blue lines above and below zero (the centerline) represent the buy and sell trigger points. Using zero as the crossover point for the buy and sell signals generated too many false signals. To reduce the number of signals, you can set the buy signal just above the zero line, say at +2%, and the sell signal just below the zero line, at -2%. A buy signal is in force when the 20-day EMA is more than 2% above the 60-day EMA. A sell signal is in force when the 20-day EMA is more than 2% below the 60-day EMA. You can find many good signals, but you may also find some [whipsaws](https://chartschool.stockcharts.com/table-of-contents/glossary/glossary-w#whipsaw) . Although much would depend on the exact entry and exit points, you could have made profitable trades using this system, but some may not be large profits that are probably not enough to justify the risk. If a stock fails to hold a trend, you'd have to place tight stop-losses to lock in profits. A trailing stop or use of the parabolic SAR might have helped lock in profits. [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/arthur-hill-on-moving-average-crossovers#the_bottom_line) The Bottom Line ------------------------------------------------------------------------------------------------------------------------------------------------------- Moving average crossover systems can be effective but should be used with other aspects of technical analysis (patterns, candlesticks, momentum, volume, and so on). While it's easy to find a system that worked well in the past, there is no guarantee it will work in the future. * * * circle-info **Learn More.** [**Trading With Moving Averages**](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/moving-average-trading-strategies) [PreviousArthur Hill on Goals, Style and Strategychevron-left](https://chartschool.stockcharts.com/table-of-contents/overview/arthur-hill-on-goals-style-and-strategy) [NextMulticollinearitychevron-right](https://chartschool.stockcharts.com/table-of-contents/overview/multicollinearity) Last updated 1 year ago Was this helpful? * [Moving Average Crossovers](https://chartschool.stockcharts.com/table-of-contents/overview/arthur-hill-on-moving-average-crossovers#moving_average_crossovers) * [Some Examples](https://chartschool.stockcharts.com/table-of-contents/overview/arthur-hill-on-moving-average-crossovers#some_examples) * [The Bottom Line](https://chartschool.stockcharts.com/table-of-contents/overview/arthur-hill-on-moving-average-crossovers#the_bottom_line) Was this helpful? sun-brightdesktopmoon sun-brightdesktopmoon --- # TA 101 – Part 11 | ChartSchool | StockCharts.com _This is the eleventh part of a series of articles about technical analysis from a new course we're developing. If you are new to charting, these articles will give you the “big picture” behind the charts on our site. If you are an “old hand”, these articles will help ensure you haven't “strayed too far” from the basics. Enjoy!_ circle-info **Tip.** See the entire series [Technical Analysis 101](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101) [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-11#price_patterns) Price Patterns -------------------------------------------------------------------------------------------------------------------------------------------------- Price Patterns result when the market is not in agreement on the value of a stock. Essentially, they are the _visual remains_ of a big battle between bulls and bears. In many ways, they are like weather patterns that you see on the nightly news. Often today's weather can be forecast by looking at yesterday's atmospheric data, but occasionally (frequently?) the forecast is wrong. Similarly, chart patterns often but not always indicate future price movements. At their core, most price patterns are combinations of several trend lines. The simplest pattern is the **Rectangle Pattern**. In a rectangle pattern, price moves between two horizontal lines of support and resistance. In order to qualify as a rectangle pattern, both support and resistance lines must be touched at least twice. Rectangle patterns have a narrow or wide price range and last from days to months. The pattern ends once the line of support or resistance is broken. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FbTVIbqomgsroCwq2OmfZ%252FTA-101-UPSIDE-BREAKOUT.png%3Falt%3Dmedia%26token%3D9a92fc98-b6e1-4164-8aa7-b9b23990ba83&width=768&dpr=4&quality=100&sign=c6cb83df&sv=2) A price break through resistance may be anticipated if volume expands when prices rise and contracts when prices fall within the rectangle pattern. An imminent price break above resistance may exist if prices don't fall to the support line before rising again. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FbaClzeitbPSuUHg8h13d%252FTA-101-DOWNSIDE-BREAKOUT.png%3Falt%3Dmedia%26token%3D778e0fa3-0f14-4ef6-9e4e-765b37a23d1e&width=768&dpr=4&quality=100&sign=69d10abf&sv=2) A price break through support may be anticipated if volume expands when prices fall and contracts when prices rise within the rectangle pattern. An imminent price break below support may exist if prices don't rise to the resistance line before falling again. As illustrated above, as soon as the pattern breaks down, the top (or bottom) of the rectangle changes into a support (or resistance) line for the stock. Rectangle patterns clearly show the battle between bulls and bears, with the bulls repeatedly buying when prices hit the support level, and bears repeatedly selling when prices hit the resistance level. At some point, one of those groups will win, and prices will break out of the pattern. The longer prices have been in the pattern, then the larger the _breakout move_ will be and the more significant the new support/resistance line becomes. Another common price pattern is the **Triangle Pattern**. The triangle pattern is very similar to the rectangle, except that the upper and/or lower trend lines that define the pattern are sloped instead of horizontal. Go back to the rectangle diagram above and imagine that bearish sentiment about the stock was growing over time. What would that look like? Well, in that case, more and more sellers would not wait for prices to return to the level of the red resistance line before selling. Instead, they would sell sooner. That would cause the red resistance line to become a downward trend line forming a Descending Triangle Pattern. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FkF9yY7q2X5vYLJgFBEUd%252Fta101_part11c.png%3Falt%3Dmedia%26token%3Dc7589c60-e70e-4f93-a38a-050681e2d86a&width=768&dpr=4&quality=100&sign=1290b74d&sv=2) Alternately, what if buyers started getting impatient and started buying before the stock got back to its green support line? Then a Rising Triangle Pattern would form. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FPKXE8t8usGajc0W6lbcc%252Fta101_part11d.png%3Falt%3Dmedia%26token%3D31050509-539c-4514-abf7-6c0be1235784&width=768&dpr=4&quality=100&sign=7c923595&sv=2) And what if both the bulls became more bullish while at the same time, the bears became more bearish? Then both the red and green lines would be slanted and we'd have a [Symmetric Triangle](https://chartschool.stockcharts.com/table-of-contents/chart-analysis/chart-patterns/symmetrical-triangle) Pattern. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FA4mkIdDACsnW6bELhQ0O%252Fta101_part11e.png%3Falt%3Dmedia%26token%3D48ee5288-eca9-41d5-8ec0-c0e7e078f177&width=768&dpr=4&quality=100&sign=35489025&sv=2) By the way, triangle patterns are also referred to as “coils.” Can you see why? As the upper and lower parts of the triangle get closer together, the battle between the bulls and the bears gets more intense and the suspense builds. Obviously, at some point, prices are going to move outside of the triangle's boundaries - but will they move higher or lower? Psychological energy coils up like a spring inside of the triangle and the closer the lines get, the bigger the inevitable breakout will be. As you probably guessed, the diagrams above are not realistic. Typically, triangle patterns have a breakout well before the apex of the triangle is reached. It is the direction of the breakout that is the key question when watching a triangle form. Will the bulls win? Will the bears win? A couple of clues can be found in the price action that precedes the triangle. If the stock was in an uptrend prior to the triangle, there is a good chance it will break out of the triangle pattern on the upside and continue the uptrend. In addition, rising triangles tend to break out to the upside while descending triangles often break lower. Symmetric triangles are usually not completely _even_, i.e., the support side may be stronger than the resistance side making the triangle _point up_ or, if the support side is weaker, _point down_. In that case, the triangle often breaks in the direction it is pointing. _In part 12 we'll look at how to confirm these patterns with volume and examine some real-world examples._ [PreviousTA 101 – Part 10chevron-left](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-10) [NextTA 101 – Part 12chevron-right](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-12) Last updated 1 year ago Was this helpful? Was this helpful? sun-brightdesktopmoon sun-brightdesktopmoon --- # Stage 1: Money Management | ChartSchool | StockCharts.com Money management is the first step to becoming a consistently profitable investor. It’s all about working wisely and moving the odds in your favor. Succinctly put, it’s about: knowing what you’ve got, knowing how to protect it, knowing how to grow it, writing it out in a personalized investment plan. * * * [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/the-traders-journal-by-gatis-roze/stage-1-money-management#money-management) Money Management --------------------------------------------------------------------------------------------------------------------------------------------------------------------------- [Tensile Trading: Stage #1 is Money Management arrow-up-right](https://stockcharts.com/articles/journal/2013/07/tensile-trading-stage-1-is-money-management.html) Money management is the first step to becoming a consistently profitable investor. It’s all about working... [Definition of Money Management arrow-up-right](https://stockcharts.com/articles/journal/2014/10/definition-of-money-management.html) Google “money management” and you’ll get back a quagmire of non-sequiturs, disjointed, inconsistent and incomplete... [Money Management: Why Market Wizards Claim It's the Secret Sauce arrow-up-right](https://stockcharts.com/articles/journal/2013/01/money-management-why-market-wizards-claim-its-the-secret-sauce.html) In his Market Wizards books, Jack Swagger interviews an outstanding collection of renowned investors, traders and... [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/the-traders-journal-by-gatis-roze/stage-1-money-management#asset-allocation) Asset Allocation --------------------------------------------------------------------------------------------------------------------------------------------------------------------------- [My Methodology Allocation Beats Asset Allocation arrow-up-right](https://stockcharts.com/articles/journal/2015/01/my-methodology-allocation-beats-asset-allocation.html) From what I’ve seen of most investors’ asset allocations, it’s a maze. My personal asset allocation is better... [My Methodology Allocation Beats Asset Allocation: Part II - Questions Answered arrow-up-right](https://stockcharts.com/articles/journal/2015/04/my-methodology-allocation-beats-asset-allocation-part-ii--questions-answered.html) There’s nothing like teaching a seminar to fifty sharp investors on this topic and having them demand more clarity... [My Methodology Allocation Beats Asset Allocation: Part III - Eternal Vigilance is the Price of Profits arrow-up-right](https://stockcharts.com/articles/journal/2015/04/my-methodology-allocation-beats-asset-allocation-part-iii--eternal-vigilance-is-the-price-of-profits.html) Thomas Jefferson opined that “Eternal vigilance is the price of liberty.” For modern investors, I’d say... [How I Improved My Asset Allocation Profile by Using a Correlation Calculator arrow-up-right](https://stockcharts.com/articles/journal/2015/07/how-i-improved-my-asset-allocation-profile--by-using-a-correlation-calculator.html) Many investors would be shocked to learn that what they thought was their prudent well-diversified portfolio of five... [Asset Allocation: The Most Important Truth About Correlationsarrow-up-right](https://stockcharts.com/articles/journal/2015/09/asset-allocation--the-most-important-truth-about-correlations.html) Far too many investors assume (wrongly) that if two equities – such as the S&P 500 (SPY) and the Vanguard Total... [Here's How You Build a Super Bowl Champion Portfolio (Hint: Pick Your Correlations Carefully) arrow-up-right](https://stockcharts.com/articles/journal/2017/10/heres-how-you-build-a-super-bowl-champion-portfolio-hint--pick-your-correlations-carefully.html) Imagine a football coach who has the best eleven quarterbacks in the NFL altogether on the same team and puts them... [Asset Allocation: Why Strategic Versus Tactical Choices Matter arrow-up-right](https://stockcharts.com/articles/journal/2015/10/asset-allocation-why-strategic-versus-tactical-choices-matter.html) How can I be energized after teaching a six-hour workshop? When investors appreciate the message, their... [Academics Agree: Asset Allocation is the Only Free Lunch in the Investing Arena arrow-up-right](https://stockcharts.com/articles/journal/2017/09/academics-agree-asset-allocation-is-the-only-free-lunch-in-the-investing-arena.html) Upfront, it’s important to note that unlike most investors who hear asset allocation and conjure up three asset... [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/the-traders-journal-by-gatis-roze/stage-1-money-management#beliefs-principles-rules) Beliefs, Principles, Rules --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- [Your Canary In the Trading Roomarrow-up-right](https://stockcharts.com/articles/journal/2012/05/your-canary-in-the-trading-room.html) In the sports world, parties debate whether a premiere defense defeats a premier offense or whether great hitters... [The 4 Crucial Beliefs Of Successful Investors arrow-up-right](https://stockcharts.com/articles/journal/2012/09/the-4-crucial-beliefs-of-successful-investors-deleted.html) If you don’t believe in yourself as an investor and have absolute faith in your methodology, trading the markets... [Essential Rules to Share with Your Friends: The Financial Simpletons arrow-up-right](https://stockcharts.com/articles/journal/2017/06/essential-rules-to-share-with-your-friends-the-financial-simpletons.html) I had a shock recently. I met a couple who was in the midst of what I considered to be a personal financial... [The Four Crucial Beliefs Necessary to Achieve Stock Market Mastery arrow-up-right](https://stockcharts.com/articles/journal/2016/06/the-four-crucial-beliefs-necessary-to-achieve-stock-market-mastery.html) Galloping through the markets without recognizing the impact of your essential beliefs is an investing tragedy of... [Four Timeless Investing Principles arrow-up-right](https://stockcharts.com/articles/journal/2015/06/four-timeless-investing-principles.html) I’ve spent many years of digging into my own trading journal, looking for lessons, rules, principles and insights to... [The Albert Einstein Approach to Stock Market Investing arrow-up-right](https://stockcharts.com/articles/journal/2013/04/the-albert-einstein-approach-to-stock-market-investing-old.html) Albert Einstein famously said, “If I had one hour to save the world, I would spend 55 minutes defining the problem... [Wall Street's Complexity versus Investors' Profits & Simplicity arrow-up-right](https://stockcharts.com/articles/journal/2014/09/wall-streets-complexity-versus-investors-profits--simplicity.html) “Any darn fool can make something complex; it takes a genius to make something simple.” -- Pete Seeger As a... [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/the-traders-journal-by-gatis-roze/stage-1-money-management#reduce-risk-and-increase-rewards) Reduce Risk and Increase Rewards ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- [The Two Pillars of Probability Enhancement: How To Systematically Reduce Risk and Increase Rewards arrow-up-right](https://stockcharts.com/articles/journal/2018/04/the-two-pillars-of-probability-enhancement-how-to-systematically-reduce-risk-and-increase-rewards.html) If you didn't catch my interview on Wednesday morning, I joined Tom Bowley and Erin Swenlin on their StockCharts TV... [Two-for-One: How to Live Longer and Pass the Financial Baton to Future Generations arrow-up-right](https://stockcharts.com/articles/journal/2019/02/two-for-one-how-to-live-longer-and-pass-the-financial-baton-to-future-generations.html) “Yes, the fountain of youth really does exist, and academic research is increasingly proving it to be found amidst... [All Successful Investors Need an EDGE: Here's Mine arrow-up-right](https://stockcharts.com/articles/journal/2016/08/all-successful-investors-need-an-edge---heres-mine.html) All successful investors must have some type of “edge”. If you don’t know what yours is, odds are you don’t... [My 3-Prong Recipe for the Safe Growth & Outperformance of Your Portfolio arrow-up-right](https://stockcharts.com/articles/journal/2017/05/my-3-prong-recipe-for-the--safe-growth--outperformance-of-your-portfolio.html) There is a seismic generational displacement happening in the investment landscape. Many investors are shifting... [Powerful and Profitable Pairings: 1 + 1 = 3 arrow-up-right](https://stockcharts.com/articles/journal/2016/01/powerful-and-profitable-pairings-1--1--3.html) For myself, one of the most momentous insights into life and investing happened over 25 years ago when Sir John... [Investing Is To Trading Just As Style Is To Design arrow-up-right](https://stockcharts.com/articles/journal/2016/03/investing-is-to-trading-just-as-style-is-to-design.html) In the automotive industry, a car designer begins his or her career as a automotive stylist. Over time, as... [Previous"The Trader's Journal" by Gatis Rozechevron-left](https://chartschool.stockcharts.com/table-of-contents/overview/the-traders-journal-by-gatis-roze) [NextStage 2: Business of Investingchevron-right](https://chartschool.stockcharts.com/table-of-contents/overview/the-traders-journal-by-gatis-roze/stage-2-business-of-investing) Last updated 1 year ago Was this helpful? * [Money Management](https://chartschool.stockcharts.com/table-of-contents/overview/the-traders-journal-by-gatis-roze/stage-1-money-management#money-management) * [Asset Allocation](https://chartschool.stockcharts.com/table-of-contents/overview/the-traders-journal-by-gatis-roze/stage-1-money-management#asset-allocation) * [Beliefs, Principles, Rules](https://chartschool.stockcharts.com/table-of-contents/overview/the-traders-journal-by-gatis-roze/stage-1-money-management#beliefs-principles-rules) * [Reduce Risk and Increase Rewards](https://chartschool.stockcharts.com/table-of-contents/overview/the-traders-journal-by-gatis-roze/stage-1-money-management#reduce-risk-and-increase-rewards) Was this helpful? sun-brightdesktopmoon sun-brightdesktopmoon --- # Additional Reading | ChartSchool | StockCharts.com [Five Decades Of Personal Stock Market Passages, Tools, Lessons And Stories: Part 1arrow-up-right](https://stockcharts.com/articles/journal/2022/08/five-decades-of-personal-stock-584.html) Successful investing calls for much the same prerequisites as those required to become a professional athlete. Fortunately, we investors have a much longer shelf life than pro athletes [Five Decades Of Personal Stock Market Passages, Tools, Lessons And Stories: Part 2arrow-up-right](https://stockcharts.com/articles/journal/2022/09/five-decades-of-personal-stock-935.html) To start, I want to make two points. Investing successfully requires that you remain engaged and motivated. Just because you choose to ignore the markets, the markets won't reciprocate and ignore you. [Five Decades Of Personal Stock Market Passages, Tools, Lessons And Stories: Part 3arrow-up-right](https://stockcharts.com/articles/journal/2022/09/five-decades-of-personal-stock-558.html) When I began investing full-time, my methodology's foundation was based on William O'Neil's CANSLIM® approach. It's a deeply researched and proven strategy. [Ten Timeless Tenets of Trading: A 2,500 Year Perspectivearrow-up-right](https://stockcharts.com/articles/journal/2015/05/ten-timeless-tenets-of-trading--a-2500-year-perspective.html) For those of you who pooh-pooh the lessons of history, listen up! I myself am guilty of being overly focused on today’s web – obsessed with the latest hot stocks, investment technologies and trading methodologies. [Ten Timeless Tenets of Trading: A 2,500 Year Perspective Part IIarrow-up-right](https://stockcharts.com/articles/journal/2015/05/ten-timeless-tenets-of-trading--a-2500-year-perspective-part-ii.html) Art, history and life can parallel investing. This blog is my continuation from last week’s Part I where I encouraged readers to be open to a sort of borderless-type of thinking. [PreviousStage 10: Re-Examine, Refine, Re-Enhancechevron-left](https://chartschool.stockcharts.com/table-of-contents/overview/the-traders-journal-by-gatis-roze/stage-10-re-examine-refine-re-enhance) [NextBob Farrell's 10 Ruleschevron-right](https://chartschool.stockcharts.com/table-of-contents/overview/bob-farrells-10-rules) Last updated 1 year ago Was this helpful? Was this helpful? sun-brightdesktopmoon sun-brightdesktopmoon --- # "The Trader's Journal" by Gatis Roze | ChartSchool | StockCharts.com Each one of Gatis Roze's "Traders Journal" articles covers some aspect of one of his "10 Essential Stages of Stock Market Mastery." Together, those 10 stages make up Gatis' "Tensile Trading" methodology. Below is a curated list of Gatis' articles, organized according to their corresponding stage. ![Cover](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252Fq0h7PHgs2E6Ora5NJyIw%252Fgatis-stage-1.jpeg%3Falt%3Dmedia%26token%3D97e62dfd-ca36-47de-b9e8-308185b9e849&width=490&dpr=4&quality=100&sign=70c13cc4&sv=2) [Stage 1: Money Management](https://chartschool.stockcharts.com/table-of-contents/overview/the-traders-journal-by-gatis-roze/stage-1-money-management) ![Cover](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252Fboy2Fte53IMg96Mgs6q2%252Fgatis-stage-2.jpeg%3Falt%3Dmedia%26token%3Da3e50922-37b4-4768-a6ee-677153e4b4f3&width=490&dpr=4&quality=100&sign=36ec39a5&sv=2) [Stage 2: Business of Investing](https://chartschool.stockcharts.com/table-of-contents/overview/the-traders-journal-by-gatis-roze/stage-2-business-of-investing) ![Cover](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252Fek9NkFFbEdXOuY8zQpjK%252Fgatis-stage-3.jpeg%3Falt%3Dmedia%26token%3D598428bf-701f-4310-935e-786833fece5e&width=490&dpr=4&quality=100&sign=f390a2af&sv=2) [Stage 3: The Investor Self](https://chartschool.stockcharts.com/table-of-contents/overview/the-traders-journal-by-gatis-roze/stage-3-the-investor-self) ![Cover](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FuPjzt9DcyrANFVvEPstj%252Fgatis-stage-5.jpeg%3Falt%3Dmedia%26token%3Df12832a6-8a91-418f-b57b-7d118cd08bfd&width=490&dpr=4&quality=100&sign=ce3ae245&sv=2) [Stage 4: Market Analysis](https://chartschool.stockcharts.com/table-of-contents/overview/the-traders-journal-by-gatis-roze/stage-4-market-analysis) ![Cover](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FuvoYgIn3b2yDh4Xw3tVW%252Fgatis-stage-5.jpeg%3Falt%3Dmedia%26token%3Dd65a5149-a1d9-4310-847f-ba86a464562f&width=490&dpr=4&quality=100&sign=3c24e651&sv=2) [Stage 5: Routines](https://chartschool.stockcharts.com/table-of-contents/overview/the-traders-journal-by-gatis-roze/stage-5-routines) ![Cover](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FfHrSQnXy2omIOZYgI5nR%252Fgatis-stage-6.jpeg%3Falt%3Dmedia%26token%3D2e53e84d-fec4-460f-8768-030aa76e9771&width=490&dpr=4&quality=100&sign=b210659d&sv=2) [Stage 6: Stalking Your Trade](https://chartschool.stockcharts.com/table-of-contents/overview/the-traders-journal-by-gatis-roze/stage-6-stalking-your-trade) ![Cover](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FQzLbmP3G0vgqEvEjtg7H%252Fgatis-stage-7.jpeg%3Falt%3Dmedia%26token%3D7711b69b-5f81-4abc-a25b-04e4c61d72a3&width=490&dpr=4&quality=100&sign=ae549502&sv=2) [Stage 7: Buying](https://chartschool.stockcharts.com/table-of-contents/overview/the-traders-journal-by-gatis-roze/stage-7-buying) ![Cover](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FFcyRqFTnNqMaINR6DfQt%252Fgatis-stage-8.jpeg%3Falt%3Dmedia%26token%3D1c3a366e-ed54-43cc-a1a3-65d200cd4c0c&width=490&dpr=4&quality=100&sign=d0da8593&sv=2) [Stage 8: Monitoring Your Investments](https://chartschool.stockcharts.com/table-of-contents/overview/the-traders-journal-by-gatis-roze/stage-8-monitoring-your-investments) ![Cover](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FzoqF3nzcBc31ufYT7keb%252Fgatis-stage-9.jpeg%3Falt%3Dmedia%26token%3Dc42d642d-e243-4fb5-95e7-c84fe51bad8f&width=490&dpr=4&quality=100&sign=5c7931de&sv=2) [Stage 9: Selling](https://chartschool.stockcharts.com/table-of-contents/overview/the-traders-journal-by-gatis-roze/stage-9-selling) ![Cover](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FzTEh2lDcULZ6jLQ2Gkcw%252Fgatis-stage-10.jpeg%3Falt%3Dmedia%26token%3D7ee0f340-50ac-41db-ba44-43f3abff1f34&width=490&dpr=4&quality=100&sign=fae0f77d&sv=2) [Stage 10: Re-Examine, Refine, Re-Enhance](https://chartschool.stockcharts.com/table-of-contents/overview/the-traders-journal-by-gatis-roze/stage-10-re-examine-refine-re-enhance) ![Cover](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FOKDl2Y3njIVq1Se6Crbm%252Fgatis-additional-reading.jpeg%3Falt%3Dmedia%26token%3D8f30cd14-4df7-4fc8-beb5-1cbe16b47432&width=490&dpr=4&quality=100&sign=5d026719&sv=2) [Additional Reading](https://chartschool.stockcharts.com/table-of-contents/overview/the-traders-journal-by-gatis-roze/additional-reading) [PreviousMulticollinearitychevron-left](https://chartschool.stockcharts.com/table-of-contents/overview/multicollinearity) [NextStage 1: Money Managementchevron-right](https://chartschool.stockcharts.com/table-of-contents/overview/the-traders-journal-by-gatis-roze/stage-1-money-management) Last updated 1 year ago Was this helpful? Was this helpful? sun-brightdesktopmoon sun-brightdesktopmoon --- # TA 101 – Part 14 | ChartSchool | StockCharts.com _This is the fourteenth part of a series of articles about technical analysis from a new course we're developing. If you are new to charting, these articles will give you the “big picture” behind the charts on our site. If you are an “old hand,” these articles will help ensure you haven't “strayed too far” from the basics. Enjoy!_ circle-check **Tip.** See the entire series [Technical Analysis 101](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101) [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-14#fibonacci_lines) Fibonacci Lines ---------------------------------------------------------------------------------------------------------------------------------------------------- How high is “too high?” How low is “too low?” Think back to any time that you've owned a stock and think about when you started to get worried about its performance. At what point did “your gut” start to tell you that you needed to sell? Chances are your gut started talking to you after the stock had moved up (or down) by 38.2%. Wow, that's a really specific number - “38.2”! It seems kind of arbitrary, also. There's no way that could be correct, right? I mean, without knowing anything about the stock you were trading, or the amount of money involved, or the overall market conditions, or anything else - how can we stand here and tell you that you got nervous right at 38.2%? The reason is because 38.2 appears to be programmed into the human psyche (as well as many other parts of nature). It's one of a set of numbers called “Fibonacci Percentages.” They are derived from the “Fibonacci Sequence” which is a list of numbers where each number equals the sum of the previous two, i.e., 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, 610 etc. The branching in trees, the arrangement of leaves on a stem, the flowering of artichokes, an uncurling fern and the arrangement of a pine cone - all these things exhibit Fibonacci characteristics. In addition, if you take any large Fibonacci number and divide it by the previous number, you'll get something very close to 1.6180339887 (the larger the number, the closer you'll get). Now, 1.6180 has been known for centuries as “The Golden Ratio,” mostly, because we humans tend to prefer things - art, sculpture, architecture, etc. - that have proportions that equal the golden ratio. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FQHyg8TlZmqskm5q7QDFw%252Fta101_part14a.png%3Falt%3Dmedia%26token%3Dda9a91d8-f4cf-41c9-83db-7c5811c67e84&width=768&dpr=4&quality=100&sign=98cf3eb1&sv=2) Which of these picture looks the most natural to you? The middle one has golden ratio proportions. Getting back to stock charting, R.N. Elliott made the first well-known connection between price movements and the golden ratio. He noted that many reversals occurred around 61.8% or its complement 38.2% (i.e., 100 - 61.8). Combined with 50% and 100%, they make up the standard set of Fibonacci Percentages. Regardless of how the numbers were arrived at, chart analysts have observed that prices often will reverse after moving up (or down) by one of those percentages. Basically, those percentages are where something tells many people that it is time to take action - and thus prices reverse. Strange but true. Check it out: ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FfS3EE5SRLr3F1K1UHwV8%252Fta101_part14b.png%3Falt%3Dmedia%26token%3D3da1ead1-1416-48b7-aac8-228a6d4f4391&width=768&dpr=4&quality=100&sign=1f1045eb&sv=2) The Fibonacci Lines on this chart were created based on the move from Feb. 9th to May 30th - so just focus on the shaded blue area of the chart. Like a weatherman, the lines “forecast” that support for IBM would occur around 88.79 essentially because lots of people would probably feel that IBM had “fallen enough” and would start buying it again. That is precisely what happened at the end of June (red circle). Unfortunately, many people have gone on to claim that Fibonacci lines (and their variants) have almost “magical powers” to predict price movements. Like most technical analysis tools, we think Fibonacci Lines are useful forecasting tools - but not magical. You can add Fibonacci Lines to your charts using our ChartNotes annotation tool. To get started, simply click on the “Annotation” link below any SharpCharts. circle-info If you hold down “CTRL” while drawing Fibonacci lines, we'll add the 23.6% and 161.8% lines as well. _In part 15, we'll cover Price Gaps._ [PreviousTA 101 – Part 13chevron-left](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-13) [NextTA 101 – Part 15chevron-right](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-15) Last updated 1 year ago Was this helpful? Was this helpful? sun-brightdesktopmoon sun-brightdesktopmoon --- # TA 101 – Part 13 | ChartSchool | StockCharts.com _This is the thirteenth part of a series of articles about technical analysis from a new course we're developing. If you are new to charting, these articles will give you the “big picture” behind the charts on our site. If you are an “old hand”, these articles will help ensure you haven't “strayed too far” from the basics. Enjoy!_ circle-check **Tip.** See the entire series [Technical Analysis 101](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101) [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-13#the_infamous_head_and_shoulders_reversal_pattern) The Infamous Head and Shoulders Reversal Pattern ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- One of the most common reversal patterns is the Head and Shoulders pattern. This pattern forms in an uptrend and its completion marks a trend reversal. The pattern contains three successive peaks with the middle peak (head) being the highest and the two outside peaks (shoulders) being lower. The reaction lows of each peak can be connected to form a line of support called a neckline. The top reversal pattern is completed when price breaks below the neckline. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FyWz1T6i5HypBjwNAyziC%252Fta101_part13a.png%3Falt%3Dmedia%26token%3D6b75458a-e3d5-4e5d-abe5-a1c0ee7c1366&width=768&dpr=4&quality=100&sign=c5f66ae7&sv=2) Illustration of Head and Shoulders Top Reversal Pattern While it is preferable that the left and right shoulders be symmetrical, it is not an absolute requirement. They can be different widths as well as different heights. It's important to realize that up until the point where prices move back below the level of the left shoulder, things look like a normal, ongoing uptrend. It is only when the left shoulder's price level is violated that the bulls become fearful and the bears start to smell blood. The right shoulder forms as the bulls try to reestablish the uptrend and then fail - usually because many of the more skittish investors will take profits at that point. As the Head and Shoulders top reversal pattern unfolds, volume plays an important role in confirmation. **Buying volume** (volume on up days) will slowly translate into **selling volume** (volume on down days) as the pattern develops. This is seen when volume that previously expanded on rallies begins to expand on declines and contract on rallies. The Head and Shoulders bottom reversal pattern is just the reverse of the top reversal pattern with volume acting as a confirmation. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FyO5b0Z98paYqoGbKprX5%252Fta101_part13b.png%3Falt%3Dmedia%26token%3D40c7fb76-7b77-41c7-a6d0-a00b2fa71c93&width=768&dpr=4&quality=100&sign=2841fd36&sv=2) Illustration of Head and Shoulders Bottom Reversal Pattern As with the Head and Shoulders top reversal pattern, volume action is helpful in confirming the trend reversal. Volume that was previously expanding on declines begins to expand on rallies and contract on declines as the trend reversal develops. Traders begin noticing lighter selling volume on the declines and heavier buying volume on the rallies. This kind of price and volume action is quickly noticed by the market which results in additional buying volume supporting the trend reversal. A couple of other comments about this pattern: * Sometimes several left shoulders will form before a true head appears. Sometimes several right shoulders appear before a true neckline break occurs. * When a neckline break occurs, the stock will often fall at least as much as the distance from the neckline to the top of the head. [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-13#other_reversal_patterns) Other Reversal Patterns -------------------------------------------------------------------------------------------------------------------------------------------------------------------- Many of the technical analysis books out there will go on to talk about several other kinds of reversal patterns - the rounding bottom, the V-reversal, double tops, triple bottoms, and others. (We have many of them cataloged [in our ChartSchool area.](https://chartschool.stockcharts.com/table-of-contents/chart-analysis/chart-patterns) ) Here's a trade secret - most of those are just variations of the Head and Shoulders reversal pattern that didn't form “perfectly” for some reason. For example, the Triple Top is a Head and Shoulders pattern where the head doesn't go above the left shoulder. The key point here is this - don't worry about what type of reversal is occurring. Knowing it's a Triple Top instead of a Head & Shoulders won't make you more money. Focus on what the chart is telling you—the fear/greed ratio is changing—and react accordingly. _In part 14, we'll look at the question “How much is too much?"_ [PreviousTA 101 – Part 12chevron-left](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-12) [NextTA 101 – Part 14chevron-right](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-14) Last updated 1 year ago Was this helpful? * [The Infamous Head and Shoulders Reversal Pattern](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-13#the_infamous_head_and_shoulders_reversal_pattern) * [Other Reversal Patterns](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-13#other_reversal_patterns) Was this helpful? sun-brightdesktopmoon sun-brightdesktopmoon --- # Stage 6: Stalking Your Trade | ChartSchool | StockCharts.com Let’s get this out on the table first off. Stock market stalking is analogous to a lion stalking prey, not the paparazzi stalking a movie star. Stalking is one stage that most investors transition through in a similar predictable path as they evolve from novice, advanced beginner, competent, proficient and finally to expert investor. The simple truth is that novices have trouble limiting their sources of ideas and are then challenged again in how to winnow these infinite choices down to a few promising candidates upon which to focus. * * * [Tensile Trading: Stage #6 Stalking for Winning Investment Ideas arrow-up-right](https://stockcharts.com/articles/journal/2013/09/tensile-trading-stage-6-stalking-for-winning-investment-ideas.html) Let’s get this out on the table first off. Stock market stalking is analogous to a lion stalking prey, not the... [The Triumph of Catching a Big Move arrow-up-right](https://stockcharts.com/articles/journal/2012/04/the-triumph-of-catching-a-big-move.html) Big money is made by being on the correct side of a major market move and executing a carefully pre-planned scenario... [Seven Attributes To Give You The Edge arrow-up-right](https://stockcharts.com/articles/journal/2012/10/seven-attributes-to-give-you-the-edge.html) What do Wayne Gretsky, Coach Phil Jackson, Michael Jordan and William O’Neil have in common? They all... [Chasing Last Year's Winners arrow-up-right](https://stockcharts.com/articles/journal/2013/03/chasing-last-years-winners.html) Warren Buffett’s partner, Charles Munger, once said “All I want to know is where I’m going to die so I’ll never go... [Trading Secrets from Baseball & the Game of Thrones arrow-up-right](https://stockcharts.com/articles/journal/2013/04/trading-secrets-from-baseball-the-game-of-thrones.html) It’s spring and the baseball season is upon the Kingdom. The Mariners are playing at Safeco Field again, and I... [This Could Change Your Life! How You Can Mimic Wall Street's Best & Profit Handsomely: Part 1 arrow-up-right](https://stockcharts.com/articles/journal/2016/06/this-could-change-your-life-how-you-can-mimic-wall-streets-best--profit-handsomely.html) This should be illegal. If I was a hedge fund or mutual fund manager, I’d be thoroughly upset, but since I’m... [This Could Change Your Life! How You Can Mimic Wall Street's Best & Profit Handsomely: Part II arrow-up-right](https://stockcharts.com/articles/journal/2014/06/this-could-change-your-life-how-you-can-mimic-wall-streets-best---profit-handsomely-part-ii.html) This is a continuation of last week’s popular blog about how individual investors can outperform institutional money... [A Big Trading Mistake I Made So You Won't Have To! arrow-up-right](https://stockcharts.com/articles/journal/2015/02/a-big-trading-mistake-i-made--so-you-wont-have-to.html) I’ve learned that you have to be very thick-skinned to be a trader or a blogger. Many of my blogs are lifted... [How I Only Trade Stocks Soaked in Positive Probabilities arrow-up-right](https://stockcharts.com/articles/journal/2015/03/how-i-only-trade-stocks-soaked-in-positive-probabilities.html) I only trade the strongest and prettiest equities in the market. I’ve written before about how I leave my deep... [Investing: The Probability Tool arrow-up-right](https://stockcharts.com/articles/journal/2015/05/investing--the-probability-tool.html) Investing and thinking in probabilities should go hand in hand. Probabilities can be expressed both... [Wall Street's Free Lunch... But Investors Must Still Read the Menu arrow-up-right](https://stockcharts.com/articles/journal/2016/04/wall-streets-free-lunch-but-investors-must-still-read-the-menu.html) To paraphrase Bill Murray from the movie “Aloha,” the future is not something that just happens. It’s a brutal... [Stalking the "Best of Breed" Equities arrow-up-right](https://stockcharts.com/articles/journal/2016/05/stalking-the-best-of-breed-equities.html) The same investment analysis seldom yields consistent conclusions over a period of time. As much as investors... [The Secret of Making an Investment Methodology Produce Consistent Profits arrow-up-right](https://stockcharts.com/articles/journal/2017/03/the-secret-of-making-an-investment-methodology--produce-consistent-profits.html) “I have heard many men talk intelligently, even brilliantly, about something – only to see them proven powerless... [Peter Lynch Nailed It; The French Nailed It; Sally Nailed It; You Can Too! arrow-up-right](https://stockcharts.com/articles/journal/2018/09/peter-lynch-nailed-it-the-french-nailed-it-sally-nailed-it-you-can-too.html) Peter Lynch was the portfolio manager for Fidelity’s Magellan Fund for 13 years. His performance results were... [PreviousStage 5: Routineschevron-left](https://chartschool.stockcharts.com/table-of-contents/overview/the-traders-journal-by-gatis-roze/stage-5-routines) [NextStage 7: Buyingchevron-right](https://chartschool.stockcharts.com/table-of-contents/overview/the-traders-journal-by-gatis-roze/stage-7-buying) Last updated 1 year ago Was this helpful? Was this helpful? sun-brightdesktopmoon sun-brightdesktopmoon --- # Multicollinearity | ChartSchool | StockCharts.com [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/multicollinearity#what-is-multicollinearity) What Is Multicollinearity? ----------------------------------------------------------------------------------------------------------------------------------------------------- Multicollinearity is a statistical term referring to the unknowing use of the same type of information more than once. It is a common problem in technical analysis. Analysts need to be careful not to utilize technical indicators that reveal the same type of information. Here is how John Bollinger puts it: “A cardinal rule for the successful use of technical analysis requires avoiding multicollinearity amid indicators. Multicollinearity is simply the multiple counting of the same information. The use of four different indicators all derived from the same series of closing prices to confirm each other is a perfect example.” Multicollinearity is a serious issue in technical analysis when your money is at stake. It is a problem because collinear variables contribute redundant information and can cause other variables to appear to be less important than they are. One of the real problems is that, oftentimes, multicollinearity is difficult to spot. [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/multicollinearity#indicators-from-different-categories) Indicators From Different Categories -------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Technical indicators should be arranged in categories to avoid using too many from the same category. Below is a table that categorizes the indicators available at StockCharts.com. Category Indicators **Momentum** [Rate of Change (ROC)](https://chartschool.stockcharts.com/table-of-contents/technical-indicators-and-overlays/technical-indicators/rate-of-change-roc#what_is_the_rate_of_change_indicator) [Stochastics (%K, %D)](https://chartschool.stockcharts.com/table-of-contents/technical-indicators-and-overlays/technical-indicators/stochastic-oscillator-fast-slow-and-full) [Relative Strength Index (RSI)](https://chartschool.stockcharts.com/table-of-contents/technical-indicators-and-overlays/technical-indicators/relative-strength-index-rsi) [Commodity Channel Index (CCI)](https://chartschool.stockcharts.com/table-of-contents/technical-indicators-and-overlays/technical-indicators/commodity-channel-index-cci) [Williams %R (Wm%R)](https://chartschool.stockcharts.com/table-of-contents/technical-indicators-and-overlays/technical-indicators/williams-r) [StochRSI](https://chartschool.stockcharts.com/table-of-contents/technical-indicators-and-overlays/technical-indicators/stochrsi) [TRIX](https://chartschool.stockcharts.com/table-of-contents/technical-indicators-and-overlays/technical-indicators/trix) [Ultimate Oscillator](https://chartschool.stockcharts.com/table-of-contents/technical-indicators-and-overlays/technical-indicators/ultimate-oscillator) [Aroon](https://chartschool.stockcharts.com/table-of-contents/technical-indicators-and-overlays/technical-indicators/aroon) **Trend** [Moving Averages](https://chartschool.stockcharts.com/table-of-contents/technical-indicators-and-overlays/technical-overlays/moving-averages-simple-and-exponential) [Moving Average Convergence Divergence (MACD)](https://chartschool.stockcharts.com/table-of-contents/technical-indicators-and-overlays/technical-indicators/macd-moving-average-convergence-divergence-oscillator) [Average True Range (ATR)](https://chartschool.stockcharts.com/table-of-contents/technical-indicators-and-overlays/technical-indicators/average-true-range-atr-and-average-true-range-percent-atrp) [Wilder's DMI (ADX)](https://chartschool.stockcharts.com/table-of-contents/technical-indicators-and-overlays/technical-indicators/average-directional-index-adx) [Price Oscillator (PPO)](https://chartschool.stockcharts.com/table-of-contents/technical-indicators-and-overlays/technical-indicators/percentage-price-oscillator-ppo) **Volume** [Accumulation Distribution](https://chartschool.stockcharts.com/table-of-contents/technical-indicators-and-overlays/technical-indicators/accumulation-distribution-line) [Chaikin Money Flow (CMF)](https://chartschool.stockcharts.com/table-of-contents/technical-indicators-and-overlays/technical-indicators/chaikin-money-flow-cmf) Volume Rate of Change [Volume Oscillator (PVO)](https://chartschool.stockcharts.com/table-of-contents/technical-indicators-and-overlays/technical-indicators/percentage-volume-oscillator-pvo) Demand Index [On Balance Volume (OBV)](https://chartschool.stockcharts.com/table-of-contents/technical-indicators-and-overlays/technical-indicators/on-balance-volume-obv) [Money Flow Index](https://chartschool.stockcharts.com/table-of-contents/technical-indicators-and-overlays/technical-indicators/money-flow-index-mfi) The best way to quickly determine if an indicator is collinear with another one is to chart it. Make sure you have enough data on the chart to get a good indication. If they rise and fall in the same areas, the odds are that they're collinear and you should just use one of them. The first chart below shows some examples of indicators that are collinear. Notice that all three indicators are basically saying the same thing. If your analysis was that this was supportive information, you would be falling into the multicollinearity trap. Pick one of the indicators for your analysis and do not use the others. ![A chart from StockCharts.com displaying three indicators (RSI, CCI, Wm %R) that show similar scenarios](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FCAWyjA9HpEuVZ7UiVnui%252Fmulticollinearity01.png%3Falt%3Dmedia%26token%3D21ebfe49-99ec-4596-a181-f3a73345928d&width=768&dpr=4&quality=100&sign=1a971d67&sv=2) The RSI, CCI, and Wm%R all indicate similar scenarios. Below are some examples of indicators that are not collinear. When interpreted correctly, each will give different information. The indicators can be used to confirm a trading signal. ![A chart from StockCharts.com displaying three indicator that indicate different information about a stock](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FYAKf2WikFruOZ7uBu9Fe%252Fmulticollinearity02.png%3Falt%3Dmedia%26token%3D044f38dc-7627-4b0e-b666-18ea01ef16dd&width=768&dpr=4&quality=100&sign=65f725cf&sv=2) Three indicators that are not collinear show different information about a stock. They can be used as confirmation tools. [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/multicollinearity#the-takeaway) **The Takeaway** ------------------------------------------------------------------------------------------------------------------------------ If you are randomly selecting indicators to support your analysis, you will more than likely fall into the multicollinearity trap of using multiple indicators that are all saying the same thing. They are not giving you any additional information; in fact, they are restricting your overall view of the market. Don't search for supporting information among collinear indicators; though they can be appealing, they are ultimately misleading. [PreviousArthur Hill on Moving Average Crossoverschevron-left](https://chartschool.stockcharts.com/table-of-contents/overview/arthur-hill-on-moving-average-crossovers) [Next"The Trader's Journal" by Gatis Rozechevron-right](https://chartschool.stockcharts.com/table-of-contents/overview/the-traders-journal-by-gatis-roze) Last updated 1 year ago Was this helpful? * [What Is Multicollinearity?](https://chartschool.stockcharts.com/table-of-contents/overview/multicollinearity#what-is-multicollinearity) * [Indicators From Different Categories](https://chartschool.stockcharts.com/table-of-contents/overview/multicollinearity#indicators-from-different-categories) * [The Takeaway](https://chartschool.stockcharts.com/table-of-contents/overview/multicollinearity#the-takeaway) Was this helpful? sun-brightdesktopmoon sun-brightdesktopmoon --- # TA 101 – Part 16 | ChartSchool | StockCharts.com _This is the sixteenth article in our technical analysis series. If you are new to charting, these articles will give you the “big picture” behind the charts on our site. If you are an “old hand,” these articles will help ensure you haven't “strayed too far” from the basics. Enjoy!_ circle-check **Tip.** See the entire series [Technical Analysis 101](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101) [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-16#candlestick_patterns) Candlestick Patterns -------------------------------------------------------------------------------------------------------------------------------------------------------------- A series of candlesticks often develop into recognizable patterns that can give a trader insight about the current market psychology and the likelihood of near-term price moves. Many of these 1, 2 or 3 candlestick patterns are used as warning signs for upcoming trend reversals. Dozens of candlestick patterns have been identified dating back to the 1700s with Japanese rice futures traders. Japanese traders were able to quickly identify and communicate short-term supply and demand forces in the market with these recurring patterns of price action. ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-16#doji_candlestick) Doji Candlestick ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FcY1LzxAPc1EHJjnrb8t1%252Fta101_part16a.png%3Falt%3Dmedia%26token%3D971345e0-52f2-4d72-8080-6e75b7c7ee64&width=768&dpr=4&quality=100&sign=77b02bd8&sv=2) One candlestick that has significance by itself and in combination with other candlesticks is the doji candlestick shown above. Price moves above and below the opening price during the day and then closes at the same, or nearly so, price as it opened. This is an indication that buying and selling market forces were balanced even though investors had a roller-coaster ride in price swings during the day. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FHgvD9E2wiW28agNuIur7%252Fta101_part16b.png%3Falt%3Dmedia%26token%3Ddefa462c-3fee-4ef7-b7ac-699f0e3df01e&width=768&dpr=4&quality=100&sign=5787a04e&sv=2) The SharpChart of ERIE above illustrates a doji candlestick. The intraday 10-minute SharpChart of this particular doji candlestick below shows the 2.2% price swing from high to low that investors endured during the day. Doji candlesticks are a sign of market indecision which often precedes a trend reversal. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252Fjmh7Rdd3iR6hywP6JgPl%252Fta101_part16c.png%3Falt%3Dmedia%26token%3D49c8f43f-6e9d-46d5-bf52-a9325af9085c&width=768&dpr=4&quality=100&sign=80c5dec0&sv=2) With doji candlesticks, a long lower shadow is considered bullish since buying interest moved the price up from a deep intraday decline before market close. Long upper shadows are bearish for a similar reason; initial buying interest gives way to sellers by market close. ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-16#doji_candlestick_formations) Doji Candlestick Formations ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FgAKfcrFvVsM7Ak4j5grN%252Fta101_part16d.png%3Falt%3Dmedia%26token%3D019f27b9-7682-4dc4-8032-77f6cc7669c0&width=768&dpr=4&quality=100&sign=406f5ac2&sv=2) The candlestick patterns above are often present in trend changes. The doji in these patterns illustrate how market indecision often acts as a pivot in trend changes. ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-16#other_important_candlestick_patterns) Other Important Candlestick Patterns While there are literally hundreds of candlestick patterns out there, the following candlestick patterns have been found by Thomas N. Bulkowski to be six of the most reliable candlestick patterns based on testing on 4.7 million candle lines. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FNbmLyN3TRxsf0BsB5u4H%252Fta101_part16e.png%3Falt%3Dmedia%26token%3D05f1ac92-7d59-426b-a780-3a241ad45d89&width=768&dpr=4&quality=100&sign=a8259b89&sv=2) circle-info Note: The gray candlestick bodies in the diagrams indicate that the body color is not relevant for the subject pattern. Additional candlestick reliability information can be found in Bulkowski's book [_Encyclopedia of Candlestick Charts_arrow-up-right](https://store.stockcharts.com/products/encyclopedia-of-candlestick-charts) . While Greg Morris's book [_Candlestick Charting Explained_arrow-up-right](https://store.stockcharts.com/products/candlestick-charting-explained-3rd-edition) is a good general introduction to the topic. _In part 17, we'll cover Comparison Charting._ [PreviousTA 101 – Part 15chevron-left](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-15) [NextTA 101 – Part 17chevron-right](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-17) Last updated 1 year ago Was this helpful? * [Candlestick Patterns](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-16#candlestick_patterns) * [Doji Candlestick](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-16#doji_candlestick) * [Doji Candlestick Formations](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-16#doji_candlestick_formations) * [Other Important Candlestick Patterns](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-16#other_important_candlestick_patterns) Was this helpful? sun-brightdesktopmoon sun-brightdesktopmoon --- # Stage 9: Selling | ChartSchool | StockCharts.com The bottom line: pick a chair close to the exit before you buy an equity and then sit down. As they say in the movie MARGIN CALL, "it's not panic selling if you are first out the door.” * * * [Talk to Your EGO Before You Trade! arrow-up-right](https://stockcharts.com/articles/journal/2012/04/talk-to-your-ego-before-you-trade.html) Most individual investors seem to feel it isn't cool to talk about exits before even buying an equity. ... [The Art of Selling Well: Part I arrow-up-right](https://stockcharts.com/articles/journal/2012/05/the-art-of-selling-well-part-i.html) In its most elemental form, selling is an inner struggle that deals with an investor’s ability to tame two wild... [The Art of Selling Well: Part II arrow-up-right](https://stockcharts.com/articles/journal/2012/06/the-art-of-selling-well-part-ii.html) I trust you read last week’s post, Part I on “The Art of Selling Well”. Those rules provide the foundation for what... [How I Deal with Trading Losses arrow-up-right](https://stockcharts.com/articles/journal/2016/01/how-i-deal-with-trading-losses.html) “I’m the only person I know that’s lost a quarter of a billion dollars in one year... It’s very character building.”... [We Investors Lose At Times: You Are Not Alone arrow-up-right](https://stockcharts.com/articles/journal/2014/02/we-investors-lose-at-times-you-are-not-alone.html) We investors are imperfect creatures living in a complex world. We are destined to stumble and fall. ... [The Endowment Effect arrow-up-right](https://stockcharts.com/articles/journal/2014/04/the-endowment-effect.html) Investors beware or at least be aware. Over the past two years, I’ve had a number of significant... [Memory Tricks for Investors arrow-up-right](https://stockcharts.com/articles/journal/2014/07/memory-tricks-for-investors.html) As Oscar Wilde aptly said, “Memory is the diary that we all carry with us.” It’s July 4th, and I’m coaching... [Bob Farrell: 10 Timely Reminders from a Wall Street Legend arrow-up-right](https://stockcharts.com/articles/journal/2018/07/bob-farrell-10-timely-reminders-from-a-wall-street-legend.html) As markets make new highs, investors often befriend a dangerous new companion. He’s the greedy little devil... [Selling Methodology: 1 + 1 = 3 arrow-up-right](https://stockcharts.com/articles/journal/2015/10/selling-methodology--1--1--3.html) I’ve been teaching investors about Stage 9 – The Selling Stage – of the Tensile Trading methodology for over 15... [Pulling the Trigger: Six Essential Rules arrow-up-right](https://stockcharts.com/articles/journal/2016/02/pulling-the-trigger-six-essential-rules.html) Make no mistake about it: these are internet days and news circles the globe at the speed of light. Couple... [How I Deal With Investment Losses (And How Not To) arrow-up-right](https://stockcharts.com/articles/journal/2017/04/how-i-deal-with-investment-losses-and-how-not-to.html) Financial investment losses are the markets’ way of telling you to make adjustments and to correct your present... [Now Is the Time to Brush Up on Your Selling Disciplines arrow-up-right](https://stockcharts.com/articles/journal/2017/10/now-is-the-time-to-brush-up-on-your-selling-disciplines.html) We’ve all heard the cliche that “shutting the barn door after the horse has bolted” means one is late to action... [PreviousStage 8: Monitoring Your Investmentschevron-left](https://chartschool.stockcharts.com/table-of-contents/overview/the-traders-journal-by-gatis-roze/stage-8-monitoring-your-investments) [NextStage 10: Re-Examine, Refine, Re-Enhancechevron-right](https://chartschool.stockcharts.com/table-of-contents/overview/the-traders-journal-by-gatis-roze/stage-10-re-examine-refine-re-enhance) Last updated 1 year ago Was this helpful? Was this helpful? sun-brightdesktopmoon sun-brightdesktopmoon --- # Point and Figure Basics | ChartSchool | StockCharts.com Point & Figure (P&F) charts focus on price movement using X and O columns. The X columns represent rising prices and the O columns represent declining prices. These columns make it easier to identify price breakouts, which in turn can generate buy or sell signals. The P&F charts available from StockCharts.com can be modified to suit your needs. You can change chart attributes, chart scaling, and add overlays such as trend lines, moving averages, and Volume by Price, to name a few. In this section, we cover all the basics of P&F charts so you can create a P&F chart, use the appropriate price intervals and timeframes, and better understand the automatic trend lines. [hashtag](https://chartschool.stockcharts.com/table-of-contents/chart-analysis/point-and-figure-charts/point-and-figure-basics#p_f_basics) P&F Basics ---------------------------------------------------------------------------------------------------------------------------------------------------------- [**Introduction to Point & Figure Charts**](https://chartschool.stockcharts.com/table-of-contents/chart-analysis/point-and-figure-charts/point-and-figure-basics/introduction-to-point-and-figure-charts) . Learn how to construct P&F charts with a step-by-step example. Understand how to identify support and resistance levels and draw P&F trend lines. [**P&F Scaling and Timeframes**](https://chartschool.stockcharts.com/table-of-contents/chart-analysis/point-and-figure-charts/point-and-figure-basics/point-and-figure-scaling-and-timeframes) . Learn to apply different price intervals to choose a charting timeframe. Intraday intervals can be used for medium-term timeframes, while daily intervals are often best for long-term charts. [**P&F Trend Lines**](https://chartschool.stockcharts.com/table-of-contents/chart-analysis/point-and-figure-charts/point-and-figure-basics/p-and-f-trend-lines) . P&F trend lines are unique because they are drawn at a specific angle to represent a certain rate of ascent or descent. Understand how automatic trend lines appear on a P&F chart, when they reverse, and how to identify a break. [PreviousPoint and Figure Chartschevron-left](https://chartschool.stockcharts.com/table-of-contents/chart-analysis/point-and-figure-charts) [NextIntroduction to Point & Figure Chartschevron-right](https://chartschool.stockcharts.com/table-of-contents/chart-analysis/point-and-figure-charts/point-and-figure-basics/introduction-to-point-and-figure-charts) Last updated 1 year ago Was this helpful? Was this helpful? sun-brightdesktopmoon sun-brightdesktopmoon --- # Stage 5: Routines | ChartSchool | StockCharts.com Look around you. Anywhere you see the pursuit of excellence happening, you discover the same set of recurring universal truths. Great athletes make greatness look effortless. Great traders make trading seem natural. The fact is that those who’ve achieved mastery make greatness look easy. * * * [Tensile Trading: Stage #5 The Stairway to Reproducing Profits - Routines arrow-up-right](https://stockcharts.com/articles/journal/2013/08/tensile-trading-stage-5-the-stairway-to-reproducing-profits-routines.html) Look around you. Anywhere you see the pursuit of excellence happening, you discover the same set of recurring... [A Day in the Life of a Stock Market Trader: The First 3 Hours arrow-up-right](https://stockcharts.com/articles/journal/2013/05/a-day-in-the-life-of-a-stock-market-trader-the-first-3-hours.html) I’ve known a lot of great traders. Yes, they are out there. Some eventually became money managers, and... [A Day in the Life of a Stock Market Trader - Redux arrow-up-right](https://stockcharts.com/articles/journal/2013/06/a-day-in-the-life-of-a-stock-market-trader-redux.html) Some people meticulously prepare and perfectly execute a mountain ascent, catching the significance of both the... [A Day in the Life of a Stock Market Trader: Part III 11:30 AM - 1:00 PM (NYC Time) arrow-up-right](https://stockcharts.com/articles/journal/2013/06/a-day-in-the-life-of-a-stock-market-trader-part-iii-1130-am-100-pm-nyc-time.html) I actually wear my office during the trading hours. “All work is social,” claims Larry Prusak, director of... [A Day in the Life of a Stock Market Trader: The Midday Pause arrow-up-right](https://stockcharts.com/articles/journal/2013/06/a-day-in-the-life-of-a-stock-market-trader-the-midday-pause.html) Inevitably, there comes a time during the trading day or the trading week that I ask myself, “why am I doing... [A Day in the Life of a Stock Market Trader 1:00 - 2:30 PM (NYC Time) arrow-up-right](https://stockcharts.com/articles/journal/2013/06/a-day-in-the-life-of-a-stock-market-trader-100-230-pm-nyc-time.html) Some battles you stay and fight. Others you best walk away from. This is the part of my day when I... [A Day in the Life of a Stock Market Trader: The Last 90 Minutes arrow-up-right](https://stockcharts.com/articles/journal/2013/07/a-day-in-the-life-of-a-stock-market-trader-the-last-90-minutes.html) The last trading hour in the markets is like “The Hour of Power” television show. It matters! The last... [Investing Routines: A Pillar of Any Successful Program arrow-up-right](https://stockcharts.com/articles/journal/2012/06/investing-routines-a-pillar-of-any-successful-program.html) Ever drive a bumper car at an amusement park? Remember how the bumper car headed off in one direction until it... [How Two Investors Warm-up Before Executing Any Trade arrow-up-right](https://stockcharts.com/articles/journal/2015/12/how-two-investors-warm-up-before-executing-any-trade.html) Recently, I had a very personal conversation with my fellow trader, Harvey Baraban. I asked him what he did to... [Personal Productivity & Routines arrow-up-right](https://stockcharts.com/articles/journal/2013/02/personal-productivity-routines.html) Have you heard the famous cliché about discipline? “You’ve got to do what you have to do before you can do... [A Trader's Discipline: How I Stay the Course arrow-up-right](https://stockcharts.com/articles/journal/2015/12/a-traders-discipline--how-i-stay-the-course.html) Investors don’t always have the discipline to act like a Nike ‘Just do it’ advertisement. [The Secret Of Success Is... arrow-up-right](https://stockcharts.com/articles/journal/2012/06/the-secret-of-success-is-old.html) When I was a graduate student in business school, I had the privilege and good fortune of watching John Elway play... [Your Money Tree: The Tree of Color arrow-up-right](https://stockcharts.com/articles/journal/2012/06/your-money-tree-the-tree-of-color.html) Most people call it Technical Analysis, but I prefer to think of it as “Visual Analysis”. Picture it as a tree with... [Powerful Parallels Yield Insights into Top Traders & Top Salespersons arrow-up-right](https://stockcharts.com/articles/journal/2012/08/powerful-parallels-yield-insights-into-top-traders-top-salespersons.html) Knowing how top salespeople convert suspects into prospects into clients yields powerful insights as to how top... [How to be a Successful Investor Over All 12 Months arrow-up-right](https://stockcharts.com/articles/journal/2013/01/how-to-be-a-successful-investor-over-all-12-months.html) Mark Twain once commented on the celebration of New Year’s and said something to this effect: Last week... [Staying Atop the Market arrow-up-right](https://stockcharts.com/articles/journal/2013/02/staying-atop-the-market.html) The stock market is always one step ahead of you. The sooner you accept this fact, the better for your trading... [Compare Your Traders Journal to Minearrow-up-right](https://stockcharts.com/articles/journal/2015/09/compare-your-traders-journal-to-mine.html) I’ll show you mine, if you show me yours! What were you thinking? We are talking journals here... [Unique Insights From Dinner With An $8 Billion Investor arrow-up-right](https://stockcharts.com/articles/journal/2015/10/unique-insights-from-dinner-with-an-8-billion-investor.html) I had the pleasure of having dinner with a mutual fund portfolio manager who manages over $8 Billion and who has the... [How Not to Lose Sight of the Forest (the Market) by Focusing on the Trees (Individual Equities) arrow-up-right](https://stockcharts.com/articles/journal/2017/06/how-not-to-lose-sight-of-the-forest-the-market--by-focusing-on-the-trees-individual-equities.html) Have any of you ever found yourselves so overly focused on your individual positions that you are missing the... [You Said It Fred: A Leading VC On The Value Of Routines, Plus An Overview Of My Weekly Checklist arrow-up-right](https://stockcharts.com/articles/journal/2019/03/you-said-it-fred-a-leading-vc-on-the-value-of-routines-plus-an-overview-of-my-weekly-checklist.html) Anytime I hear a successful, well-respected figure mention the importance of routines, my ears perk up. ... [PreviousStage 4: Market Analysischevron-left](https://chartschool.stockcharts.com/table-of-contents/overview/the-traders-journal-by-gatis-roze/stage-4-market-analysis) [NextStage 6: Stalking Your Tradechevron-right](https://chartschool.stockcharts.com/table-of-contents/overview/the-traders-journal-by-gatis-roze/stage-6-stalking-your-trade) Last updated 1 year ago Was this helpful? Was this helpful? sun-brightdesktopmoon sun-brightdesktopmoon --- # TA 101 – Part 17 | ChartSchool | StockCharts.com _This is the seventeenth article in our technical analysis series. If you are new to charting, these articles will give you the “big picture” behind the charts on our site. If you are an “old hand,” these articles will help ensure you haven't “strayed too far” from the basics. Enjoy!_ circle-check **Tip.** See the entire series [Technical Analysis 101](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101) [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-17#comparison_charting) Comparison Charting ------------------------------------------------------------------------------------------------------------------------------------------------------------ Comparison charting allows the analyst to study individual price performance and performance relative to other stocks. John Murphy, who provides expert market commentary on StockCharts.com, uses comparison charting extensively in his market analysis. [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-17#individual_price_performance) Individual Price Performance ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ [Click here for a live version of the chartarrow-up-right](https://stockcharts.com/h-sc/ui?s=%24INDU&p=D&st=2018-01-01&en=2018-06-29&id=p12160522302&a=656650162) to see how it was created with the “Performance” chart type setting. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FYnPptsTzoxnTr0z5v6WS%252Fta101_part17a.png%3Falt%3Dmedia%26token%3D4d3962fb-5b1a-4528-9a4f-a7216bab239a&width=768&dpr=4&quality=100&sign=ea85fd0e&sv=2) The SharpChart above shows how the Performance plotting style can be used to monitor the year-to-date performance of the Dow Jones Industrial Average. Once this chart is generated, the page can be bookmarked as a favorite in your browser for quick access in the future. [Click here for a live version of the chart.arrow-up-right](https://stockcharts.com/h-sc/ui?s=AA&p=D&st=2018-01-01&en=2018-06-29&id=p81051545129&a=656650449) ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FQgyD6UQWkUr3NTGsRYuj%252Fta101_part17b.png%3Falt%3Dmedia%26token%3Da0bfbb4c-1519-401a-ba12-bb7845fa1a31&width=768&dpr=4&quality=100&sign=32f25c20&sv=2) Multiple symbols can be plotted and compared in this manner by using the Price indicator and other ticker symbols as parameters with a Behind Price position setting. The SharpChart above shows the performance of AA compared with BA and IBM. [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-17#relative_performance_comparison) Relative Performance Comparison ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FnYF2TY84MtZs4G2GlmzW%252Fta101_part17c.png%3Falt%3Dmedia%26token%3D372e8405-6a4f-46d0-910d-2f7591dff73a&width=768&dpr=4&quality=100&sign=828385c7&sv=2) [Click here for a live version of the chart.arrow-up-right](https://stockcharts.com/h-sc/ui?s=BA&p=D&st=2018-08-21&en=2019-02-19&id=p28908325906&a=656652909) The SharpChart above illustrates how the performance between Boeing (BA) and the Dow Jones Industrial Average (DJIA) index can be compared in the Indicator Panel above the Price Plot Area. The relative performance indicator is displayed by selecting Price as an indicator on the workbench and inserting BA:$INDU as a parameter. A positive slope of the indicator line shows that the first symbol in the ratio is outperforming the second symbol. A negative slope indicates the opposite; the first ticker symbol is underperforming the second ticker symbol. And a flat line indicates that both symbols have similar performance. This information can be used in several ways. In the case of comparing a stock to a market index, the analyst can quickly determine whether or not a stock is outperforming the market. In the case of comparing two stocks, the analyst can easily determine how the stocks are performing relative to each other. _You've reached the end of Technical Analysis 101!_ [_Click here_](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101) _to return to the main Technical Analysis 101 menu to revisit any topics, or_ [_here_](https://chartschool.stockcharts.com/table-of-contents/overview) _to return to the main Overview page._ [PreviousTA 101 – Part 16chevron-left](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-16) [NextIrrational Exuberancechevron-right](https://chartschool.stockcharts.com/table-of-contents/overview/irrational-exuberance) Last updated 1 year ago Was this helpful? * [Comparison Charting](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-17#comparison_charting) * [Individual Price Performance](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-17#individual_price_performance) * [Relative Performance Comparison](https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis-101/ta-101-part-17#relative_performance_comparison) Was this helpful? sun-brightdesktopmoon sun-brightdesktopmoon --- # Stage 4: Market Analysis | ChartSchool | StockCharts.com No one can predict the stock market with 100% consistency, but a logical chart-based investment methodology will significantly shift the probabilities for your investment success towards that direction. * * * [Tensile Trading: Stage #4 How to Put the Winds at Your Back with Stock Market Analysis arrow-up-right](https://stockcharts.com/articles/journal/2013/08/tensile-trading-stage-4-how-to-put-the-winds-at-your-back-with-stock-market-analysis.html) Don’t ever try to stand in front of a fire hydrant to quench your thirst – you’ll hurt yourself! The same... [The Best of Breed Methodology: Stage 4 - A Significant Enhancement arrow-up-right](https://stockcharts.com/articles/journal/2019/05/the-best-of-breed-methodology-stage-4-a-significant-enhancement.html) A quarter century of investing yields one paramount conclusion. Venture capitalists have known this forever.. [Double Your Money - Buy on Rumors arrow-up-right](https://stockcharts.com/articles/journal/2012/04/double-your-money-buy-on-rumors.html) I doubled my money on the very first stock trade I ever made. With luck, this is something that everyone should do at least once in a lifetime. [Are You Too Educated to be a Successful Investor? arrow-up-right](https://stockcharts.com/articles/journal/2012/06/are-you-too-educated-to-be-a-successful-investor.html) Highly educated people are, for the most part, trained to ask the question “Why?” Engineers, accountants... [The Investor's Curse: "If It Ain't Broke, We Fix It Until It Is" arrow-up-right](https://stockcharts.com/articles/journal/2012/11/the-investors-curse-if-it-aint-broke-we-fix-it-until-it.html) This phrase is most often heard in reference to lawmakers and bureaucrats in Washington, DC, but I think it’s an... [You Can Talk The Talk But Can You Walk The Talk? arrow-up-right](https://stockcharts.com/articles/journal/2013/03/you-can-talk-the-talk-but-can-you-walk-the-talk.html) I attend investment seminars as half-monk, half-hit man. My time is a precious commodity, so if you are a... [The Probability Buster Chart: Improved & Strengthened arrow-up-right](https://stockcharts.com/articles/journal/2014/06/the-probability-buster-chart-improved--strengthened.html) A powerful profit-enhancing tool has just been refined and put on steroids. Back in December of 2013, I wrote... [The Probability Buster Chart: Possibly the Single Best Visual Analysis Chart Ever arrow-up-right](https://stockcharts.com/articles/journal/2013/12/the-probability-buster-chart-possibly-the-single-best-visual-analysis-chart-ever.html) If there was one mantra to embrace which would make you money it would be “let the probabilities work for you” or... [Fundamentals versus Technicals: This Ends the Debate! arrow-up-right](https://stockcharts.com/articles/journal/2016/08/fundamentals-versus-technicals-this-ends-the-debate.html) In one corner, you have investors. In the other corner, you have the stock market. When the two... [Market Timing Tools That Work: Pullbacks versus Corrections arrow-up-right](https://stockcharts.com/articles/journal/2017/03/market-timing-tools-that-work-pullbacks-versus-corrections.html) Here is how to tell if it’s a regular market pullback versus a serious bearish correction. I strongly disagree with... [Believe Your Eyes, Not Your Brains Ask Yourself What, Not Why arrow-up-right](https://stockcharts.com/articles/journal/2013/12/believe-your-eyes-not-your-brains-ask-yourself-what-not-why.html) Seventeen thousand money managers around the globe pay to use BlackRock’s Aladdin risk assessment platform to manage... [How Life Hacking Applies To Us As Individual Investors arrow-up-right](https://stockcharts.com/articles/journal/2014/03/how-life-hacking-applies-to-us-as-individual-investors.html) Life hacking was a term first tossed around by computer programmers in the ‘80s as the label they used trying to get... [The Most Important Question Every Investor Must Answer! arrow-up-right](https://stockcharts.com/articles/journal/2014/07/the-most-important-question-every-investor-must-answer.html) Have you ever met a famous investor at a cocktail party or event, taken his or her advice on a stock and lost money?... [Smart Beta Funds Leading to Stupid Choices arrow-up-right](https://stockcharts.com/articles/journal/2014/10/smart-beta-funds-leading-to-stupid-choices.html) The latest wave on Wall Street’s beach of complexity and opaqueness is a new type of ETF fund referred to as a Smart... [CAN SLIM on Steroids arrow-up-right](https://stockcharts.com/articles/journal/2014/10/canslim-on-steroids.html) Profitable investing demands a unique type of profitable thinking. Once you’ve achieved this consistently in... [Wizard Investing: Assembly Required, Construction Prohibited arrow-up-right](https://stockcharts.com/articles/journal/2014/11/wizard-investing-assembly-required-construction-prohibited.html) Read the Market Wizard books. These remarkable investors use proven off-the-shelf tools and indicators which... [Five Advantages Individual Investors Have Over Institutional Investors arrow-up-right](https://stockcharts.com/articles/journal/2014/11/five-advantages-individual-investors-have-over-institutional-investors-OLD.html) The walls of advantage once held by institutional traders over individual investors have come crashing down... [Stock Market Mastery: Blending Fundamental & Technical Analysis Part I arrow-up-right](https://stockcharts.com/articles/journal/2014/11/stock-market-mastery-blending-fundamental--technical-analysis-part-i.html) The Harvard Business Review (November, 2014) just published its list of the Best Performing CEOs. This list... [Only the 58 Navigators Matter arrow-up-right](https://stockcharts.com/articles/journal/2014/12/only-the-58-navigators-matter.html) Of the approximately 6,000 stars visible to the naked eye, only 58 are considered navigator stars. Since... [Former Wall Street CEO: Guest Blogger arrow-up-right](https://stockcharts.com/articles/journal/2015/02/former-wall-street-ceo-guest-blogger.html) For over fifty years, Harvey Baraban has been an active stock market investor. For over twenty-five years, he... [The Vincent van Gogh Trading Toolkit - Refurbished arrow-up-right](https://stockcharts.com/articles/journal/2015/06/the-vincent-van-gogh-trading-toolkit--refurbished.html) This popular blog was first published over three years ago. I thought that a timely update was called for... [Trading the News: Lessons From My Personal Trading Journal arrow-up-right](https://stockcharts.com/articles/journal/2015/07/trading-the-news--lessons-from-my-personal-trading-journal.html) The motto in the news business seems to be “If it bleeds, it leads.” Investors must appreciate that our news... [How to Profit from Momentum Investing: Guest Blogger, Harvey Baraban arrow-up-right](https://stockcharts.com/articles/journal/2015/08/how-to-profit-from-momentum-investing-guest-blogger-harvey-baraban.html) Harvey Baraban is a Wall Street insider. As the former CEO of Baraban Securities, he managed... [Ben Bernanke Speaks, This Trader Listens arrow-up-right](https://stockcharts.com/articles/journal/2015/11/ben-bernanke-speaks-this-trader-listens.html) A good friend of mine who is a professional money manager recently invited my family to hear former Federal Reserve... [The Best Source of Investable Ideas arrow-up-right](https://stockcharts.com/articles/journal/2015/12/the-best-source-of-investable-ideas.html) A mongst investors these days, there are a number of lively debates going on. Fundamental analysis versus technical... [The "WHY" Investors Versus The "WHAT" Investors: And The Winner Is... arrow-up-right](https://stockcharts.com/articles/journal/2016/03/the-why-investors-versus-the-what-investors-and-the-winner-is.html) Highly educated people are, for the most part, trained to ask the question “Why?” Engineers, accountants... [The Single Most Important Lesson I've Learned Trading the Markets for 25 Years arrow-up-right](https://stockcharts.com/articles/journal/2016/07/the-single-most-important-lesson--ive-learned-trading-the-markets-for-25-years-.html) My Thesaurus lists the same two words – enhance and augment – as synonyms for both words “improve” and “more”... [Five Advantages Individual Investors Have Over Institutional Investors arrow-up-right](https://stockcharts.com/articles/journal/2018/08/five-advantages-individual-investors-have-over-institutional-investors.html) The walls of advantage once held by institutional traders over individual investors have come crashing down... [PreviousStage 3: The Investor Selfchevron-left](https://chartschool.stockcharts.com/table-of-contents/overview/the-traders-journal-by-gatis-roze/stage-3-the-investor-self) [NextStage 5: Routineschevron-right](https://chartschool.stockcharts.com/table-of-contents/overview/the-traders-journal-by-gatis-roze/stage-5-routines) Last updated 1 year ago Was this helpful? Was this helpful? sun-brightdesktopmoon sun-brightdesktopmoon --- # Stage 7: Buying | ChartSchool | StockCharts.com [Tensile Trading: Stage #7 Strategic Profitable Buying versus Impulsive Expressive Buying arrow-up-right](https://stockcharts.com/articles/journal/2013/09/tensile-trading-stage-7-strategic-profitable-buying-versus-impulsive-expressive-buying.html) When I go to the Barrett-Jackson car auction in Scottsdale each year, I get literally glassy-eyed. Just too... [Pyramid Trading: Greater Profits with Less Risk arrow-up-right](https://stockcharts.com/articles/journal/2013/01/pyramid-trading-greater-profits-with-less-risk.html) No, the pyramids are not a range of mountains between France and Spain. Yes, there are over 80 pyramids in... [Investing with a Cleaner Windshield: The Buyer's Checklist arrow-up-right](https://stockcharts.com/articles/journal/2013/04/investing-with-a-cleaner-windshield-the-buyers-checklist.html) I have found that if you offer the market your sincere attention – presented on a platter of organized checklists –... [Here's How Your Buying & Selling RT (Reaction Time) Flows Through to Your Bottom Line arrow-up-right](https://stockcharts.com/articles/journal/2016/04/heres-how-your-buying--selling-rt-reaction-time-flows-through-to-your-bottom-line.html) I’ve been told I’m a little unusual in that I rate my trades on a scale of 1 – 5 stars depending on my reaction time... [What I Learned from 30,874 Trades arrow-up-right](https://stockcharts.com/articles/journal/2016/01/what-i-learned-from-30874-trades.html) Thomas Edison said “Vision without execution is hallucination.” Real estate experts love to claim that success is... [Precisely How I Bought the 4 'FANG' Stocks Before Their Run-Up arrow-up-right](https://stockcharts.com/articles/journal/2016/06/precisely-how-i-bought-the-4-fang-stocks-before-their-run-up.html) Put your hands up if you can remember the big money we made in the ‘Nifty Fifty’ – those stocks from the ‘60s and... [A Surefire Method to Increase Your Profits and Improve Your Golf Game arrow-up-right](https://stockcharts.com/articles/journal/2012/12/a-surefire-method-to-increase-your-profits-and-improve-your-golf-game.html) Whether it’s golf or trading, it’s all about stress control. If you were sitting across the table from me and... [Evidence-Based Trading for Dummies arrow-up-right](https://stockcharts.com/articles/journal/2014/08/evidence-based-trading-for-dummies.html) Robin Griffiths, the renowned technical strategist, once opined that “Trading is a traffic light system. At a... [How A Fellow Investor Critiqued This Trader arrow-up-right](https://stockcharts.com/articles/journal/2015/11/how-a-fellow-investor-critiqued-this-trader-.html) My motives in writing these weekly blogs and in teaching investment classes are in part selfish ones. I write... [The Paralysis of Perfection: The Investor's Ongoing Challenge arrow-up-right](https://stockcharts.com/articles/journal/2014/03/the-paralysis-of-perfection-the-investors-ongoing-challenge.html) The brilliant novelist Isabel Allende once wrote, “Fear is inevitable, I have to accept that, but I cannot allow it... [Invest Like You Drive & Put $$$ in Your Pockets arrow-up-right](https://stockcharts.com/articles/journal/2014/06/invest-like-you-drive--put--in-your-pockets.html) I spent the weekend with my friend Dan, a prison chaplain, who always seems to have unique and useful insights... [PreviousStage 6: Stalking Your Tradechevron-left](https://chartschool.stockcharts.com/table-of-contents/overview/the-traders-journal-by-gatis-roze/stage-6-stalking-your-trade) [NextStage 8: Monitoring Your Investmentschevron-right](https://chartschool.stockcharts.com/table-of-contents/overview/the-traders-journal-by-gatis-roze/stage-8-monitoring-your-investments) Last updated 1 year ago Was this helpful? Was this helpful? sun-brightdesktopmoon sun-brightdesktopmoon --- # Stage 8: Monitoring Your Investments | ChartSchool | StockCharts.com If the trend turns against you, the first loss is always the cheapest. Don’t wait for a gift wrapped invitation to the selling party! Monitoring is all about _you_, the investor. * * * [Tensile Trading: Stage #8 You Bought It - Now What? arrow-up-right](https://stockcharts.com/articles/journal/2013/09/tensile-trading-stage-8-you-bought-it-now-what.html) “Yesterday is a cancelled check, tomorrow is a promissory note, today is all about the equity in your hand so watch... [How History Unlocks Deep Insights Within Today's Price and Volume Charts arrow-up-right](https://stockcharts.com/articles/journal/2012/11/how-history-unlocks-deep-insights-within-todays-price-and-volume-charts-DONTUSE.html) History matters because markets do indeed repeat themselves. John Kenneth Galbraith was interviewed in the PBS... [You Bought It! Now What? arrow-up-right](https://stockcharts.com/articles/journal/2012/12/you-bought-it-now-what.html) I’ll confess that my students have referred to me as tough, irreverent and leathery – and those are the kind... [How to Make a 100% Return on Your Equity arrow-up-right](https://stockcharts.com/articles/journal/2013/04/how-to-make-a-100-return-on-your-equity.html) You watch your equity position tear away on a 200% parabolic run and then you allow your greed and fantasies to kick... [Monitoring Your Investments is a Sisyphean Task arrow-up-right](https://stockcharts.com/articles/journal/2014/02/monitoring-your-investments-is-a-sisyphean-task.html) "When Google’s co-founder, Larry Page, famously asked Steve Jobs for advice, Job’s reply was “Don’t get... [Why Successful Investors Embrace the Laws of Grouping arrow-up-right](https://stockcharts.com/articles/journal/2014/12/why-successful-investors-embrace-the-laws-of-grouping.html) Fish swim in schools. Birds fly in flocks. Humans follow grouping principles too. Gestalt... [Yes - Successful Investors Must Be Like Loving Parents arrow-up-right](https://stockcharts.com/articles/journal/2015/02/yes--successful-investors-must-be-like-loving-parents.html) As any accomplished trader will tell you, investors should think of their equity positions as their children... [Can You Believe 90% of Fortune 500 Equities Have Vaporized? arrow-up-right](https://stockcharts.com/articles/journal/2015/08/can-you-believe-90-of-fortune-500-equities-have-vaporized.html) Be careful where you sit. I shared a table at Starbucks last week with two investors who became very animated... [Your Investing Pipeline to Profits arrow-up-right](https://stockcharts.com/articles/journal/2015/11/your-investing-pipeline-to-profits.html) It might be human nature, but it’s not a good thing. In my Tensile Trading seminars, investors study six... [You Bought It...But Here's How You Increase Your Probabilities of Making Profits! arrow-up-right](https://stockcharts.com/articles/journal/2016/06/you-bought-itbut-heres-how-you-increase-your-probabilities-of-making-profits.html) I think of this weekly blog as a sort of view from the kitchen. Mine is not some candy-coated representation... [How History Unlocks Deep Insights Within Today's Price and Volume Charts arrow-up-right](https://stockcharts.com/articles/journal/2017/09/how-history-unlocks-deep-insights-within-todays-price-and-volume-charts.html) History matters because markets do indeed repeat themselves. John Kenneth Galbraith was interviewed in the PBS... [PreviousStage 7: Buyingchevron-left](https://chartschool.stockcharts.com/table-of-contents/overview/the-traders-journal-by-gatis-roze/stage-7-buying) [NextStage 9: Sellingchevron-right](https://chartschool.stockcharts.com/table-of-contents/overview/the-traders-journal-by-gatis-roze/stage-9-selling) Last updated 1 year ago Was this helpful? Was this helpful? sun-brightdesktopmoon sun-brightdesktopmoon --- # Stage 10: Re-Examine, Refine, Re-Enhance | ChartSchool | StockCharts.com “If past history was all there was to the game, the richest people would be librarians.” - Warren Buffet * * * [My Pal Warren On The 10 Stages Of Investing arrow-up-right](https://stockcharts.com/articles/journal/2012/08/my-pal-warren-on-the-10-stages-of-investing-old.html) I’m a big fan of pithy quotes. When I teach my college class “Tensile Trading”, I use quotes extensively to... [Investing Lessons & Trading Rules arrow-up-right](https://stockcharts.com/articles/journal/2012/11/investing-lessons-trading-rules.html) The stock market has always attracted a disproportionate number of exceptional intellectuals and uniquely... [3 Investors, 3 Blind Spots, 3 Solutions arrow-up-right](https://stockcharts.com/articles/journal/2013/03/3-investors-3-blind-spots-3-solutionsOLD.html) Picture this: I am at a cocktail party chatting with three people about investing. The first person... [The Teacher Becomes The Student arrow-up-right](https://stockcharts.com/articles/journal/2014/01/the-teacher-becomes-the-student.html) “Tell me and I forget. Teach me and I remember. Involve me and I learn.” Those are the words of... [Tell Us All You Know About Investing arrow-up-right](https://stockcharts.com/articles/journal/2014/01/tell-us-all-you-know-about-investing.html) “Mr. Roze: we’d like to offer you 90 minutes to speak to our group and tell us all you know about... [How the Markets Have Changed Me Over the Past 25 Years: Part I arrow-up-right](https://stockcharts.com/articles/journal/2014/05/how-the-markets-have-changed-me-over-the-past-25-years-part-i.html) As I’ve revisited my trading journals from many years ago, I’ve come to realize what an unbelievable transformative... [How the Markets Have Changed Me Over 25 Years: Part II arrow-up-right](https://stockcharts.com/articles/journal/2014/06/how-the-markets-have-changed-me-over-25-years-part-ii.html) “It is good to have an end to journey toward; but it is the journey that matters, in the end.” -- Ernest... [The Most Profitable Takeaways from 'The Traders Journal' arrow-up-right](https://stockcharts.com/articles/journal/2015/05/the-most-profitable-takeaways-from-the-traders-journal.html) After many years of writing The Traders Journal, I thought it was time to revisit how investors can best maximize... [Buffett-isms and Bezos-isms: Great Investing Insights arrow-up-right](https://stockcharts.com/articles/journal/2017/11/buffett-isms-and-bezos-isms---great-investing-insights.html) “Rule #1: Never lose Money.” “Rule #2: Never forget Rule #1.” [The Triple Crown of Investing: Motivation, Confidence, Action arrow-up-right](https://stockcharts.com/articles/journal/2015/08/the-triple-crown-of-investing-motivation-confidence-action.html) As many of you know who’ve taken my Tensile Trading seminar or watched the DVD, the tenth stage of stock market... [Learning From Legends: Gerald Loeb's Timeless Investing Wisdom Stands The Test Of Time arrow-up-right](https://stockcharts.com/articles/journal/2019/03/learning-from-legends-gerald-loebs-timeless-investing-wisdom-stands-the-test-of-time.html) I’m sure you’ve heard the expression, “the more things change, the more they stay the same.” Gerald Loeb... [The Secrets I Learned from Jesse Livermore arrow-up-right](https://stockcharts.com/articles/journal/2015/11/the-secrets-i-learned.html) When seasoned traders get together, we have a sort of “secret handshake” that the uninitiated may not notice... [Peter Lynch: How He Helped My Evolution as an Investor arrow-up-right](https://stockcharts.com/articles/journal/2013/05/peter-lynch-how-he-helped-my-evolution-as-an-investor.html) Peter Lynch started managing the Fidelity Magellan Fund in 1978 with $20 Million in assets. When he retired in... [Pivotal Books in the 25-Year Trading Life of a Stock Market Investor arrow-up-right](https://stockcharts.com/articles/journal/2013/10/pivotal-books-in-the-25-year-trading-life-of-a-stock-market-investor.html) I’ve always believed that an accurate way to take the measure of a person is to ascertain which books had the most... [Ten Trading Rules from This Trader's Own Journal arrow-up-right](https://stockcharts.com/articles/journal/2013/11/ten-trading-rules-from-this-traders-own-journal.html) Embrace the laws of nature. Springs produce either salt water or fresh water. Not both. I am... [The Essential Investor's Formula for the New Year: Psych, Prep, Perspire, Persevere, Persist arrow-up-right](https://stockcharts.com/articles/journal/2014/01/the-essential-investors-formula-for-the-new-year-psych-prep-perspire-persevere-persist.html) Each year at this time, I become a trader of “change”. I take certain steps to tackle challenges I’ve... [Your Biological Passport To Profits: Use It With Care! arrow-up-right](https://stockcharts.com/articles/journal/2015/07/your-biological-passport-to-profits--use-it-with-care.html) Most professional athletes these days have biological passports. I submit to you that investors should apply... [What They Don't Teach You About Investing at Harvard and Stanford Business Schools arrow-up-right](https://stockcharts.com/articles/journal/2016/05/what-they-dont-teach-you-about-investing--at-harvard-and-stanford-business-schools.html) I was recently discussing trading and investing with Carlos Obando, former portfolio manager and graduate of a... [This is How to Maximize Your Investor Benefits arrow-up-right](https://stockcharts.com/articles/journal/2015/10/this-is-how-to-maximize-your-investor-benefits.html) After writing this column for over three years, I was recently asked by a reader what he should expect to get out of... [This Investor's Take on the "Pyramid of Success" arrow-up-right](https://stockcharts.com/articles/journal/2015/12/this-investors-take-on-the-pyramid-of-success.html) “Success is peace of mind which is a direct result of self-satisfaction in knowing you made the effort to become the... [New Year's Resolutions for Investors arrow-up-right](https://stockcharts.com/articles/journal/2016/12/new-years-resolutions-for-investors.html) Babylonians did it. Ancient Romans did it. Medieval knights pledged the “peacock vow” each New Year as... [How Individual Investors Can Use Data Mining to Grow Their Profits arrow-up-right](https://stockcharts.com/articles/journal/2014/04/how-individual-investors-can-use-data-mining-to-grow-their-profits.html) Schwab, Fidelity, TD Ameritrade and Google likely know more about most investors and their trading habits than the... PM [ETF Guru Retires: Leaves Us with Six Key Lessons arrow-up-right](https://stockcharts.com/articles/journal/2018/11/etf-guru-retires-leaves-us-with-six-key-lessons.html) This is a salute to Ben Johnson, the departing editor of Morningstar’s ETF Investor publication. Over the years... [PreviousStage 9: Sellingchevron-left](https://chartschool.stockcharts.com/table-of-contents/overview/the-traders-journal-by-gatis-roze/stage-9-selling) [NextAdditional Readingchevron-right](https://chartschool.stockcharts.com/table-of-contents/overview/the-traders-journal-by-gatis-roze/additional-reading) Last updated 1 year ago Was this helpful? Was this helpful? sun-brightdesktopmoon sun-brightdesktopmoon --- # Why and How To Use Correlation | ChartSchool | StockCharts.com [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/why-and-how-to-use-correlation#what_is_correlation) What Is Correlation? ------------------------------------------------------------------------------------------------------------------------------------------------------ In statistics, correlation measures the degree to which two (or more) variables move together. Positive correlation values indicate movement together in the same direction. Negative correlation values indicate movement in opposite directions. Correlation values range from -1.0 to +1.0, with a value of 0 indicating no relationship between the variables. In finance and financial markets, correlation measures the relationship between two securities (stocks, bonds, ETFs, mutual funds, indexes, etc.) and the degree to which they move together. Securities with high positive correlation values move together in the same direction. Securities with high negative correlation values move in exactly opposite directions. Securities with very low correlation values (at or around 0) are unrelated with respect to the directions in which they move. [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/why-and-how-to-use-correlation#why_use_correlation) Why Use Correlation? ------------------------------------------------------------------------------------------------------------------------------------------------------ Correlation values can be used to construct a well-diversified portfolio, reducing risk while also improving returns. By building a portfolio that consists of a diverse set of securities across multiple asset classes, each with low correlation values, you can limit risk by reducing exposure to singular market shocks. [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/why-and-how-to-use-correlation#how_to_use_correlation) How To Use Correlation ----------------------------------------------------------------------------------------------------------------------------------------------------------- To use correlation to your advantage, balance the securities in your portfolio according to their correlation values, while ensuring that the correlation values against a common benchmark (such as the S&P 500) are not all clustered in a specific range. For example, if you have 10 stocks and funds in your portfolio, all with correlation values against the S&P 500 ranging from +0.87 to +0.98, the assets in your portfolio can be shown to move in very similar directions, increasing your risk exposure to singular market shocks. If, however, the set of stocks and funds in your portfolio is more diverse and the correlation values range from, for example, -0.79 to +0.95, your portfolio can be considered more broadly diversified and thus less exposed to singular market shocks. [PreviousDonchian Trading Guidelineschevron-left](https://chartschool.stockcharts.com/table-of-contents/overview/donchian-trading-guidelines) [NextChart Analysischevron-right](https://chartschool.stockcharts.com/table-of-contents/chart-analysis) Last updated 1 year ago Was this helpful? * [What Is Correlation?](https://chartschool.stockcharts.com/table-of-contents/overview/why-and-how-to-use-correlation#what_is_correlation) * [Why Use Correlation?](https://chartschool.stockcharts.com/table-of-contents/overview/why-and-how-to-use-correlation#why_use_correlation) * [How To Use Correlation](https://chartschool.stockcharts.com/table-of-contents/overview/why-and-how-to-use-correlation#how_to_use_correlation) Was this helpful? sun-brightdesktopmoon sun-brightdesktopmoon --- # Richard Rhodes' Trading Rules | ChartSchool | StockCharts.com I must admit, I am not smart enough to have devised these ridiculously simple trading rules. A great trader gave them to me some 15 years ago. However, I will tell you, they work. If you follow these rules, breaking them as infrequently as possible, you will make money year in and year out, some years better than others, some years worse - but you will make money. The rules are simple. Adherence to the rules is difficult. [hashtag](https://chartschool.stockcharts.com/table-of-contents/overview/richard-rhodes-trading-rules#old_rules__but_very_good_rules) "Old Rules ... but Very Good Rules" ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ If I've learned anything in my decades of trading, I've learned that the simple methods work best. Those who need to rely upon complex Stochastics, linear weighted moving averages, smoothing techniques, Fibonacci numbers etc., usually find that they have so many things rolling around in their heads that they cannot make a rational decision. One technique says buy; another says sell. Another says sit tight while another says add to the trade. It sounds like a cliche, but simple methods work best. 1. The first and most important rule is - in bull markets, one is supposed to be long. This may sound obvious, but how many of us have sold the first rally in every bull market, saying that the market has moved too far, too fast? I have before, and I suspect I'll do it again at some point in the future. Thus, we've not enjoyed the profits that should have accrued to us for our initial bullish outlook, but have actually lost money while being short. In a bull market, one can only be long or on the sidelines. Remember, not having a position is a position. 2. Buy that which is showing strength - sell that which is showing weakness. The public continues to buy when prices have fallen. The professional buys because prices have rallied. This difference may not sound logical, but buying strength works. The rule of survival is not to “buy low, sell high”, but to “buy higher and sell higher”. Furthermore, when comparing various stocks within a group, buy only the strongest and sell the weakest. 3. When putting on a trade, enter it as if it has the potential to be the biggest trade of the year. Don't enter a trade until it has been well thought out, a campaign has been devised for adding to the trade, and contingency plans set for exiting the trade. 4. On minor corrections against the major trend, add to trades. In bull markets, add to the trade on minor corrections back into support levels. In bear markets, add on corrections into resistance. Use the 33-50% corrections level of the previous movement or the proper moving average as a first point in which to add. 5. Be patient. If a trade is missed, wait for a correction to occur before putting the trade on. 6. Be patient. Once a trade is put on, allow it time to develop and give it time to create the profits you expected. 7. Be patient. The old adage that “you never go broke taking a profit” is maybe the most worthless piece of advice ever given. Taking small profits is the surest way to ultimate loss I can think of, for small profits are never allowed to develop into enormous profits. The real money in trading is made from the one, two or three large trades that develop each year. You must develop the ability to patiently stay with winning trades to allow them to develop into that sort of trade. 8. Be patient. Once a trade is put on, give it time to work; give it time to insulate itself from random noise; give it time for others to see the merit of what you saw earlier than they. 9. Be impatient. As always, small losses and quick losses are the best losses. It is not the loss of money that is important. Rather, it is the mental capital that is used up when you sit with a losing trade that is important. 10. Never, ever under any condition, add to a losing trade, or “average” into a position. If you are buying, then each new buy price must be higher than the previous buy price. If you are selling, then each new selling price must be lower. This rule is to be adhered to without question. 11. Do more of what is working for you, and less of what's not. Each day, look at the various positions you are holding, and try to add to the trade that has the most profit while subtracting from that trade that is either unprofitable or is showing the smallest profit. This is the basis of the old adage, “let your profits run.” 12. Don't trade until the technicals and the fundamentals both agree. This rule makes pure technicians cringe. I don't care! I will not trade until I am sure that the simple technical rules I follow, and my fundamental analysis, are running in tandem. Then I can act with authority, and with certainty, and patiently sit tight. 13. When sharp losses in equity are experienced, take time off. Close all trades and stop trading for several days. The mind can play games with itself following sharp, quick losses. The urge “to get the money back” is extreme, and should not be given in to. 14. When trading well, trade somewhat larger. We all experience those incredible periods of time when all of our trades are profitable. When that happens, trade aggressively and trade larger. We must make our proverbial “hay” when the sun does shine. 15. When adding to a trade, add only 1/4 to 1/2 as much as currently held. That is, if you are holding 400 shares of a stock, at the next point at which to add, add no more than 100 or 200 shares. That moves the average price of your holdings less than half of the distance moved, thus allowing you to sit through 50% corrections without touching your average price. 16. Think like a guerrilla warrior. We wish to fight on the side of the market that is winning, not wasting our time and capital on futile efforts to gain fame by buying the lows or selling the highs of some market movement. Our duty is to earn profits by fighting alongside the winning forces. If neither side is winning, then we don't need to fight at all. 17. Markets form their tops in violence; markets form their lows in quiet conditions. 18. The final 10% of the time of a bull run will usually encompass 50% or more of the price movement. Thus, the first 50% of the price movement will take 90% of the time and will require the most backing and filling and will be far more difficult to trade than the last 50%. There is no “genius” in these rules. They are common sense and nothing else, but as Voltaire said, “Common sense is uncommon.” Trading is a common-sense business. When we trade contrary to common sense, we will lose. Perhaps not always, but enormously and eventually. Trade simply. Avoid complex methodologies concerning obscure technical systems and trade according to the major trends only. [PreviousBob Farrell's 10 Ruleschevron-left](https://chartschool.stockcharts.com/table-of-contents/overview/bob-farrells-10-rules) [NextDonchian Trading Guidelineschevron-right](https://chartschool.stockcharts.com/table-of-contents/overview/donchian-trading-guidelines) Last updated 1 year ago Was this helpful? Was this helpful? sun-brightdesktopmoon sun-brightdesktopmoon --- # Introduction to Chart Patterns | ChartSchool | StockCharts.com [hashtag](https://chartschool.stockcharts.com/table-of-contents/chart-analysis/introduction-to-chart-patterns#what_are_chart_patterns) What Are Chart Patterns? -------------------------------------------------------------------------------------------------------------------------------------------------------------------- Market participants buy and sell securities for many reasons: the hope of gain, fear of loss, tax consequences, short-covering, hedging, stop-loss triggers, price target triggers, fundamental analysis, technical analysis, broker recommendations, etc. Determining why investors buy and sell can take time and effort, so making sense of chart patterns can help. Chart patterns put all buying and selling into perspective by consolidating the forces of supply and demand into a concise picture. This visual record of all trading provides a framework to analyze the battle between bulls and bears. More importantly, chart patterns and technical analysis help determine whether bulls or bears are winning the battle. This allows traders and investors to position themselves accordingly. In many ways, chart patterns are more complex versions of trend lines. So before continuing, it's important to read and understand [Support and Resistance](https://chartschool.stockcharts.com/table-of-contents/chart-analysis/support-and-resistance) levels and [Trend Lines](https://chartschool.stockcharts.com/table-of-contents/chart-analysis/trend-lines) . Chart pattern analysis can be used to make short-term or long-term forecasts. The data can be intraday, daily, weekly, or monthly, and the patterns can be as short as one day or as long as many years. Gaps and outside reversals may form in one trading session, while broadening tops and dormant bottoms may require many months to form. The [head and shoulders pattern](https://chartschool.stockcharts.com/table-of-contents/chart-analysis/chart-patterns/head-and-shoulders-top) in the chart below took seven months to form. ![An example of a head and shoulders top that took seven days to form using StockCharts.com](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FaYMaAI8iLYh6Ip4HGbGH%252Fpatterns-1amzn.png%3Falt%3Dmedia%26token%3D3f8f7b61-0269-498e-888b-353eb7561614&width=768&dpr=4&quality=100&sign=4a780981&sv=2) Example of a head and shoulders pattern that took seven days to form. The pattern in CIENA Corp. (CIEN), on the other hand, formed in a single day. ![Example of an outside reversal or bearish engulfing pattern that took one day to form](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FojM4u0JNvJcrcvy42BAs%252Fpatterns-2cien.png%3Falt%3Dmedia%26token%3D586d16cb-63d1-4f7c-826c-eb8ebb7d2c84&width=768&dpr=4&quality=100&sign=7d28e28&sv=2) Example of an outside reversal or bearish engulfing pattern that took one day to complete. [hashtag](https://chartschool.stockcharts.com/table-of-contents/chart-analysis/introduction-to-chart-patterns#an_oldie_but_goodie) An Oldie but Goodie ----------------------------------------------------------------------------------------------------------------------------------------------------------- Much of our understanding of chart patterns can be attributed to the work of Richard Schabacker. His 1932 classic, _Technical Analysis and Stock Market Profits_, laid the foundations for modern pattern analysis. In [_Technical Analysis of Stock Trends_arrow-up-right](https://a.co/d/3xKIOBg) (1948), Edwards and Magee credit Schabacker for most of the concepts put forth in the first part of their book. We would also like to acknowledge Messrs. Schabacker, Edwards and Magee, and John Murphy as the driving forces behind these articles and our understanding of chart patterns. Pattern analysis may seem straightforward, but it is no easy task. Schabacker states: * * * “The science of chart reading, however, is not as easy as the mere memorizing of certain patterns and pictures and recalling what they generally forecast. Any general stock chart is a combination of countless different patterns and its accurate analysis depends upon constant study, long experience and knowledge of all the fine points, both technical and fundamental, and, above all, the ability to weigh opposing indications against each other, to appraise the entire picture in the light of its most minute and composite details as well as in the recognition of any certain and memorized formula.” * * * Even though Schabacker refers to “the science of chart reading”, technical analysis can at times be less science and more art. In addition, pattern recognition can be open to interpretation, which can be subject to personal biases. To defend against biases and confirm pattern interpretations, other aspects of technical analysis should be employed to verify or refute the conclusions drawn. While many patterns may seem similar in nature, no two patterns are exactly alike. False breakouts, bogus reads, and exceptions to the rule are all part of the ongoing education. Careful and constant study is required for successful chart analysis. In the earlier example of the head and shoulders reversal pattern in AMZN, the stock broke below the neckline of the head and shoulders. This is a bearish signal, but you must continue your analysis to confirm the bearish trend. Some analysts might have labeled the pattern in the chart below as a head and shoulders pattern with neckline support around 17.50. Whether or not this is robust remains open to debate. Even though the stock broke neckline support at 17.50, it repeatedly moved back above its support break. This might be considered a sign of strength, which would warrant a reassessment of the pattern. ![An example of a stock that broke below a head and shoulders neckline but didn't continue to decline.](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FNznCZMOpx4D9eQFsV6gc%252Fpatterns-3nvls.png%3Falt%3Dmedia%26token%3D9951032f-96bb-49b6-bf54-dd79588405cf&width=768&dpr=4&quality=100&sign=2add20a5&sv=2) Even though the stock price broke below the head and shoulders neckline, price moved back above it. This could be considered a sign of strength, and it would make sense to continue to analyze the chart. [hashtag](https://chartschool.stockcharts.com/table-of-contents/chart-analysis/introduction-to-chart-patterns#continuation_patterns_vs_reversal_patterns) Continuation Patterns vs. Reversal Patterns ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Two basic tenets of technical analysis are that prices trend and history repeats itself. **An uptrend indicates the forces of demand (bulls) are in control, while a downtrend indicates the forces of supply (bears) are in control.** But prices don't trend forever, and as the balance of power shifts, a chart pattern begins to emerge. Certain patterns, such as a parallel channel, denote a strong trend (see chart below). However, most chart patterns fall into two main groups—reversals and continuations. Reversal patterns indicate a trend change and can be broken down into top and bottom formations. Continuation patterns indicate a pause in trend and that the previous direction will resume after some time. ![Chart showing an upward sloping price channel from StockCharts.com](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252F1tUeRkM1dkPbnZSofqGd%252Fpatterns-4msft.png%3Falt%3Dmedia%26token%3Df871f42a-60d4-47d1-87b0-3e9e0f884e4e&width=768&dpr=4&quality=100&sign=b40fb5a2&sv=2) Example of an upward-sloping parallel channel. Just because a pattern forms after a significant advance or decline does not mean it is a reversal pattern. Many patterns, such as a rectangle, can be classified as either reversal or continuation. Much depends on the previous price action, volume, and other indicators as the pattern evolves. This is where the science of technical analysis becomes the art of technical analysis. circle-info For detailed explanations of specific continuation and reversal chart patterns, see the [Chart Patterns](https://chartschool.stockcharts.com/table-of-contents/chart-analysis/chart-patterns) page in ChartSchool. [PreviousGaps and Gap Analysischevron-left](https://chartschool.stockcharts.com/table-of-contents/chart-analysis/gaps-and-gap-analysis) [NextChart Patternschevron-right](https://chartschool.stockcharts.com/table-of-contents/chart-analysis/chart-patterns) Last updated 1 year ago Was this helpful? * [What Are Chart Patterns?](https://chartschool.stockcharts.com/table-of-contents/chart-analysis/introduction-to-chart-patterns#what_are_chart_patterns) * [An Oldie but Goodie](https://chartschool.stockcharts.com/table-of-contents/chart-analysis/introduction-to-chart-patterns#an_oldie_but_goodie) * [Continuation Patterns vs. Reversal Patterns](https://chartschool.stockcharts.com/table-of-contents/chart-analysis/introduction-to-chart-patterns#continuation_patterns_vs_reversal_patterns) Was this helpful? sun-brightdesktopmoon sun-brightdesktopmoon --- # Rising Wedge | ChartSchool | StockCharts.com The Rising Wedge is a bearish pattern that begins wide at the bottom and contracts as prices move higher and the trading range narrows. In contrast to [symmetrical triangles](https://chartschool.stockcharts.com/table-of-contents/glossary/glossary-s#symmetrical_triangle) , which have no definitive [slope](https://chartschool.stockcharts.com/table-of-contents/glossary/glossary-s#slope) and no bullish or bearish bias, rising wedges definitely slope up and have a bearish bias. While though this article will focus on the rising wedge as a reversal pattern, the pattern can also fit into the continuation category. As a continuation pattern, the rising wedge will still slope up, but the slope will be against the prevailing downtrend. As a reversal pattern, the rising wedge will slope up and with the prevailing trend. **Regardless of the type (reversal or continuation), rising wedges are bearish.** ![Chart showing a rising wedge pattern using StockCharts.com](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FzWfMfSyvWxP2D4rHnSxF%252Frisingwedge-dell.png%3Falt%3Dmedia%26token%3D4c8ce0a7-0e44-4443-a17e-9a7e6fac6918&width=768&dpr=4&quality=100&sign=ccec90b0&sv=2) Example of a Rising Wedge pattern. * **Prior Trend.** To qualify as a reversal pattern, there must be a prior trend to reverse. The rising wedge usually forms over a three to six month period and can mark an intermediate or long-term trend reversal. Sometimes the current trend is totally contained within the rising wedge; other times the pattern will form after an extended advance. * **Upper Resistance Line.** It takes at least two reaction highs to form the upper [resistance](https://chartschool.stockcharts.com/table-of-contents/glossary/glossary-r#resistance) line, ideally three. Each reaction high should be higher than the previous high. * **Lower Support Line.** At least two reaction lows are required to form the lower [support](https://chartschool.stockcharts.com/table-of-contents/glossary/glossary-s#support) line. Each reaction low should be higher than the previous low. * **Contraction.** The upper resistance line and lower support line converge as the pattern matures. The advances from the reaction lows (lower support line) become shorter and shorter, which makes the rallies unconvincing. This creates an upper resistance line that fails to keep pace with the slope of the lower support line and indicates a supply overhang as prices increase. * **Support Break.** Bearish confirmation of the pattern does not come until the support line is broken in a convincing fashion. It is sometimes prudent to wait for a break of the previous reaction low. Once support is broken, there can sometimes be a reaction rally to test the newfound resistance level. * **Volume.** Ideally, [volume](https://chartschool.stockcharts.com/table-of-contents/glossary/glossary-v#volume) will decline as prices rise and the wedge evolves. An expansion of volume on the support line break can be taken as bearish confirmation. The rising wedge can be one of the most difficult chart patterns to recognize and trade accurately. While it is a consolidation formation, the loss of upside momentum on each successive high gives the pattern its bearish bias. However, the series of higher highs and higher lows keeps the trend inherently bullish. The final break of support indicates that the forces of supply have finally won out, and lower prices are likely. There are no measuring techniques to estimate the decline – other aspects of technical analysis should be employed to forecast price targets. ![Example of a rising wedge pattern in the chart of Ann Taylor (ANN) from StockCharts.com](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FPMJcyG4oo1XUJOXoUa16%252Frisingwedge-ann.png%3Falt%3Dmedia%26token%3Db9bb71ac-7fae-4403-aa93-25d114d6fe10&width=768&dpr=4&quality=100&sign=f298998&sv=2) A Rising Wedge pattern in the stock chart of ANN. ANN provides a good example of the rising wedge as a reversal pattern that forms in the face of weakening momentum and money flow. * **Prior Trend.** From a low of around $10 in October 1998, ANN surpassed $23 in less than seven months. The final leg up was a sharp advance from below $15 in February to $23.50 in mid-April. * **Upper Resistance Line.** The upper resistance line formed with three successively higher peaks. * **Lower Support Line.** The lower support line formed with three successive higher lows. * **Contraction.** The upper resistance line and lower support line converged as the pattern matured. A visual assessment confirms that the slope of the lower support line is steeper than that of the upper resistance line. Less slope in the upper resistance line indicates that momentum is waning as the stock makes new highs. * **Support Break.** The stock hugged the support line for over a week before finally breaking with a sharp decline. The previous reaction low was broken a few days later with a long black candlestick (red arrow). * **Volume.** [Chaikin Money Flow](https://chartschool.stockcharts.com/table-of-contents/technical-indicators-and-overlays/technical-indicators/chaikin-money-flow-cmf) turned negative in late April and was well below -10% when the support line was broken. There was an expansion of volume when the previous reaction low was broken. * Support from the April reaction low of around $20 turned into resistance, and the stock tested this level in early July before declining further. [PreviousFalling Wedgechevron-left](https://chartschool.stockcharts.com/table-of-contents/chart-analysis/chart-patterns/falling-wedge) [NextRounding Bottomchevron-right](https://chartschool.stockcharts.com/table-of-contents/chart-analysis/chart-patterns/rounding-bottom) Last updated 1 year ago Was this helpful? Was this helpful? sun-brightdesktopmoon sun-brightdesktopmoon --- # Double Bottom Reversal | ChartSchool | StockCharts.com The Double Bottom Reversal is a bullish reversal pattern typically found on bar charts, line charts, and candlestick charts. As its name implies, the pattern comprises two consecutive troughs that are roughly equal, with a moderate peak in between. circle-exclamation **Note:** A Double Bottom Reversal on a bar or line chart is different from a Double Bottom Breakdown on a P&F chart. Double Bottom Breakdowns on P&F charts are bearish patterns that mark a downside support break. ![Chart from StockCharts.com displaying a double bottom reversal](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FHxiA52ORpOuoW0EwVOfp%252Fdoublebot-utx.png%3Falt%3Dmedia%26token%3Ddff35d91-dd8f-4a3e-a883-4f1674a9a570&width=768&dpr=4&quality=100&sign=6a66138a&sv=2) Example of a double bottom reversal. Although there can be variations, the classic Double Bottom Reversal usually marks an intermediate or long-term change in trend. Many potential double bottom reversals can form during a downtrend, but until key resistance is broken, a reversal cannot be confirmed. To help clarify, let's look at the key points in the formation and then walk through an example. * **Prior Trend.** With any reversal pattern, there must be an existing trend to reverse. In the case of the Double Bottom Reversal, a significant downtrend of several months should be in place. * **First Trough.** The first trough should mark the lowest point of the current trend. The first trough is fairly normal, and the downtrend remains firmly in place. * **Peak.** Generally, after the first trough, an advance follows, ranging from 10 to 20%. [Volume](https://chartschool.stockcharts.com/table-of-contents/glossary/glossary-v#volume) on the advance from the first trough is usually inconsequential, but an increase could signal early accumulation. The peak's high is sometimes rounded or drawn out a bit from the hesitation to go back down. This hesitation indicates that demand is increasing but still not strong enough for a breakout. * **Second Trough.** The decline of the reaction high usually occurs with low volume and meets [support](https://chartschool.stockcharts.com/table-of-contents/glossary/glossary-s#support) from the previous low. Support from the previous low should be expected. Even after establishing support, only the possibility of a Double Bottom Reversal exists and still needs to be confirmed. The time between troughs can vary from a few weeks to many months, with the norm being one to three months. While exact troughs are preferable, there is room to maneuver; typically, a trough within 3% of its predecessor is considered valid. * **Advance From Trough.** Volume is more important for the Double Bottom Reversal than the double top. There should be clear evidence that volume and buying pressure are accelerating during the advance off of the second trough. An accelerated ascent, perhaps marked with a gap or two, also indicates a potential change in sentiment. * **Resistance Break.** Even after trading up to resistance, the double top and trend reversal are still incomplete. Breaking resistance from the highest point between the troughs completes the Double Bottom Reversal. Like advances, these should occur with increased volume and/or an accelerated ascent. * **Resistance Turned Support.** Broken resistance becomes potential support, and sometimes, the first correction tests this newfound support level. Such a test can offer a second chance to close a short position or initiate a long one. * **Price Target.** To estimate a target, the distance from the resistance breakout to trough lows can be added to the price at which the breakout took place. This would imply that the bigger the formation, the larger the potential advance. It's important to remember that the Double Bottom Reversal is an intermediate- to long-term reversal pattern that doesn't form in a few days. Although formation in a few weeks is possible, having at least four weeks between lows is preferable. Bottoms usually take longer to form than tops; patience can often be a virtue. Give the pattern time to develop and look for the proper clues. The advance off of the first trough should be 10-20%. The second trough should form a low within 3% of the previous low, and volume on the ensuing advance should increase. Volume indicators such as [Chaikin Money Flow](https://chartschool.stockcharts.com/table-of-contents/technical-indicators-and-overlays/technical-indicators/chaikin-money-flow-cmf) (CMF), [OBV](https://chartschool.stockcharts.com/table-of-contents/technical-indicators-and-overlays/technical-indicators/on-balance-volume-obv) , and [Accumulation/Distribution](https://chartschool.stockcharts.com/table-of-contents/technical-indicators-and-overlays/technical-indicators/accumulation-distribution-line) can be used to look for signs of buying pressure. Just as with the double top, waiting for the resistance breakout is paramount. The formation is not complete until the previous reaction high is taken out. After trending lower for almost a year, Pfizer, Inc. (PFE) stock formed a Double Bottom Reversal and broke resistance with an expansion in volume (see chart below). ![Chart showing a double bottom reversal in Pfizer, Inc. stock](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FkladJ36ecTHeAw3JV3RJ%252Fdoublebot-pfe.png%3Falt%3Dmedia%26token%3Da8d00527-2994-4151-bf75-a42b4882c6fe&width=768&dpr=4&quality=100&sign=b4b63742&sv=2) A double bottom reversal in PFE stock. * From a high near $50 in April 1999, PFE declined to 30 in December 1999, a new 52-week low. * The stock advanced over 20% off its low and formed a reaction high of around $37.50. Volume expanded, and the January 13 advance (green arrow) occurred at the highest volume since November 5. * After a short pullback, another attempt to break above resistance failed. Even so, volume on advancing days was generally higher than on declining days. The stock's ability to remain in the mid-thirties for an extended period of time indicated some strengthening in demand. * The decline from $37.50 back to $30 was sharp, but downside volume didn't expand materially. There were two days when volume on a decline exceeded the 60-day [Exponential Moving Average](https://chartschool.stockcharts.com/table-of-contents/technical-indicators-and-overlays/technical-overlays/moving-averages-simple-and-exponential) (EMA) of volume, and CMF dipped near -10% twice. However, money flows indicated accumulation throughout the decline by remaining mostly above zero with periodic movements above +10%. * The second trough formed with a low equal to the previous low ($30). The two lows were a little over two months apart. * The advance off the second low witnessed an accelerated move with a volume expansion. After the second low at $30, five of the next six advancing days saw volume well above the 60-day EMA. The CMF, which didn't weaken, moved above +20% within six days of the low. * Resistance at $37.50 was broken with a [gap up](https://chartschool.stockcharts.com/table-of-contents/glossary/glossary-g#gap_-_up_down) on the open and another volume expansion. After running from $30 to $40 in a few weeks, the stock pulled back to the resistance break at $37.50, which now turned into support. There was a brief chance to put on a long position on the pullback. The stock quickly advanced past $45. [PreviousDouble Top Reversalchevron-left](https://chartschool.stockcharts.com/table-of-contents/chart-analysis/chart-patterns/double-top-reversal) [NextHead and Shoulders Topchevron-right](https://chartschool.stockcharts.com/table-of-contents/chart-analysis/chart-patterns/head-and-shoulders-top) Last updated 1 year ago Was this helpful? Was this helpful? sun-brightdesktopmoon sun-brightdesktopmoon --- # Rounding Bottom | ChartSchool | StockCharts.com The Rounding Bottom is a long-term reversal pattern best suited for weekly charts. It is also referred to as a saucer bottom. The chart pattern represents a long consolidation period that turns from a bearish to a bullish bias. ![Chart displaying a rounding bottom pattern from StockCharts.com](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FTAIoCzZfUj8BtEEWgtxy%252Froundingbot-bby.png%3Falt%3Dmedia%26token%3D87cbb62d-1da8-4567-b9a6-339f528afb08&width=768&dpr=4&quality=100&sign=24db8dd7&sv=2) Example of a Rounding Bottom. * **Prior Trend.** For a reversal pattern to exist, there must be a prior trend to reverse. Ideally, the low of a rounding bottom will mark a new low or reaction low. In practice, there are occasions when the low is recorded many months earlier, and the security trades flat before forming the pattern. When the rounding bottom finally forms, its low may not be the lowest low of the last few months. * **Decline.** The first portion of the rounding bottom is the decline that leads to the pattern's low. This decline can take on different forms: some are quite jagged, with several reaction highs and lows, while others trade lower in a more linear fashion. * **Low.** The low of the rounding bottom can resemble a “V” bottom but shouldn't be too sharp. It should also take a few weeks to form. Because prices are in a long-term decline, the possibility of a selling climax exists that could create a lower spike. * **Advance.** The advance off the lows forms the right half of the pattern and should take about the same amount of time as the prior decline. If the advance is too sharp, a rounding bottom's validity may be questioned. * **Breakout.** Bullish confirmation comes when the pattern breaks above the reaction high (the beginning of the decline at the start of the pattern). As with most [resistance](https://chartschool.stockcharts.com/table-of-contents/glossary/glossary-r#resistance) breakouts, this level can become [support](https://chartschool.stockcharts.com/table-of-contents/glossary/glossary-s#support) . However, rounding bottoms represent a long-term reversal, and this new support level may not be that significant. * **Volume.** In an ideal pattern, volume levels will track the shape of the rounding bottom: high at the beginning of the decline, low at the end of the decline, and rising during the advance. Volume levels are not too important during the decline, but there should be an increase in volume on the advance and preferably on the breakout. A rounding bottom could be thought of as a [head and shoulders bottom](https://chartschool.stockcharts.com/table-of-contents/chart-analysis/chart-patterns/head-and-shoulders-bottom) without the identifiable shoulders. The head represents the low and is fairly central to the pattern. The volume levels throughout the pattern mimic those of the head and shoulders bottom; confirmation comes with a resistance breakout. While symmetry is preferable on the rounding bottom, the left and right sides don't have to be equal in time or slope. It's important to capture the essence of the pattern. ![Chart displaying a rounding bottom reversal pattern in the chart of AMGN from StockCharts.com](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FMWR1LU90sPISFoD6cdzK%252Froundingbot-amgn.png%3Falt%3Dmedia%26token%3D0e1d581d-70a3-4673-9eea-7472e99b5854&width=768&dpr=4&quality=100&sign=4eeac571&sv=2) An example of a rounding bottom is in the chart of Amgen, Inc. AMGN provides an example of a rounding bottom that formed after a long consolidation period. Throughout 1996, the stock traded in a tight range bound by $16.63 and $12.83. The trading range continued for the first half of 1997, and the stock broke support by falling to a low of $12 in August. * **Prior Trend.** With the break of support at 12.83, it appeared that a downtrend had begun. Even though the decline was not that sharp, the new reaction low represented a 52-week low. AMGN was not in an uptrend. * **Decline.** The stock declined from 17 to a low of 11.22 and a pair of [hammers](https://chartschool.stockcharts.com/table-of-contents/glossary/glossary-h#hammer) formed in October 1998 to mark the end of the decline (red arrow). * **Low.** Prior to the hammers, the stock traded around 12 for the previous 6 weeks. When the [gap up](https://chartschool.stockcharts.com/table-of-contents/glossary/glossary-g#gap_-_up_down) with high volume followed the hammers, it appeared that a low had been formed. After a short rally, there was another test of the low, and a higher low formed at 11.66. * **Advance.** From the second low at 11.66, the advance began in earnest and volume started to increase. In March, there was a large advance with the highest volume in 4 months (green arrow). * May 1997 resistance at 17 represented the confirmation line for the pattern. The stock broke resistance in Jul-98 with a further expansion of volume. This breakout was also confirmed with a new high in [OBV](https://chartschool.stockcharts.com/table-of-contents/glossary/glossary-o#on_balance_volume_obv) . * After breaking resistance, there was a test of support and the stock actually fell back below 17. The stock had advanced from 11.66 to 19.84 in 6 months and some sort of pullback could have been expected. [PreviousRising Wedgechevron-left](https://chartschool.stockcharts.com/table-of-contents/chart-analysis/chart-patterns/rising-wedge) [NextTriple Top Reversalchevron-right](https://chartschool.stockcharts.com/table-of-contents/chart-analysis/chart-patterns/triple-top-reversal) Last updated 1 year ago Was this helpful? Was this helpful? sun-brightdesktopmoon sun-brightdesktopmoon --- # Candlestick Charts | ChartSchool | StockCharts.com [hashtag](https://chartschool.stockcharts.com/table-of-contents/chart-analysis/candlestick-charts#candlestick-charts) Candlestick Charts --------------------------------------------------------------------------------------------------------------------------------------------- [**Introduction to Candlesticks**](https://chartschool.stockcharts.com/table-of-contents/chart-analysis/candlestick-charts/introduction-to-candlesticks) History and formation of Candlesticks [**Candlesticks and Traditional Chart Analysis**](https://chartschool.stockcharts.com/table-of-contents/chart-analysis/candlestick-charts/candlesticks-and-traditional-chart-analysis) In addition to their own merits as a charting system, Japanese candlesticks can function as confirmation for signals generated by other technical analysis techniques. [**Candlesticks and Support**](https://chartschool.stockcharts.com/table-of-contents/chart-analysis/candlestick-charts/candlesticks-and-support) This list contains candlesticks and candlestick patterns that can be used with support levels. [**Candlesticks and Resistance**](https://chartschool.stockcharts.com/table-of-contents/chart-analysis/candlestick-charts/candlesticks-and-resistance) This list contains candlesticks and candlestick patterns that can be used to identify or confirm resistance levels. [**Candlestick Bullish Reversal Pattern**](https://chartschool.stockcharts.com/table-of-contents/chart-analysis/candlestick-charts/candlestick-bullish-reversal-patterns) A bullish reversal candlestick pattern signals a potential change from a downtrend to an uptrend. It's a hint that the market's sentiment might be shifting from selling to buying. [**Candlestick Bearish Reversal Patterns**](https://chartschool.stockcharts.com/table-of-contents/chart-analysis/candlestick-charts/candlestick-bearish-reversal-patterns) A bearish reversal candlestick pattern is a sequence of price actions or a pattern that signals a potential change from uptrend to downtrend. It's a hint that the market sentiment may be shifting from buying to selling. [**Candlestick Pattern Dictionary**](https://chartschool.stockcharts.com/table-of-contents/chart-analysis/candlestick-charts/candlestick-pattern-dictionary) Our Candlestick Pattern Dictionary provides brief descriptions of many common candlestick patterns. [PreviousYield Curvechevron-left](https://chartschool.stockcharts.com/table-of-contents/chart-analysis/chart-types/yield-curve) [NextIntroduction to Candlestickschevron-right](https://chartschool.stockcharts.com/table-of-contents/chart-analysis/candlestick-charts/introduction-to-candlesticks) Last updated 1 year ago Was this helpful? Was this helpful? sun-brightdesktopmoon sun-brightdesktopmoon --- # Moving Average Trading Strategies | ChartSchool | StockCharts.com **KEY TAKEAWAYS** * Three ways to trade with moving averages are moving average crossovers, support & resistance levels, and moving average ribbons * Crossovers can help identify entry and exit points * Support and resistance levels help identify turning points in trends * * * Moving averages are among the most popular technical indicators traders and investors use. Talking heads mention them on financial media channels. You can find moving averages on popular financial sites and in just about every stock charting software. Even fundamental analysts apply them in their analyses. But how do you use moving averages to exit and enter trades? There are different ways to trade with moving averages. We'll explore how to make entry and exit decisions with moving average and/or price crossovers, utilize moving averages as support and resistance levels, and identify trends and/or trend reversals using moving average ribbons. Moving averages are easily incorporated into platforms like [SharpCharts](https://help.stockcharts.com/charts-and-tools/sharpcharts) , [StockChartsACP](https://help.stockcharts.com/charts-and-tools/stockchartsacp) , or [P&F charts](https://chartschool.stockcharts.com/table-of-contents/chart-analysis/point-and-figure-charts/point-and-figure-basics/introduction-to-point-and-figure-charts) . [hashtag](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/moving-average-trading-strategies#why_use_moving_average_trading_strategies) Why Use Moving Average Trading Strategies? --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- The financial markets can be complex. Sometimes, a simpler approach to understanding market activity can be more efficient and effective than complicated analytical methods. This is where moving average-based strategies can come into play. ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/moving-average-trading-strategies#simpler_trend_analysis) Simpler Trend Analysis Moving averages can help eliminate market noise, making it easier to interpret and analyze market direction. ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/moving-average-trading-strategies#versatility) Versatility The difference in approaches—crossovers, support & resistance levels, and MA ribbons—offers multiple ways to identify potential entry and exit points. This allows you to choose various methods that best fit a market opportunity. ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/moving-average-trading-strategies#dynamic_support_and_resistance_levels) Dynamic Support and Resistance Levels Moving averages dynamically adjust based on new price data. This makes support and resistance more fluid and adaptable to changing market conditions. ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/moving-average-trading-strategies#visual_cues_on_trend_strength) Visual Cues on Trend Strength Moving averages, in relation to price or other moving averages (e.g., ribbons), can provide a graphical representation of trend direction and strength. This information can be helpful when making trading decisions. * * * [hashtag](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/moving-average-trading-strategies#trading_moving_average_crossovers) Trading Moving Average Crossovers ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Two popular ways to use crossovers are price-to-moving-average and moving-average crossovers. ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/moving-average-trading-strategies#price_crossovers) Price Crossovers Trading with moving averages can be helpful to trend traders. When the price crosses above a moving average, it could be bullish. When price moves below a moving average, it could be considered a bearish signal. But a lot depends on what moving average you use and if that price crossover is a follow-through move. You've probably heard the adage, “The trend is your friend until it bends.” Based on this premise, you could combine a price crossover with the major trend so your trading aligns with the trend. circle-info **Learn More.** [**How To Trade Price-to-Moving Average Crossovers**](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/moving-average-trading-strategies/how-to-trade-price-to-moving-average-crossovers) ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/moving-average-trading-strategies#moving_average_crossovers) Moving Average Crossovers Moving average crossovers occur when one moving average crosses another. Say you have a 50-day simple moving average (SMA) and a 100-day SMA overlaid on your price chart. A bullish crossover is when the shorter moving average crosses above the longer one; in this case, it's when the 50-day SMA crosses above the 100-day SMA, called a [Golden Cross](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/moving-average-trading-strategies/trading-using-the-golden-cross) . A bearish crossover, or [**a Death Cross**](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/moving-average-trading-strategies/trading-the-death-cross) , is when the shorter moving average crosses below the longer SMA. Moving average crossovers can also be used for short-term trading. The [5-8-13 EMA crossover](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/moving-average-trading-strategies/using-the-5-8-13-ema-crossover-for-short-term-trades) is a popular strategy among short-term traders. The crossovers between the three [exponential moving averages](https://chartschool.stockcharts.com/table-of-contents/technical-indicators-and-overlays/technical-overlays/moving-averages-simple-and-exponential) (EMAs) can indicate price moves in the near term. * * * [hashtag](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/moving-average-trading-strategies#support_and_resistance) Support and Resistance ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ Moving averages can be used as support and resistance levels. You may notice that prices often bounce off a moving average. The moving average is acting as a support level. Sometimes, prices are reluctant to move beyond a moving average. That's when a moving average acts as a resistance level. Traders often use the levels to identify entry and exit points. circle-info **Learn More.** [**Finding Support and Resistance in Moving Averages**](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/moving-average-trading-strategies/finding-support-and-resistance-in-moving-averages) * * * [hashtag](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/moving-average-trading-strategies#moving_average_ribbons) Moving Average Ribbons ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ When you plot a bunch of moving averages on a price chart, the appearance resembles a ribbon moving across the chart. You can use Moving Average Ribbons to identify long and short-term trend direction, trend strength, and trend reversals. The width of the ribbon, that is, the distance between the moving averages, also helps to identify trend strength, the end of a trend, and the beginning of a trend. There are different ways to apply [Moving Average Ribbons](https://chartschool.stockcharts.com/table-of-contents/technical-indicators-and-overlays/technical-overlays/moving-average-ribbon) . The Guppy Multiple Moving Average is a popular method which combines 12 exponential moving averages. [PreviousMACD Zero-Line Crosses With Swing Pointschevron-left](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/macd-zero-line-crosses-with-swing-points) [NextFinding Support and Resistance in Moving Averageschevron-right](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/moving-average-trading-strategies/finding-support-and-resistance-in-moving-averages) Last updated 1 year ago Was this helpful? * [Why Use Moving Average Trading Strategies?](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/moving-average-trading-strategies#why_use_moving_average_trading_strategies) * [Simpler Trend Analysis](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/moving-average-trading-strategies#simpler_trend_analysis) * [Versatility](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/moving-average-trading-strategies#versatility) * [Dynamic Support and Resistance Levels](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/moving-average-trading-strategies#dynamic_support_and_resistance_levels) * [Visual Cues on Trend Strength](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/moving-average-trading-strategies#visual_cues_on_trend_strength) * [Trading Moving Average Crossovers](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/moving-average-trading-strategies#trading_moving_average_crossovers) * [Price Crossovers](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/moving-average-trading-strategies#price_crossovers) * [Moving Average Crossovers](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/moving-average-trading-strategies#moving_average_crossovers) * [Support and Resistance](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/moving-average-trading-strategies#support_and_resistance) * [Moving Average Ribbons](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/moving-average-trading-strategies#moving_average_ribbons) Was this helpful? sun-brightdesktopmoon sun-brightdesktopmoon --- # Six-Month Cycle MACD | ChartSchool | StockCharts.com Sy Harding introduced his seasonal MACD strategy in his 1999 book, _Riding the Bear_. The strategy combines the six-month seasonal cycle from the _Stock Trader's Almanac_ and momentum using MACD, which was developed by Gerald Appel. Basically, MACD is used to confirm or trigger bullish and bearish signals within the guidelines of the six-month cycle. According to the _Stock Trader's Almanac_, using MACD greatly increased the profitability of the seasonal system and reduced risk. [hashtag](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/six-month-cycle-macd#six-month_cycle) Six-Month Cycle --------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Discovered by Yale Hirsch, founder of the _Stock Trader's Almanac_, the six-month cycle defines a bullish cycle running from November to April and a bearish cycle running from May to October. This is where the phrase “sell in May and go away” comes from. While this cycle is certainly not infallible, statistics from the _Stock Trader's Almanac_ show the stock market seriously outperforming during the bullish six month period and underperforming during the bearish six-month period. Over the past 50 years, the average gain for the Dow was less than 1% from May to October. In contrast, the average gain was more than 7% from November to April. The chart below shows the S&P 500 with the six-month cycle over a 10-year period. The red arrows mark the start of May (bearish cycle), and the green arrows mark the beginning of November (bullish cycle). ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252F0L53LZrnY30sbdrs4ucJ%252Fts-sixmacd-01-spx-cycle.png%3Falt%3Dmedia%26token%3D25c6a11f-09c6-4d52-98cb-ae6f40d0374b&width=768&dpr=4&quality=100&sign=9e7b3a05&sv=2) Chart 1 - Six Month Cycle MACD [hashtag](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/six-month-cycle-macd#strategy) Strategy ------------------------------------------------------------------------------------------------------------------------------------------------------------- Sy Harding made some minor adjustments to the six-month cycle and added the MACD as a timing mechanism. First, Harding started the bullish cycle on October 16th, which is two weeks earlier. Starting the cycle a little earlier makes sense because there have been several October bottoms in the S&P 500. Second, Harding started the bearish cycle on April 20th, which is almost three weeks later. Third, Harding added MACD to time signals near these cycle dates (October 16th and April 20th). Chartists can move ahead to the next trading date should April 20th or October 16th fall on a weekend. There is more than one way to trigger a signal. A buy signal is triggered when the bullish cycle starts and MACD is on a bullish signal or, alternately, when MACD turns bullish after the bullish cycle starts. A sell signal is triggered when the bearish cycle starts and MACD is on a bearish signal or when MACD turns bearish after the bearish cycle starts. MACD turns bullish when it moves above its signal line or into positive territory, whichever comes first. MACD turns bearish when it moves below its signal line or into negative territory. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FxByuT2ryzXrHGKRXVtnz%252Fts-sixmacd-02-spx-macd.png%3Falt%3Dmedia%26token%3Df12a5fab-c721-4127-bbbe-22a707e4a1fb&width=768&dpr=4&quality=100&sign=891186ba&sv=2) Chart 2 - Six Month Cycle MACD The chart above shows the S&P 500 with MACD from March 2011 to February 2012, which encompasses two cycles. The bearish cycle started on April 20th and MACD was already on a bearish signal (below its signal line). The bullish cycle started on October 16th and MACD was already on a bullish signal (above its signal line and in positive territory). #### [hashtag](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/six-month-cycle-macd#buy-signal-recap) **Buy Signal Recap:** 1. Buy on October 16th if MACD is bullish. 2. Wait for bullish MACD signal if MACD is not bullish on October 16th. #### [hashtag](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/six-month-cycle-macd#sell-signal-recap) **Sell Signal Recap:** 1. Sell on April 20th if MACD is bearish. 2. Wait for a bearish MACD signal if MACD is not bearish on April 20th. [hashtag](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/six-month-cycle-macd#tweaks) Tweaks --------------------------------------------------------------------------------------------------------------------------------------------------------- Sy Harding tweaked this system even further by anticipating the six-month cycle. While chartists do not really know when a MACD signal will trigger, we can figure out when the six-month cycle will trigger. It is, after all, like clockwork. Knowing that the six-month cycle will turn bearish in May, traders can use the whole month of April to anticipate a sell signal in MACD. Similarly, traders can use the whole month of October to anticipate a buy signal. This requires a lot more discretion and intuition, however. Taking a signal in April or October seems acceptable, but what about signals in late March or late September? ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FhWeF60XhgnQ9LOyoxGpG%252Fts-sixmacd-03-spy-tweak.png%3Falt%3Dmedia%26token%3D89a11cb1-39f8-46cb-a665-4068962ae086&width=768&dpr=4&quality=100&sign=e18f91ba&sv=2) Chart 4 - Six Month Cycle MACD The chart above shows SPY from February 2010 to February 2011. MACD moved below its signal line in late April and SPY broke support in early May, both of which produced solid signals. SPY bottomed in early July and formed a higher low in August. MACD moved above its signal line in early September and broke resistance in mid-September. These signals were well before the bullish six-month cycle started, but traders would have faced an overbought market if they had waited until October. Speculation requires anticipation. Chartists can also consider using weekly charts and weekly MACD. However, only the signal line crossovers would work because the centerline crosses are too infrequent. The chart below shows DIA with weekly MACD, bearish cycles in yellow and bullish cycles in white. There were some good signals, some bad signals, and some non-signals. For example, MACD did not turn down during the bearish cycle period from May 2009 until October 2009. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FrybUrZq7nPSHb3e8BXML%252Fts-sixmacd-04-dia-tweak.png%3Falt%3Dmedia%26token%3D01f0179b-4052-478f-afdb-7d768c1064ec&width=768&dpr=4&quality=100&sign=458f4360&sv=2) Chart 14 - Six Month Cycle MACD [hashtag](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/six-month-cycle-macd#conclusion) Final Thoughts --------------------------------------------------------------------------------------------------------------------------------------------------------------------- The six-month cycle is not infallible. While adding MACD improves the historical results, it does not mean every signal will work. As with every system, there will be good signals, great signals, bad signals and ugly signals. The overall results are based on over 50 years of trading, which means over 100 signals. Most likely, the gains in some of the great signals made up for the losses in the bad signals to produce a positive result overall. Keep in mind that this article is designed as a starting point for trading system development. Use these ideas to augment your trading style, risk-reward preferences and personal judgments. [PreviousRSI(2)chevron-left](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/rsi-2) [NextSlope Performance Trendchevron-right](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/slope-performance-trend) Last updated 1 year ago Was this helpful? * [Six-Month Cycle](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/six-month-cycle-macd#six-month_cycle) * [Strategy](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/six-month-cycle-macd#strategy) * [Tweaks](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/six-month-cycle-macd#tweaks) * [Final Thoughts](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/six-month-cycle-macd#conclusion) Was this helpful? sun-brightdesktopmoon sun-brightdesktopmoon --- # Swing Charting | ChartSchool | StockCharts.com What do Point & Figure charts, Kagi charts, Renko charts, Filtered Waves, and ZigZag have in common? They are all related to swing charting in some way. [hashtag](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/swing-charting#what-is-swing-charting) What Is Swing Charting? ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ Swing charting follows a simple concept: additional information to the chart is made when a new price swing penetrates the level of the prior swing in the same direction. The basis of this type of charting is the filter. Once prices have moved by the distance specified by this filter, a new line is drawn next to the previous one. In a nutshell, it is a chart that shows up and down price movement of a minimum size, regardless of the time it takes. Swing charts work similarly to a breakout system. A new high made after so many days is a buy signal, while a sell signal occurs when a new low is made after so many days. This has been written about for years by Gann, Merrill, Livermore, Donchian, Hochheimer, Wilder, and Keltner, all of whom used some form of swing charting. Many swing-based systems use volatility as the basis for determining the parameters for the swing filter. This way, as the current volatility increases, the number of days used to calculate the swing filter decreases. [hashtag](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/swing-charting#swing-charting-techniques) Swing Charting Techniques ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- One of the simpler swing systems was Donchian's Four-Week Rule: buy when the current price goes above the highs of the previous four full weeks, but sell (go short) when the price falls below the lows of the last four whole weeks. That's it. Guess what? In 1970, Dunn and Hargitt Financial Services rated it the best of the popular systems of the day. There are a host of different swing charting techniques. Some use three consecutive new highs as an upmove and will remain as such until three consecutive new lows. The list is endless, but the concept is the same. Arthur Merrill first wrote about filtered waves in his book, _Filtered Waves_, in 1977. His swing filter was merely a percentage of price movement. This technique removes actual price from the decision and can work on almost any time series. For all you engineers, it is just an amplitude filter; it helps remove undesirable information. ZigZag is used by many charting programs, including StockCharts.com, for this filtered wave type of charting. A simple example is to display price data identifying only moves of 5% or greater. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FDZcwNA2jciTcVIf3G6jV%252Fswingcharting002.jpg%3Falt%3Dmedia%26token%3D9436661b-1e77-40c9-aa94-64dfed99e2b7&width=768&dpr=4&quality=100&sign=301c6bfb&sv=2) Hewlett-Packard Co. (HPQ) Swing example chart from StockCharts.com It filters out all the small price variations, showing only 5% or greater moves. A caveat, however, is that the last leg of ZigZag will change as the most recent price changes until prices are reversed by the filter amount (5% in the above chart). The critical item is the turning point, which is the point at which prices have reached at least the filter amount since they reversed. If you see a turning point, then prices have already moved at least the filtered amount in the opposite direction. (Please re-read this paragraph until it sinks in.) Below is the same price data but with a 10% filter being used. Notice how it removed some of the smaller waves. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252F6CzUASN1wAJ4QjrX3i49%252Fswingcharting004.jpg%3Falt%3Dmedia%26token%3Dcf8587c0-8806-4dda-b4e1-581eb912e34f&width=768&dpr=4&quality=100&sign=4ba6d3a4&sv=2) Hewlett-Packard Co. (HPQ) Swing example chart from StockCharts.com Below is a chart using the exact same data, but with a filter of 15%. That is, only moves of 15% or greater are shown by ZigZag. Notice that the small up-move in the last few days of the previous charts is gone. This is because prices have not moved upward by 15% since the down leg started. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FcYV2kv46OLB4cpAyK3yh%252Fswingcharting006.jpg%3Falt%3Dmedia%26token%3D41d03c5c-2e92-4a92-9286-2322677e4edd&width=768&dpr=4&quality=100&sign=a579a28c&sv=2) Hewlett-Packard Co. (HPQ) Swing example chart from StockCharts.com Swing charting is a viable tool for trading and making investment decisions, as it assists you in staying with the trend, limiting losses and following well-defined rules. [PreviousStochastic Pop and Dropchevron-left](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/stochastic-pop-and-drop) [NextTrend Quantification and Asset Allocationchevron-right](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/trend-quantification-and-asset-allocation) Last updated 1 year ago Was this helpful? * [What Is Swing Charting?](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/swing-charting#what-is-swing-charting) * [Swing Charting Techniques](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/swing-charting#swing-charting-techniques) Was this helpful? sun-brightdesktopmoon sun-brightdesktopmoon --- # Percent B Money Flow | ChartSchool | StockCharts.com In his book [_Bollinger on Bollinger Bands_arrow-up-right](https://www.amazon.com/Bollinger-Bands-John/dp/0071373683) , John Bollinger introduces a trading strategy using %B and the Money Flow Index (MFI). As Bollinger puts it, “the real power of Bollinger Bands becomes evident when they are combined with indicators.” %B and the Money Flow Index are used to identify the start of a new trend when both reach a bullish or bearish threshold. A surge in %B reflects a strong upthrust in prices, and high MFI readings indicate strong buying volume. Conversely, a plunge in %B reflects strong downside momentum and low MFI readings show an increase in selling volume. [hashtag](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/percent-b-money-flow#defining_the_indicators) Defining the Indicators ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- [Percent B (%B)](https://chartschool.stockcharts.com/table-of-contents/technical-indicators-and-overlays/technical-indicators/b-indicator) reflects the location of prices within the Bollinger Bands. %B at 0.80 or higher indicates that current prices are near the upper band and in the top 20% of the Bollinger Band range. Such a move suggests that prices have moved sharply higher with some sort of upside momentum thrust. %B 0.20 or lower indicates that current prices are near the lower band and in the bottom 20% of the Bollinger Band range. This suggests that prices moved sharply lower with a downside momentum thrust. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FrdSP5k7xjErxo4kFSFp3%252Fts-pbmfi-01-adbe-exam.png%3Falt%3Dmedia%26token%3D2eab96e2-65d0-48bf-9fd2-afaa0cd1f6ae&width=768&dpr=4&quality=100&sign=273a4018&sv=2) Chart 1 - Percent B and Money Flow The [Money Flow Index (MFI)](https://chartschool.stockcharts.com/table-of-contents/technical-indicators-and-overlays/technical-indicators/money-flow-index-mfi) is a volume-based indicator that measures buying or selling strength. Raw money flow equals the change in typical price multiplied by volume. Raw money flow is positive when the typical price rises for the period and negative when the usual price falls. (Typical price = (H + L + C) / 3). The RSI formula is then applied to raw money flow to create an indicator oscillating between zero and one hundred. [hashtag](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/percent-b-money-flow#strategy) Strategy ------------------------------------------------------------------------------------------------------------------------------------------------------------- The system is quite straightforward. Buy when %B moves above .80 and the Money Flow Index (MFI) moves above 80. Sell when %B moves below .20 and the Money Flow Index (MFI) moves below 20. Bollinger suggests using the Parabolic SAR for stops. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FOjnnYuVua2gUDxeZjsc4%252Fts-pbmfi-02-a-buysell.png%3Falt%3Dmedia%26token%3D70cd5a2f-522a-42ec-bbe1-daa92e601930&width=768&dpr=4&quality=100&sign=4c5b8d4a&sv=2) Chart 2 - Percent B and Money Flow The example above shows Agilent with a sell signal in mid-December and a buy signal in early January. Selling short on the mid-December sell signal would have resulted in a loss, while buying on the early January buy signal would have resulted in a modest gain. The idea behind the system is to sell weakness and buy strength. A strong up thrust shows strength and further strength is then expected. In theory, the buy signal will occur in the middle of the advance. A strong down thrust shows weakness and further weakness is expected. This means a sell signal will occur in the middle of the decline. [hashtag](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/percent-b-money-flow#trading_examples) Trading Examples ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------- The example below shows Hershey (HSY) with two buy signals within a few months. A sharp decline followed the mid-October buy signal and resulted in a sharp loss. Failure of the trend to continue is the biggest risk to the system. The second buy signal occurred in early December and the advance continued throughout December. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FOpk8ssy8J6rDexgug6Zh%252Fts-pbmfi-03-hsy-buy.png%3Falt%3Dmedia%26token%3D78077ea8-b8ff-4211-821e-b298fb1192dd&width=768&dpr=4&quality=100&sign=f95d8bdd&sv=2) Chart 3 - Percent B and Money Flow The next example highlights some sell signals for Range Resources (RRC). Notice how the stock surged after the initial sell signal in late November. After triggering a Parabolic SAR stop for a loss, the stock produced another sell signal in mid-December. This one occurred in the middle of the decline as the stock fell further in early January. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FzRIvgxiSgit0jAmKuyaA%252Fts-pbmfi-04-rrc-sell.png%3Falt%3Dmedia%26token%3D7b560551-d484-401b-94bf-4273db4e3222&width=768&dpr=4&quality=100&sign=494c86b1&sv=2) [hashtag](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/percent-b-money-flow#tweaking) Tweaking ------------------------------------------------------------------------------------------------------------------------------------------------------------- While this system will certainly produce some good signals, there is significant risk of a countertrend bounce after a sharp move. In other words, after an up thrust and buy signal, a stock is often short-term overbought and ripe for a pullback already. Some stocks continue higher, but others correct and trigger Parabolic SAR stops. Chartists should consider using MACD or another momentum oscillator to generate signals in the direction of the emerging trend. After a buy signal, chartists could wait for a pullback and act when MACD crosses above its signal line. After a sell signal, chartists could wait for a bounce and act when MACD crosses below its signal line. Another suggestion for improving the system is to ensure the absence of an existing trend before a signal is triggered. Low Average Directional Index (ADX) readings indicate the absence of a trend or the presence of a weak trend. Buy and sell signals after low ADX readings would indeed suggest that a new trend is emerging. The chart below shows these tweaks in action for PNC Financial Services (PNC). First, notice that ADX moved below 15 in April, May and early June. Second, %B plunged below .20 and the Money Flow Index (MFI) fell below 20 to suggest the emergence of a new downtrend. The stock bounced after this signal and MACD turned down in July to trigger a sell signal. Waiting for the MACD signal significantly improved the risk-reward ratio. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FH6Xdz06htJVLFIjiNKax%252Fts-pbmfi-05-pnc-adx.png%3Falt%3Dmedia%26token%3D1c0c0797-32cb-4f72-b4fc-e93f973e84df&width=768&dpr=4&quality=100&sign=862d988&sv=2) Chart 5 - Percent B and Money Flow The buy signal setup started with ADX moving back below 15 in October. This was followed by a buy signal as %B surged above .80 and the Money Flow Index exceeded 80. After a pullback in November, MACD triggered a buy signal by moving above its signal line in early December. [hashtag](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/percent-b-money-flow#conclusion) The Bottom Line ---------------------------------------------------------------------------------------------------------------------------------------------------------------------- %B and MFI combine momentum thrusts and money flow surges to signal the start of a new trend. There is, however, no guarantee that the new trend will extend after the signal. This does not mean the strategy is useless. There are some good ideas here and chartists should use these ideas to augment their trading style and current systems. In fact, Bollinger invites readers to explore variations and use what he termed “rational analysis” with this strategy. [Click herearrow-up-right](https://stockcharts.com/h-sc/ui?s=$SPX&p=D&yr=0&mn=11&dy=0&id=p46220049970&a=259435179) for a chart of the S&P 500 with %B, MFI, ADX and MACD. [PreviousPercent Above 50-day SMAchevron-left](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/percent-above-50-day-sma) [NextThe Pre-Holiday Effectchevron-right](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/the-pre-holiday-effect) Last updated 1 year ago Was this helpful? * [Defining the Indicators](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/percent-b-money-flow#defining_the_indicators) * [Strategy](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/percent-b-money-flow#strategy) * [Trading Examples](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/percent-b-money-flow#trading_examples) * [Tweaking](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/percent-b-money-flow#tweaking) * [The Bottom Line](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/percent-b-money-flow#conclusion) Was this helpful? sun-brightdesktopmoon sun-brightdesktopmoon --- # The Pre-Holiday Effect | ChartSchool | StockCharts.com Over the past century, there have been nine holidays during which the Exchanges have traditionally been closed. Historical research shows that stock prices often behave in a specific manner in each of the two trading days preceding these holidays. By becoming aware of this behavior, short-term traders and longer-term investors can benefit. [hashtag](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/the-pre-holiday-effect#the-pre-holiday-trading-strategy) The Pre-Holiday Trading Strategy --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- The general strategy is to purchase equities one or two days before a holiday. Short-term traders would look to sell just after the holiday, while longer-term investors would wait until the year's end. Both strategies have proven to be profitable plays. The theory behind this effect is that traders lighten up their holdings (selling) before the three-day holiday to avoid any unexpected bad news. The selling pressure drives stock prices down, making those days a good opportunity for buying lower in the range. Here are the average pre-holiday results for the last 50 years (excluding Juneteenth), based on the S&P 500 Index: **Holiday** Buy two days before, sell at year end Buy one day before, sell at year end President's Day\* \-0.1% 12.2% Good Friday 7.3% 17.8% Memorial Day \-4.7% 22.8% Independence Day 13.3% 37.3% Labor Day 16.8% 33.7% Election Day 17.9% 4.6% Thanksgiving 4.3% 1.1% Christmas \-7.1% 15.2% New Year's 31.1% 19.6% circle-exclamation **Note:** President's Day data is comprised of the aggregate of both Washington and Lincoln's birthdays before 1998. The original research was based on the behavior of the S&P 500 Index around the 419 holiday market closings that occurred from 1928 to 1975. To put those returns in perspective, if you had invested $10,000 in the S&P 500 Index in January 1928 and sold it all in December 1975, you would have ended up with $51,441. However, if you had invested one-ninth of your money just before each pre-holiday period (selling everything at the end of the year), you would have finished with $1,440,716. Not bad! [hashtag](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/the-pre-holiday-effect#the_short-term_trading_strategy) The Short-Term Trading Strategy ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Short-term trading using this pre-holiday effect can provide excellent results. In the chart for General Electric (GE) below, we see that a buy near the open on June 30th would be accomplished at around $47.75. Selling at open on July 5th at $50.25 provided excellent returns. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FpVbRC1yCtpVW4MNUKKbH%252Fholiday-ge.png%3Falt%3Dmedia%26token%3Dd324ae68-563c-4862-b345-43de9307c723&width=768&dpr=4&quality=100&sign=42db09c1&sv=2) General Electric Co. (GE) Pre-Holiday example chart from StockCharts.com It is important to note that there are two holidays which often have a partial trading day during the holiday weekend - the day before Independence Day and the day after Thanksgiving. These days usually have a shortened trading session that can be extremely volatile. While they can be traded, volume is always very light and it may be difficult to get limit orders filled. In the chart below for Motorola (MOT), we can see that a buy at $30 on June 30th would have been a flat trade on July 3rd, but rose $2 and $3 a share in the two days following the July 4th holiday. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252Fjt3QwixvvvaDThgLcg2Q%252Fholiday-mot.png%3Falt%3Dmedia%26token%3D9c884929-9670-4058-a29f-43c02afcd474&width=768&dpr=4&quality=100&sign=c6a9d447&sv=2) Motorola, Inc. (MOT) Pre-Holiday example chart from StockCharts.com For Realty Income (O), we have a buy near close at $21.2 and a sell just after the open on July 5th at $22. The volume is less than 50,000 shares on average and the stock is generally down-trending, but the method is still viable. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FXThWZnOIV3HX9INuLfOa%252Fholiday-o.png%3Falt%3Dmedia%26token%3D5b2d12fc-d522-4048-a9e0-e7dcd0e3d7e9&width=768&dpr=4&quality=100&sign=aa4cdbe9&sv=2) Realty Income Corp. Md. (O) Pre-Holiday example chart from StockCharts.com [hashtag](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/the-pre-holiday-effect#the_long-term_trading_strategy) The Long-Term Trading Strategy ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Again, the theory says that stocks generally fall just before holidays because traders offload their holdings in order to avoid the risk of significant news appearing while the markets are closed. Longer-term investors who are willing to ride out any short-term negative news are rewarded with lower entry prices. Here are four examples from the 2000 Memorial Day holiday (May 26th) where excellent entry points appeared: ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FbVit7rUtbGIq91JDvR9B%252Fholiday-msft.png%3Falt%3Dmedia%26token%3Dbe45ea55-48d4-4248-909b-b9877d3b270b&width=768&dpr=4&quality=100&sign=6ad963e2&sv=2) ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252Fhrr9CZErSKdRQJ5x56Bq%252Fholiday-rmbs.png%3Falt%3Dmedia%26token%3Daf599313-5a86-4ab5-9535-be6e2d2c6b61&width=768&dpr=4&quality=100&sign=67317118&sv=2) ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FW2DiVh6EUT92jjHab3N0%252Fholiday-cien.png%3Falt%3Dmedia%26token%3D6e80359f-0b46-4f10-b364-e1669165e3f1&width=768&dpr=4&quality=100&sign=48d6bd74&sv=2) ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252Fm2qphOqztSobvOgw8klP%252Fholiday-hpq.png%3Falt%3Dmedia%26token%3D33b99077-0797-49e5-a53c-48c59472be0c&width=768&dpr=4&quality=100&sign=e032f2ff&sv=2) Investors that took advantage of those dips would likely be rewarded by year-end. [PreviousPercent B Money Flowchevron-left](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/percent-b-money-flow) [NextRSI(2)chevron-right](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/rsi-2) Last updated 1 year ago Was this helpful? * [The Pre-Holiday Trading Strategy](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/the-pre-holiday-effect#the-pre-holiday-trading-strategy) * [The Short-Term Trading Strategy](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/the-pre-holiday-effect#the_short-term_trading_strategy) * [The Long-Term Trading Strategy](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/the-pre-holiday-effect#the_long-term_trading_strategy) Was this helpful? sun-brightdesktopmoon sun-brightdesktopmoon --- # Slope Performance Trend | ChartSchool | StockCharts.com Trend direction and relative strength are important components of any investment strategy designed to outperform the overall market. This article will show chartists how to use the slope indicator to define trend direction and quantify relative strength. Sectors that show relative strength and are in uptrends are worthy of long positions. Sectors that show relative weakness and are in downtrends should be avoided. This strategy goes to the heart of a basic investment philosophy: buy the strong and avoid the weak. [hashtag](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/slope-performance-trend#the_slope_indicator) The Slope Indicator -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- The slope indicator is at the heart of this strategy, so we will first explain what it tells us and how it works. Even though it sounds complicated, the slope indicator is pretty easy to understand. All you need to know is that the trend is up when the slope is positive and is down when the slope is negative. For those looking for a technical explanation, the slope indicator measures the rise over the run for a linear regression. Fortunately, we have algorithms and charting software to do all the calculation work. In SharpCharts, chartists can use the Raff Regression Channel to plot a linear regression, which is the middle line. The chart below shows three Raff Regression Channels covering three twelve-month periods. The slope of the first linear regression (blue) is relatively flat, the second slope (red) is clearly down, and the third slope (green) is up. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252Fq2s7g5tfqtUed1vPDZvK%252Fts-sslop-01-xly-slopeexam.png%3Falt%3Dmedia%26token%3D416ec5cc-7016-45f9-9c55-c323de2e7ae6&width=768&dpr=4&quality=100&sign=b4ccc93f&sv=2) Chart 1 - Slope, Performance and Direction The indicator window shows the actual values of the slope indicator. Remember, the slope measures the rise over run for the linear regression. This is the ending value of the linear regression less the beginning value divided by the timeframe. If the ending value were 35, the beginning value 29 and the run 12, then the slope would be .5 (35 - 29 = 6, 6/12 = .50). The slope indicator is zero when the linear regression is flat, positive when the linear regression slants up and negative when the linear regression slopes down. The steepness of the slope is also reflected in the value. Slope values well above zero reflect a sharply rising linear regression (uptrend), while slope values well below zero reflect a sharply falling linear regression (downtrend). [hashtag](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/slope-performance-trend#trend_direction) Trend Direction ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ Trend direction can be defined with the 12-month slope of the closing prices. This means we will use monthly charts to define the trend based on the direction of the one-year slope. The chart below shows the Utilities SPDR (XLU) with a 12-month slope indicator changing direction five times in ten years. There was one whipsaw (bad signal) in early 2008, but the other signals foreshadowed decent trends. No indicator is perfect and whipsaws are unavoidable. However, most of the time, the 12-month slope will produce fewer whipsaws than the 12-month simple moving average. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FbgOM2vzN7vMbN6QVCzrv%252Fts-sslop-02-xlu-trend.png%3Falt%3Dmedia%26token%3D3511985f-4096-4ce5-9d28-a19fdd702d1c&width=768&dpr=4&quality=100&sign=80f890c7&sv=2) Chart 2 - Slope, Performance and Direction [hashtag](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/slope-performance-trend#relative_performance) Relative Performance ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Chartists can use the price relative to measure relative strength and relative weakness. The price relative is a ratio of the underlying security divided by the benchmark index. In this example, we will use the nine S&P Sector SPDRs as the trading vehicles and the S&P 500 ETF (SPY) as the benchmark index. To measure the performance of the Technology SPDR (XLK) relative to the S&P 500 ETF, chartists would plot the ratio of the two symbols (XLK:SPY). This ratio rises when XLK outperforms and shows relative strength, and falls when XLK underperforms and shows relative weakness. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252Fw353ae74dq7JBxLsGuIq%252Fts-sslop-03-xlk-pricerel.png%3Falt%3Dmedia%26token%3D8a0326d3-b44b-4738-b267-380abefcdbfc&width=768&dpr=4&quality=100&sign=eef15d3c&sv=2) Chart 3 - Slope, Performance and Trend The chart above shows the price relative or XLK:SPY ratio in the main window and the 12-month slope in the indicator window. Overall, the price relative declined from 2004 to mid-2006 and advanced from mid-2006 until early 2012. The 12-month slope moved from positive to negative as these relative performance trends strengthened and weakened. A positive slope shows strong outperformance, while a negative slope shows strong underperformance. [hashtag](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/slope-performance-trend#strategy_details) Strategy Details -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- The strategy is quite straightforward. Buy signals are generated when the 12-month slope for the price chart is positive and when the 12-month slope for the price relative is positive. This two-pronged approach ensures that the sector is in an uptrend and shows relative strength, which makes for a powerful combination. A sell signal is generated when the 12-month slope for the price chart is negative and the 12-month slope for the price relative is negative. Again, this ensures that the sector is in a downtrend and shows relative weakness. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FtU867oSL74ZSya01Jlbf%252Fts-sslop-04-xly-strat.png%3Falt%3Dmedia%26token%3Dc4e40bfd-7fbc-4931-9223-256f0d1ad570&width=768&dpr=4&quality=100&sign=8a493de9&sv=2) Chart 4 - Slope, Performance and Trend The chart above shows the Consumer Discretionary SPDR (XLY) with the 12-month slope for the price chart in the top indicator window, the price relative in the middle indicator window and the 12-month slope of the price relative in the bottom window. There were only five signals in ten years, which makes this a long-term model. The sell signal in 2005 caused a whipsaw and missed most of the surge in the third quarter of 2006. Despite this whipsaw, this strategy would have exited XLY before the 2008 bear market and caught most of the bull market that started in 2009. [hashtag](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/slope-performance-trend#increasing_signal_frequency) Increasing Signal Frequency ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ While this strategy can be used to define the big trend, chartists should implement another strategy to time short- or medium-term movements. After all, some traders, or even investors, may need more than five signals every ten years. Using the slope indicators on the monthly chart, the Industrials SPDR (XLI) triggered a buy signal in November 2010. While the trend was clearly up, the risk-reward ratio did not look so great after such a sharp advance. Chartists could then turn to the daily chart and the Commodity Channel Index (CCI) to generate bullish signals within this uptrend. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252F6pU9vfdahb4viyZ3dqRv%252Fts-sslop-05-xli-tweak.png%3Falt%3Dmedia%26token%3De180f6cf-638d-438f-85cb-8f0b721d4eb7&width=768&dpr=4&quality=100&sign=3af4debf&sv=2) Chart 5 - Slope, Performance and Trend The chart above shows XLI with daily bars and the Commodity Channel Index (CCI) in 2010. With the long-term trend up, bullish signals are taken and bearish signals are ignored. A bullish signal triggers when CCI becomes oversold and then moves above the zero line, which occurred five times in 2010. The June signal resulted in a whipsaw (bad trade), but the other signals foreshadowed sizable advances. Even though bearish signals are ignored, chartists would need to employ a stop-loss or profit-taking strategy to lock in gains. [hashtag](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/slope-performance-trend#strong_and_weak_sectors) Strong and Weak Sectors ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Applying the slope to the price relative can also help chartists differentiate strong sectors from weak sectors. In this regard, investors can focus on strong sectors for long positions and avoid or short weak sectors. The chart below shows the 12-month slope for six price relatives. The green boxes highlight positive slopes and relative strength, while the red boxes highlight negative slopes and relative weakness. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FCSYvCsVbZDPaJ92y5iTw%252Fts-sslop-06-xlk-compare.png%3Falt%3Dmedia%26token%3D44fe5297-2ce2-4759-b843-1492d2cfe081&width=768&dpr=4&quality=100&sign=8f0bedcb&sv=2) Chart 6 - Slope, Performance and Trend In early 2012, only the technology (XLK:SPY) and consumer discretionary (XLY:SPY) sectors were showing relative strength, as measured by the 12-month slope of their price relatives. Chartists could have used this information to focus their buying power on stocks within these two sectors. The other four sectors showed relative weakness because the slopes for their price relatives were in negative territory. Chartists could have used this information to avoid these sectors in 2012. [hashtag](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/slope-performance-trend#conclusion) The Bottom Line ------------------------------------------------------------------------------------------------------------------------------------------------------------------------- By applying the slope indicator to the price chart and price relative, you can quantify the price trend and relative performance with one indicator. A positive slope indicates an uptrend and a negative slope indicates a downtrend. It is as easy as that. Even though 12-month slopes were used in this example, chartists can adjust the timeframe to suit their needs. A 13-week slope could be used for medium-term timing, while a 20-day slope could be used for the short-term timing. Keep in mind that this article is designed as a starting point for trading system development. Use these ideas to augment your trading style, risk-reward preferences and personal judgments. ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/slope-performance-trend#further_study) Further Study [**Technical Analysis of the Financial Markets**arrow-up-right](https://www.amazon.com/dp/0735200661?k=technical%20analysis%20of%20the%20financial%20markets&ref_=nb_sb_ss_w_scx-ent-pd-bk-d_l_k0_1_32&crid=DPIPHDS7T7IH&sprefix=Technical%20Anlaysis%20of%20the%20Financ) John J. Murphy [PreviousSix-Month Cycle MACDchevron-left](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/six-month-cycle-macd) [NextStochastic Pop and Dropchevron-right](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/stochastic-pop-and-drop) Last updated 1 year ago Was this helpful? * [The Slope Indicator](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/slope-performance-trend#the_slope_indicator) * [Trend Direction](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/slope-performance-trend#trend_direction) * [Relative Performance](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/slope-performance-trend#relative_performance) * [Strategy Details](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/slope-performance-trend#strategy_details) * [Increasing Signal Frequency](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/slope-performance-trend#increasing_signal_frequency) * [Strong and Weak Sectors](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/slope-performance-trend#strong_and_weak_sectors) * [The Bottom Line](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/slope-performance-trend#conclusion) * [Further Study](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/slope-performance-trend#further_study) Was this helpful? sun-brightdesktopmoon sun-brightdesktopmoon --- # Percent Above 50-day SMA | ChartSchool | StockCharts.com [hashtag](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/percent-above-50-day-sma#what_is_the_percent_above_50-day_sma_indicator) What Is the Percent Above 50-day SMA Indicator? ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- The Percent Above 50-Day SMA is a breadth indicator that measures the percentage of stocks in an index trading above their 50-day moving average. It is a useful tool for gauging the overall health of the market and identifying overbought and oversold conditions. One way to use the Percent Above 50-Day SMA in a trading strategy is to combine it with a long-term moving average to identify whether a trend is bullish or bearish. Another way to use it is to combine it with a short-term moving average to identify pullbacks and bounces within the overall trend. The goal of using the Percent Above 50-Day SMA is to participate in the bigger trend with a better risk-reward ratio. By using this indicator to identify pullbacks and bounces, you can reduce your risk of entering trades at the wrong time. [hashtag](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/percent-above-50-day-sma#how_to_use_the_percent_above_50-day_sma_indicator) How to Use the Percent Above 50-Day SMA Indicator --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- As the chart below shows, the raw data for this indicator can be quite volatile, with frequent crosses above/below the 50% line. In general, the bulls have the trading edge when the indicator is above 50%, and the bears have the edge when it is below 50%. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FU25PMh7aRdWCjZZwy56p%252Fts-pa50d-01-spx.png%3Falt%3Dmedia%26token%3Dd410bc94-dc9d-41b9-9562-8b6e37909e4c&width=768&dpr=4&quality=100&sign=9b9f4511&sv=2) Chart 1 - Trading Strategy: Percent above 50-day SMA The raw data is too choppy for an effective system. Therefore, chartists can use moving averages to smooth the data and reduce volatility. A long moving average can set the overall tone, bullish or bearish. A short moving average can then be used to identify overbought or oversold levels. There are three steps to developing this system with two moving averages. **1\. Define the market tone with a long-term moving average.** Smoothing the indicator with a 150-day EMA will greatly reduce volatility and allow chartists to establish a general tone for the S&P 500. Even though a move above 50% is technically bullish and a move below 50% bearish, whipsaws can be reduced by using buffers for bullish and bearish thresholds. Therefore, a move above 52.5% is deemed bullish until countered with a move below 47.5%. Conversely, a move below 47.5% is deemed bearish until countered with a move above 52.5%. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252F6kCSX9DTr10AmaUuzwfI%252Fts-pa50d-02-spx.png%3Falt%3Dmedia%26token%3D2489679e-d6d2-41f1-8e77-cc35b6cadb17&width=768&dpr=4&quality=100&sign=5413938d&sv=2) Chart 2 - Trading Strategy: Percent above 50-day SMA **2\. Use a short-term indicator to identify pullbacks or bounces.** While the raw indicator can be used, applying a short 5-day EMA provides a little smoothing without sacrificing too much sensitivity. Chartists then need to set the levels to identify pullbacks and bounces. Setting these levels too high or low will result in too few signals, while setting these levels too much in the middle will result in too many signals. A golden middle is needed. This example uses 40 and 60. A move below 40 signals a pullback, while a move above 60 signals a bounce. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FAAlmR93qsaKKpXyrTxeL%252Fts-pa50d-03-spx.png%3Falt%3Dmedia%26token%3Daa1f4389-0183-47ec-b8c7-05800c8baade&width=768&dpr=4&quality=100&sign=57c96508&sv=2) Chart 3 - Trading Strategy: Percent above 50-day SMA **3\. Set a level to signal that the pullback or bounce has reversed.** At this point, chartists are looking for pullbacks when the general tone is bullish and bounces when the general tone is bearish. The pullback serves as an alert, but we need a level to signal that the pullback has ended. A move back above 50 provides the first indication that breadth is improving again and the uptrend may be resuming. After a bounce above 60, a move back below 50 provides the first indication that breadth is deteriorating again and the downtrend may be resuming. #### [hashtag](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/percent-above-50-day-sma#bull-signal-recap) **Bull Signal Recap:** 1. 150-day EMA of $SPXA50R crosses above 52.5 and remains above 47.50 to set the bullish tone. 2. 5-day EMA of $SPXA50R moves below 40 to signal a pullback #### [hashtag](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/percent-above-50-day-sma#bear-signal-recap) **Bear Signal Recap:** 1. 150-day EMA of $SPXA50R crosses below 47.50 and remains below 52.50 to set the bearish tone. 2. 5-day EMA of $SPXA50R moves above 60 to signal a bounce [hashtag](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/percent-above-50-day-sma#trading_examples) Trading Examples --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- The first chart shows the indicators in the first two windows and the S&P 500 in the bottom window. In the middle window, the 150-day EMA of $SPXA50R sets the bullish tone with a move above 52.50 in early May 2003. This bullish tone would last until January 2008, when the indicator moved below 47.50. With a bullish tone, chartists would only focus on bullish signals using the 5-day EMA of $SPXA50R. A move below 40 signals a pullback and a subsequent move back above 50 triggers the bullish signal. There were no bullish signals in 2003 and three bullish signals in 2004. Signals 1 and 2 did not work out well, but signal 3 preceded a solid advance and signaled a continuation of the bigger uptrend. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252F3YZaAT7K9QVldUTGfFEj%252Fts-pa50d-04-spx.png%3Falt%3Dmedia%26token%3Dbbc3ca17-4a79-4c90-8777-aa08e16109ab&width=768&dpr=4&quality=100&sign=43ced9ac&sv=2) Chart 4 - Trading Strategy: Percent above 50-day SMA The second chart shows four bullish signals in 2005 and 2006. Notice that the 150-day EMA of $SPXA50R never broke below 47.50 to reverse the bullish tone that was initially set in 2003. There were at least seven dips below 40, but only four were followed by a surge back above 50. It is important to wait for the surge above 50 to ensure that the uptrend has in fact resumed. Signal 1 was not good, but the other three signals preceded significant advances in the S&P 500. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252F7OXSw4aWNHgqiMOj3HgA%252Fts-pa50d-05-spx.png%3Falt%3Dmedia%26token%3Dbcbc36ef-59f8-4337-81a4-a2943f1e3e97&width=768&dpr=4&quality=100&sign=f4e07871&sv=2) Chart 5 - Trading Strategy: Percent above 50-day SMA The third chart shows the market tone changing from bullish to bearish in early January 2008. There were two bullish signals in 2007 and then two bearish signals in 2008. These bearish signals occurred just after important peaks and foreshadowed significant declines in the S&P 500. The blue arrow marks a bullish signal that did not materialize. Even though the market tone was bullish and the 5-day EMA of $SPX50R dipped below 40, the subsequent rebound failed to exceed 50 and trigger a bullish signal. After the market tone turned bearish, the 5-day EMA of $SPX50R surged above 60, but did not move back below 50 to confirm a resumption of the downtrend (black arrow). ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FTV2Aj80Ei4hjcFYULYcU%252Fts-pa50d-06-spx.png%3Falt%3Dmedia%26token%3D02f58e56-d8d5-466e-bd42-cfce4d1dba5d&width=768&dpr=4&quality=100&sign=e4d369c6&sv=2) Chart 6 - Trading Strategy: Percent above 50-day SMA The last chart covers three years (2009, 2010 and 2011). The market tone changed three times and there were seven signals. The first five signals were quite good, but the period from June to December 2011 was rather tumultuous with a pair of bad signals. Signal 6 was bullish at the beginning of July and the market subsequently fell apart in August. Signal 7 was bearish at the end of November and the market subsequently surged from December 2011 to February 2012. [hashtag](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/percent-above-50-day-sma#tweaking) Tweaking ----------------------------------------------------------------------------------------------------------------------------------------------------------------- There are numerous ways to tweak a trading system, but chartists should avoid over-optimizing the indicator settings. In other words, don't attempt to find the perfect moving average period or crossover level. Perfection is unattainable when developing a system or trading the markets. It is important to keep the system logical and focus tweaks on other aspects, such as the actual price chart of the underlying security. Chartists can use support or resistance breaks to trigger signals or set stops. As the chart below shows, a stop based on the support break in late July and early August would have significantly cut losses on the bogus bull signal in early July. After the bogus sell signal in November, the quick surge back to 1250 signaled that something was amiss. This was affirmed when the market tone changed back to bullish in early December. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FOEzbKWo4sWeTTY0Kryg7%252Fts-pa50d-07-spx.png%3Falt%3Dmedia%26token%3D8e9384f6-37f9-4f9b-9f9e-4d0f1343de03&width=768&dpr=4&quality=100&sign=ca7c3413&sv=2) Chart 7 - Trading Strategy: Percent above 50-day SMA [hashtag](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/percent-above-50-day-sma#the_bottom_line) The Bottom Line ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- As a breadth-based system, the Percent Above 50-Day SMA strategy can be used to identify the big trend for the stock market and corrections within that trend. Chartists can use these signals to enhance their market timing or use these signals to define a trading bias. For example, chartists could focus on bullish stock setups when the system is bullish and bearish stock setups when the system is bearish. Keep in mind that this article is designed as a starting point for trading system development. Use these ideas to augment your trading style, risk-reward preferences, and personal judgments. [Click herearrow-up-right](https://stockcharts.com/h-sc/ui?s=$SPXA50R&p=D&yr=1&mn=0&dy=0&id=p68795960107&listNum=30&a=259163542) for a chart of the S&P 500 %Above 50-day SMA ($SPXA50R) with appropriate moving averages. StockCharts.com subscribers can view the chart settings and save this chart to one of their ChartLists. [hashtag](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/percent-above-50-day-sma#percent_above_50-day_sma_faqs) FAQs Percent Above 50-Day SMA ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- chevron-rightWhat is the main benefit of using the Percent Above 50-Day SMA strategy?[hashtag](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/percent-above-50-day-sma#what-is-the-main-benefit-of-using-the-percent-above-50-day-sma-strategy) It helps to identify the big trend and corrections within that trend. This allows chartists to enhance market timing or define a trading bias—they can focus on bullish or bearish stock setups based on the system’s indication. chevron-rightWhat do levels above and below 50% signify in the long-term moving average?[hashtag](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/percent-above-50-day-sma#what-do-levels-above-and-below-50-signify-in-the-long-term-moving-average) A move above 52.5% is deemed bullish, and below 47.5% is deemed bearish. These levels help to reduce whipsaws by using buffers for bullish and bearish thresholds. chevron-rightHow does the short-term moving average work to identify pullbacks or bounces?[hashtag](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/percent-above-50-day-sma#how-does-the-short-term-moving-average-work-to-identify-pullbacks-or-bounces) When using a 5-day EMA, a move below 40 signals a pullback, and a move above 60 signals a bounce. chevron-rightHow is the reversal of pullback or bounce identified?[hashtag](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/percent-above-50-day-sma#how-is-the-reversal-of-pullback-or-bounce-identified) A move back above 50 after a pullback or below 50 after a bounce signals that the respective trend may be resuming. chevron-rightHow can you ensure that the uptrend has resumed?[hashtag](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/percent-above-50-day-sma#how-can-you-ensure-that-the-uptrend-has-resumed) It’s essential to wait for the surge above 50 to ensure the uptrend has resumed, signaling improved breadth. chevron-rightCan the system be tweaked to optimize indicator settings?[hashtag](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/percent-above-50-day-sma#can-the-system-be-tweaked-to-optimize-indicator-settings) While there are various ways to tweak the system, seeking perfection through over-optimizing settings is advised against. It's crucial to keep the system logical and focus tweaks on the price chart of the underlying security. [hashtag](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/percent-above-50-day-sma#further_study) Further Study --------------------------------------------------------------------------------------------------------------------------------------------------------------------------- John Murphy's _Technical Analysis of the Financial Markets_ has a chapter devoted to stock market indicators (breadth) and their various uses. Murphy also covers moving averages and other signals that can be used to augment this system. [**Technical Analysis of the Financial Markets**arrow-up-right](https://www.amazon.com/dp/0735200661?k=technical%20analysis%20of%20the%20financial%20markets&ref_=nb_sb_ss_w_scx-ent-pd-bk-d_l_k0_1_32&crid=DPIPHDS7T7IH&sprefix=Technical%20Anlaysis%20of%20the%20Financ) John J. Murphy [PreviousNarrow Range Day NR7chevron-left](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/narrow-range-day-nr7) [NextPercent B Money Flowchevron-right](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/percent-b-money-flow) Last updated 1 year ago Was this helpful? * [What Is the Percent Above 50-day SMA Indicator?](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/percent-above-50-day-sma#what_is_the_percent_above_50-day_sma_indicator) * [How to Use the Percent Above 50-Day SMA Indicator](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/percent-above-50-day-sma#how_to_use_the_percent_above_50-day_sma_indicator) * [Trading Examples](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/percent-above-50-day-sma#trading_examples) * [Tweaking](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/percent-above-50-day-sma#tweaking) * [The Bottom Line](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/percent-above-50-day-sma#the_bottom_line) * [FAQs Percent Above 50-Day SMA](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/percent-above-50-day-sma#percent_above_50-day_sma_faqs) * [Further Study](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/percent-above-50-day-sma#further_study) Was this helpful? sun-brightdesktopmoon sun-brightdesktopmoon --- # Moving Momentum | ChartSchool | StockCharts.com [hashtag](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/moving-momentum#introduction) Introduction ---------------------------------------------------------------------------------------------------------------------------------------------------------------- Many trading strategies are based on a process, not a single signal. This process often involves a series of steps that ultimately lead to a signal. Typically, chartists first establish a trading bias or long-term perspective. Second, chartists wait for pullbacks or bounces that will improve the risk-reward ratio. Third, chartists look for a reversal that indicates a subsequent upturn or downturn in price. The strategy put forth here uses moving average to define the trend, the Stochastic Oscillator to identify corrections within that trend and the MACD-Histogram to signal short-term reversals. It is a complete strategy based on a three-step process. [hashtag](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/moving-momentum#defining_the_indicators) Defining the Indicators -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Moving averages are trend-following indicators that lag price. This means the actual trend changes before the moving averages generate a signal. Many traders are turned off by this lag, but this does not make them totally ineffective. Moving averages smooth prices and provide chartists with a cleaner price plot, which makes it easier to identify the general trend. This strategy employs two moving averages to define the trading bias. The bias is bullish when the shorter-moving average moves above the longer moving average. The bias is bearish when the shorter-moving average moves below the longer moving average. While chartists can use any combination of moving averages, this article uses the 20-day SMA and the 150-day SMA. The example below shows Baxter International (BAX) moving from a bullish trading bias to a bearish trading bias as the 20-day SMA moved below the 150-day SMA in mid-August. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FtmfM9dDLVbYYuDaOZhlN%252Fts-movso-01-bax-exam.png%3Falt%3Dmedia%26token%3Df57bfdc3-3fad-4a90-b910-904344f722f8&width=768&dpr=4&quality=100&sign=4f6bc33e&sv=2) Chart 1 - Moving Momentum Trading Strategy The second part of this trading strategy uses the Stochastic Oscillator to identify correction. As a bound oscillator that fluctuates between 0 and 100, the Stochastic Oscillator is ideal for spotting short-term pullbacks or bounces. A move below 20 signals a pullback in prices, while a move above 80 signals a bounce in prices. The third part of this trading strategy uses the MACD-Histogram to identify upturns and downturns in prices. The MACD-Histogram measures the difference between MACD and its signal line. The indicator is positive when MACD is above its signal line and negative when MACD is below its signal line. The MACD-Histogram turns positive when prices turn up, and turns negative when prices turn down. [hashtag](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/moving-momentum#strategy) Strategy -------------------------------------------------------------------------------------------------------------------------------------------------------- #### [hashtag](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/moving-momentum#buy-signal) **Buy Signal:** * Moving averages show a bullish trading bias, with the 20-day SMA trading above the 150-day SMA. * Stochastic Oscillator moves below 20 to signal a pullback. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FRhD7qgwLbdBonFiVdkik%252Fts-movso-02-rl-buy.png%3Falt%3Dmedia%26token%3D646cb522-486c-4342-a5bc-c94b68a0f2e2&width=768&dpr=4&quality=100&sign=9c7a73e2&sv=2) Chart 2 - Moving Momentum Trading Strategy The example above shows Polo Ralph Lauren (RL) with a few buy signals. First, notice that the 20-day SMA is above the 150-day SMA to establish a bullish trading bias. Second, the Stochastic Oscillator declined below 20 to indicate a price pullback and favorable risk-reward ratio. Chartists then turn to the MACD-Histogram to signal an end to the pullback with a move into positive territory. Notice that the MACD-Histogram is almost always in negative territory when the Stochastic Oscillator moves below 20. Sometimes this indicator stays negative for another week or two, so it's important to wait for confirmation of an upturn. #### [hashtag](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/moving-momentum#sell-signal) **Sell Signal:** * Moving averages show a bearish trading bias, with the 20-day SMA trading below the 150-day SMA. * Stochastic Oscillator moves above 80 to signal a bounce. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FxRejjTCZerz8ZurOkID5%252Fts-movso-03-flr-sell.png%3Falt%3Dmedia%26token%3D3611af32-fd22-4472-890d-f492a23f5760&width=768&dpr=4&quality=100&sign=962e7967&sv=2) Chart 3 - Moving Momentum Trading Strategy The example above shows Flour Corp (FLR) with a few sell signals. First, the trading bias turned bearish when the 20-day SMA moved below the 150-day SMA in June. Second, the Stochastic Oscillator moved above 80 several times as prices bounced within the downtrend. A move above 80 is just an alert to watch the MACD-Histogram closely. Acting on a move above 80 can result in a losing trade because it can sometimes take a week or two for prices to turn back down. The third and final signal occurs when the MACD-Histogram turns negative. [hashtag](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/moving-momentum#trading_example) Trading Example ---------------------------------------------------------------------------------------------------------------------------------------------------------------------- The example below shows United Parcel Service (UPS) with six signals over a 12-month period. This is not the most ideal example, but it does provide some insights into real-world trading, which is often not ideal. There were four different trading biases on this chart. The yellow areas mark two periods with a bearish trading bias and two periods with a bullish trading bias. Bearish signals are ignored when the bias is bullish. Bullish signals are ignored when the bias is bearish. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FsSykJfoxHHia2U0IXU8q%252Fts-movso-04-ups-buysell.png%3Falt%3Dmedia%26token%3D1d51255d-062c-40ba-bbb3-49fc34ec487e&width=768&dpr=4&quality=100&sign=459b0c1a&sv=2) Chart 4 - Moving Momentum Trading Strategy After the Stochastic Oscillator signaled pullbacks in March and April, the MACD-Histogram turned positive to trigger two bullish signals (1 and 2). These did not last long or work out well because trading was quite choppy. The thin blue lines mark support levels that could have been used for initial stops. A bearish bias started in June, with a bearish signal in mid-July (3) occurring just before the bias switched to bullish. This was a tricky signal, but chartists setting a stop-loss at resistance would have remained in the position and caught the big decline. After a couple more whipsaws (4 and 5), the strategy triggered a nice bullish signal in early December. [hashtag](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/moving-momentum#tweaking) Tweaking -------------------------------------------------------------------------------------------------------------------------------------------------------- With four indicators, there are lots of different ways to tweak this strategy. Chartists can adjust the moving averages to redefine the trend. Instead of the 20-day and 150-day SMAs, chartists could lengthen the timeframe for an even longer perspective on trend. Alternatively, chartists could use one long-term moving average, comparing it against the actual prices to identify the trend identification. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FT6vl0Rg9Ivp51s0VMi4z%252Fts-movso-05-ibm-sensi.png%3Falt%3Dmedia%26token%3Dcdc5f36b-ac94-47ae-a308-d6e295a94a57&width=768&dpr=4&quality=100&sign=e519f891&sv=2) Chart 5 - Moving Momentum Trading Strategy The oscillators can be shortened to increase sensitivity or lengthened to decrease sensitivity. A 10-day Stochastic Oscillator would become overbought/oversold more often than a 20-day Stochastic Oscillator. Similarly, the MACD-Histogram (5,30,9) would cross the zero line more often than the MACD-Histogram used with the default settings (12,26,9). The decision to increase or decrease sensitivity rests with the characteristics of the underlying security. Stocks with lower volatility, such as those in the utilities and consumer staples sectors, would warrant more sensitive settings. Stocks with higher volatility, such as those in the technology and biotech sectors, may warrant less sensitive settings. The trick is to find the setting that produces enough signals, but not too many. [hashtag](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/moving-momentum#conclusion) The Bottom Line ----------------------------------------------------------------------------------------------------------------------------------------------------------------- This “Moving Momentum” strategy provides charts with a means to trade in the direction of the bigger trend. Moreover, this strategy is designed to identify lower risk and higher reward opportunities by waiting for corrections. The moving average sets the tone, bullish or bearish. The Stochastic Oscillator is used to identify pullbacks within bigger uptrends and bounces within bigger downtrends. The MACD-Histogram is used to signal the end of a pullback or bounce. Keep in mind that this article is designed as a starting point for trading system development. Use these ideas to augment your trading style, risk-reward preferences and personal judgments. [Click herearrow-up-right](https://stockcharts.com/h-sc/ui?s=IBM&p=D&yr=0&mn=6&dy=0&id=p29111391540&a=260225198&listNum=30) for a chart of IBM with the 20-day SMA, 150-day SMA, Stochastic Oscillator and MACD-Histogram. [PreviousUsing the 5-8-13 EMA Crossover for Short-Term Tradeschevron-left](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/moving-average-trading-strategies/using-the-5-8-13-ema-crossover-for-short-term-trades) [NextNarrow Range Day NR7chevron-right](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/narrow-range-day-nr7) Last updated 1 year ago Was this helpful? * [Introduction](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/moving-momentum#introduction) * [Defining the Indicators](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/moving-momentum#defining_the_indicators) * [Strategy](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/moving-momentum#strategy) * [Trading Example](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/moving-momentum#trading_example) * [Tweaking](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/moving-momentum#tweaking) * [The Bottom Line](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/moving-momentum#conclusion) Was this helpful? sun-brightdesktopmoon sun-brightdesktopmoon --- # Trading Using the Golden Cross | ChartSchool | StockCharts.com In technical analysis, a Golden Cross is a bullish pattern in which a faster and short-term moving average crosses above a slower and longer-term moving average. Although the duration of the moving averages may vary from trader to trader, the most common setting for this pattern uses a 50-day moving average (the faster MA) against a 200-day moving average (the slower MA). The Golden Cross can indicate that a potential trend reversal toward the upside may be emerging, or that market conditions may have turned bullish (if not less bearish). ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FP4JMIZyc37xD2VGmZGvI%252Fgolden_cross.jpg%3Falt%3Dmedia%26token%3D1f9b8787-ea10-4514-bfc0-1d7d9ab6802d&width=768&dpr=4&quality=100&sign=6c84861d&sv=2) Example of a Golden Cross [hashtag](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/moving-average-trading-strategies/trading-using-the-golden-cross#is_a_golden_cross_bullish) Is a Golden Cross Bullish? -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Although a Golden Cross pattern can’t give us a surefire “green light” that the technical conditions of an asset’s price is definitively bullish, it can indicate several potentialities that may be viewed in a more bullish light. * A downtrend may have (temporarily or significantly) bottomed out. * Prices have risen with enough consistency or momentum to have brought the faster moving average above the slower moving average. * Buying activity may be rising at a steady rate, enough to lift prices over a period of time. * Market sentiment may be increasingly bullish, as evidenced by the rise in prices. As a side note (and something you should check out next), the Golden Cross is the positive half of its negative doppelganger, mirror image, or, shall we say, evil twin: the Death Cross, which indicates the exact opposite. [hashtag](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/moving-average-trading-strategies/trading-using-the-golden-cross#how_do_traders_use_the_golden_cross) How Do Traders Use the Golden Cross? ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Depending on your strategy and general market approach, there are a few ways to actionably interpret a Golden Cross event. The basic assumption here is that a trend change can generally amount to a “sea change,” so to speak, in market bias and, eventually, trading strategy. **Golden Cross as a Confirmation Signal.** The pattern can be used to confirm the likelihood that a bullish trend reversal, or an end to a downtrend, may be underway. Most traders would use other technical (and fundamental) indicators in addition to a Golden Cross to confirm such a reading. **Golden Cross as a Signal To Go “Long.”** Although several nuanced methods exist to enter a long position in the market, a Golden Cross can be used as part of a trader’s market entry strategy. **Golden Cross as a Stop-Loss.** Many investors use the 50-day moving average as a stop-loss level, assuming that a close below the 50-day MA might signal that an asset’s rising trend may be in question. The same assumption applies to the 200-day MA and depends on the investor’s investment timeframe. Such an assumption may not always be reliable, yet it’s nevertheless common. For greater accuracy in placing stops, it’s advisable to use other technical (and fundamental) indicators and methods. The important thing is to try to distinguish a longer-term bearish reversal from an exaggerated correction. [hashtag](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/moving-average-trading-strategies/trading-using-the-golden-cross#what_to_watch_out_for_when_using_a_golden_cross) What To Watch Out For When Using a Golden Cross --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/moving-average-trading-strategies/trading-using-the-golden-cross#not_all_golden_crosses_are_the_same) Not All Golden Crosses Are the Same The market conditions and price action surrounding a Golden Cross may be just as important as the signal itself. In other words, not all Golden Crosses are the same. For example, technical analyst Tom McClellan distinguishes between two types of crossover patterns. They are as follows: * **Type 1 Crossing**, where prices are extended far from the actual crossover price point (and in the direction of the crossover) * **Type 2 Crossing**, where prices retrace the actual price point in which the crossover event took place According to McClellan, a type 1 crossover event can mark a temporary or more significant reversal (shown below). A type 2 event, however, often indicates a resumption of the actual trend prior to the crossover (shown below). ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252F8xW2QjYgIvXUAG38nkPO%252Ftype1-golden-cross-1.jpg%3Falt%3Dmedia%26token%3D28e80f68-2b6c-405c-ae6b-d43a4bc69ee6&width=768&dpr=4&quality=100&sign=aa2e707a&sv=2) Example of Type 1 Golden Cross. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252F7I08t6WEmOmhUKHfHJl5%252Fgolden-cross-type2.jpg%3Falt%3Dmedia%26token%3Dec94a242-842b-4be7-b4e7-4a9ca1e162cc&width=768&dpr=4&quality=100&sign=c15e4559&sv=2) Example of Type 1 and Type 2 Golden Crosses. ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/moving-average-trading-strategies/trading-using-the-golden-cross#price_action_and_market_conditions_after_a_golden_cross_event) Price Action and Market Conditions After a Golden Cross Event Pay attention to how prices behave after a Golden Cross. This is where using other technical and fundamental indicators can help give you a broader insight into the market context. For example, if buying activity and volume dries up following a Golden Cross event, you might want to figure out why the bullish momentum appears to be dwindling. Is it a lack of conviction among market bulls? There can be several technical and fundamental reasons driving such an occurrence, and gaining insight on a market’s seemingly indecisive reaction may help you inform your trading strategy from that point forward. [hashtag](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/moving-average-trading-strategies/trading-using-the-golden-cross#conclusion) Conclusion ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- The Golden Cross is a technical event that signals a potential bullish trend reversal. The pretext is that the short-term moving average is currently below the longer-term moving average—typically characterized a downtrend—and is now reversing direction. When a Golden Cross occurs, it signals that an uptrend may be emerging from either a downtrend or a sideways trading range. While the Golden Cross, early on in its occurrence, can’t forecast bullishness with a reliable degree of accuracy, it can give you an early signal that a more bullish market environment may be ahead given the right convergence of technical and fundamental factors. [PreviousTrading the Death Crosschevron-left](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/moving-average-trading-strategies/trading-the-death-cross) [NextUsing the 5-8-13 EMA Crossover for Short-Term Tradeschevron-right](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/moving-average-trading-strategies/using-the-5-8-13-ema-crossover-for-short-term-trades) Last updated 1 year ago Was this helpful? * [Is a Golden Cross Bullish?](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/moving-average-trading-strategies/trading-using-the-golden-cross#is_a_golden_cross_bullish) * [How Do Traders Use the Golden Cross?](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/moving-average-trading-strategies/trading-using-the-golden-cross#how_do_traders_use_the_golden_cross) * [What To Watch Out For When Using a Golden Cross](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/moving-average-trading-strategies/trading-using-the-golden-cross#what_to_watch_out_for_when_using_a_golden_cross) * [Not All Golden Crosses Are the Same](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/moving-average-trading-strategies/trading-using-the-golden-cross#not_all_golden_crosses_are_the_same) * [Price Action and Market Conditions After a Golden Cross Event](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/moving-average-trading-strategies/trading-using-the-golden-cross#price_action_and_market_conditions_after_a_golden_cross_event) * [Conclusion](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/moving-average-trading-strategies/trading-using-the-golden-cross#conclusion) Was this helpful? sun-brightdesktopmoon sun-brightdesktopmoon --- # Narrow Range Day NR7 | ChartSchool | StockCharts.com Narrow range patterns come from Tony Crabel's book, _Day Trading with Short Term Price Patterns & Opening Range Breakout_. Even though the book, which was published in 1990, is currently out of print, many of its ideas are still effective. In particular, the NR4 (Narrow Range 4) and NR7 (Narrow Range 7) patterns are quite popular with short-term traders. The philosophy behind the pattern is similar to the Bollinger Band Squeeze, that is, a volatility expansion often follows a volatility contraction. Narrow range days mark price contractions that often precede price expansions. Even though Crabel traded mainly futures, traders can apply these techniques to stocks, indices and ETFs. [hashtag](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/narrow-range-day-nr7#strategy) Strategy ------------------------------------------------------------------------------------------------------------------------------------------------------------- This strategy starts with the day's range, which is simply the difference between the high and the low. Crabel used the absolute range, as opposed to the percentage range, which would be the absolute range divided by the close or the midpoint. Because we are only dealing with four and seven days, the difference between the absolute range and percentage range is negligible. Crabel focused on two different narrow range timeframes: four days and seven days. An NR4 pattern would be the narrowest range in four days, while an NR7 would be the narrowest range in seven days. It is a very short-term pattern designed to initiate a trade based on an “opening range breakout,” which is another term from Crabel's book. The opening range breakout (ORB) is based on the price range in the first five minutes of trading, which is too short of a term for this article. Instead, chartists can look for an upside breakout when prices move above the high of the narrow range day and a downside breakdown when prices move below the low of the narrow range day. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FIGFTKQ8Lh3zq79anofDe%252Fts-nr47-01-bmc-buyexam.png%3Falt%3Dmedia%26token%3De0a4442c-82aa-443b-b076-512fdb842a7a&width=768&dpr=4&quality=100&sign=78624b74&sv=2) Chart 1 - Narrow Range Days ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FljTxO0TA1xGRXlQhDOUY%252Fts-nr47-02-mchp-sellexam.png%3Falt%3Dmedia%26token%3D07f7d943-ae50-4193-ba40-26ed507affb4&width=768&dpr=4&quality=100&sign=2f11d29f&sv=2) Chart 2 - Narrow Range Days Because this is a short-term setup, it is important that the trade starts working right away. Failure to continue in the direction of the signal is the first warning. After a buy signal, a move below the low of the narrow range day would be negative. Conversely, a move above the high of the narrow range day would negate a sell signal. Chartists also need to consider profit targets and stop-losses. Crabel took profits quite quickly, usually at the close of the first trading day or on the first profitable close. Again, this is very short-term-oriented and might not be suitable for all traders. Alternatively, profits can be taken near the next resistance level or a percentage target could be used. For stops, chartists can use the Parabolic SAR to trail stops or base their stops on the Average True Range (ATR). For example, the stop-loss on a long position could be set two Average True Range values below current prices and trailed higher. #### [hashtag](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/narrow-range-day-nr7#bull-signal-recap) **Bull Signal Recap:** 1. Identify NR4 or NR7 day. 2. Buy on move above high of narrow range day high. #### [hashtag](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/narrow-range-day-nr7#bear-signal-recap) **Bear Signal Recap:** 1. Identify NR4 or NR7 day. 2. Sell on move below low of narrow range day low. [hashtag](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/narrow-range-day-nr7#trading_example) Trading Example --------------------------------------------------------------------------------------------------------------------------------------------------------------------------- The trading example shows Morgan Stanley with twelve signals in less than three months. The blue arrows show the NR7 candlesticks and the thin blue lines mark the high-low of the range. A next day move above the high is bullish, while a next day move below the low is bearish. Notice that NR7 days formed back-to-back on three different occasions. While not always the case, these back-to-back NR7 days did not result in different signals, they simply affirm the existing signal from the prior NR7 breakout. With nine signals in total, traders could have to watch price action closely, exercise judgment and manage stops. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FcT742EZTIO83YlXWRqbn%252Fts-nr47-03-ms-exam.png%3Falt%3Dmedia%26token%3D6d512448-efab-40ab-af74-018391ed140f&width=768&dpr=4&quality=100&sign=1fe0c2e1&sv=2) Chart 3 - Narrow Range Days [hashtag](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/narrow-range-day-nr7#sharpcharts_alternatives) SharpCharts Alternatives --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- SharpCharts does not offer an indicator that shows the day's range or identifies NR4 and NR7 days. However, it is possible to scan for NR4 or NR7 days using the Advanced Scan Workbench to write the code, an example of which is provided in the next section. On SharpCharts, chartists can use a 1-period Average True Range (ATR) to imitate or estimate the “range” and visually identify “NATR7” readings, which means ATR is its narrowest in seven days. While this NATR7 will not produce the exact same signals, many will overlap with the basic NR7 readings. More importantly, the Average True Range does show when the range is contracting or expanding. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FtxwaMNKrvRS8WiZFpTzQ%252Fts-nr47-04-ibm-atr.png%3Falt%3Dmedia%26token%3D82609efa-633f-48ea-a31c-0fc3e5d87bde&width=768&dpr=4&quality=100&sign=d6d3e7b&sv=2) Chart 4 - Narrow Range Days [hashtag](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/narrow-range-day-nr7#tweaking) Tweaking ------------------------------------------------------------------------------------------------------------------------------------------------------------- Most chartists will want to qualify NR7 signals, as they are quite frequent. A typical stock will produce dozens of NR7 days in a twelve-month period; a daily scan of US stocks will often return hundreds of stocks with NR7 days. Chartists can increase or decrease the number of narrow range periods to affect the results. A decrease from NR7 to NR4 would increase the number of stocks fitting the criteria, while an increase from NR7 to NR20 would decrease the number of candidates. In general, the number of stocks meeting the criteria will increase as the narrow range period decreases and decrease as the narrow range period increases. Chartists can also add other indicators to further qualify signals. In fact, it is often a good idea to add a trend indicator and an overbought/oversold indicator. Adding a trend indicator ensures that trades are in the direction of a bigger trend. Adding an overbought/oversold oscillator identifies pullbacks or bounces to improve the risk-reward ratio. The chart below shows McDonalds with the 1-period Average True Range (ATR) to mimic NR7 signals, the Aroon indicators to define the bigger trend and the Commodity Channel Index (CCI) to define overbought/oversold conditions. A bullish signal occurs when Aroon Up is above Aroon Down (uptrend), the 5-day low for CCI is below -100 (oversold) and the range moves to a seven day low (turning point). Bearish signals occur when Aroon Down is above Aroon Up (downtrend), the 5-day high for CCI is above +100 (overbought) and the range moves to a seven day low (turning point). ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FF0jsqviVBVA8ZMXmHP3P%252Fts-nr47-05-mcd-cci.png%3Falt%3Dmedia%26token%3Ddbd2a87e-0cfc-40f7-9455-fd4dd27d4fab&width=768&dpr=4&quality=100&sign=d37c1d0d&sv=2) Chart 5 - Narrow Range Days There were two signals in late November. The first signal did not work, but there was another a few days later that marked a good bottom. [hashtag](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/narrow-range-day-nr7#conclusion) The Bottom Line ---------------------------------------------------------------------------------------------------------------------------------------------------------------------- The NR7 day is based on the premise that range contractions are followed by range expansions. In this regard, the indicator is neutral when it comes to future price direction. As with Bollinger Bands, chartists must employ other tools for a directional bias. Because NR7 days are relatively commonplace and the range is small by definition, the chances of whipsaw are above average. A break above the NR7 high can fail and be followed by a break below the NR7 high. Keep the bigger picture in mind and be wary of sell signals within a bullish pattern, such as a falling flag or at a support test. This article is designed as a starting point for trading system development. Use these ideas to augment your trading style, risk-reward preferences and personal judgments. [Click herearrow-up-right](https://stockcharts.com/h-sc/ui?s=IBM&p=D&yr=0&mn=6&dy=0&id=p11241870721&listNum=30&a=262493168) for a chart of IBM with the Average True Range (ATR), Aroon indicators and Commodity Channel Index (CCI). [hashtag](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/narrow-range-day-nr7#suggested_scans) Suggested Scans --------------------------------------------------------------------------------------------------------------------------------------------------------------------------- ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/narrow-range-day-nr7#nr7_in_uptrend_after_pullback) NR7 in Uptrend After Pullback This scan reveals stocks that have just had an NR7 day during an uptrend (as indicated by the Aroon indicator values) and whose CCI values indicate an oversold condition. ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/narrow-range-day-nr7#nr7_in_downtrend_after_pullback) NR7 in Downtrend After Pullback This scan reveals stocks that have just had an NR7 day during a downtrend (as indicated by the Aroon indicator values) and whose CCI values indicate an overbought condition. [PreviousMoving Momentumchevron-left](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/moving-momentum) [NextPercent Above 50-day SMAchevron-right](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/percent-above-50-day-sma) Last updated 1 year ago Was this helpful? * [Strategy](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/narrow-range-day-nr7#strategy) * [Trading Example](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/narrow-range-day-nr7#trading_example) * [SharpCharts Alternatives](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/narrow-range-day-nr7#sharpcharts_alternatives) * [Tweaking](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/narrow-range-day-nr7#tweaking) * [The Bottom Line](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/narrow-range-day-nr7#conclusion) * [Suggested Scans](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/narrow-range-day-nr7#suggested_scans) * [NR7 in Uptrend After Pullback](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/narrow-range-day-nr7#nr7_in_uptrend_after_pullback) * [NR7 in Downtrend After Pullback](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/narrow-range-day-nr7#nr7_in_downtrend_after_pullback) Was this helpful? sun-brightdesktopmoon Copy [type = stock] and [country = us] and [daily sma(20,daily volume) > 100000] and [daily sma(60,daily close) > 20] and [Range < 1 day ago Min (6, Range)] and [today's high < yesterday's high] and [today's low > yesterday's low] and [Min (5, CCI(10)) < -100] and [Aroon Up (63) > Aroon Down(63)] Copy [type = stock] and [country = us] and [daily sma(20,daily volume) > 100000] and [daily sma(60,daily close) > 20] and [Range < 1 day ago Min (6, Range)] and [today's high < yesterday's high] and [today's low > yesterday's low] and [Max (5, CCI(10)) > 100] and [Aroon Up (63) < Aroon Down(63)] sun-brightdesktopmoon --- # RSI(2) | ChartSchool | StockCharts.com [hashtag](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/rsi-2#what_is_the_2-period_rsi_strategy) What Is the 2-Period RSI Strategy? ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Larry Connors developed the 2-period RSI strategy, a fairly simple mean-reversion trading strategy designed to buy or sell securities after a corrective period. Traders should look for buying opportunities when 2-period RSI moves below 10, which is considered deeply oversold. Conversely, traders can look for short-selling opportunities when 2-period RSI moves above 90. This is a rather aggressive short-term strategy designed to participate in an ongoing trend. It is not designed to identify major tops or bottoms. Before looking at the details, note that this article is designed to educate chartists on possible strategies. We are not presenting a standalone trading strategy that can be used right out of the box. Instead, this article is meant to enhance strategy development and refinement. [hashtag](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/rsi-2#strategy) Strategy ---------------------------------------------------------------------------------------------------------------------------------------------- There are four steps to this strategy. First, identify the major trend using a long-term moving average; Connors recommends the 200-day moving average. The long-term trend is up when a security is above its 200-day SMA and down when a security is below its 200-day SMA. Traders should look for buying opportunities when above the 200-day SMA and short-selling opportunities when below the 200-day SMA. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FKJE0irxqZx3oOm8kFXJU%252Frsi2-00-smh-exam.png%3Falt%3Dmedia%26token%3Dde3b1f18-cb4d-4124-ac94-baf6f015bc3e&width=768&dpr=4&quality=100&sign=c97b6d64&sv=2) Chart 1 - RSI(2) Second, choose an RSI level to identify buying or selling opportunities within the bigger trend. Connors tested RSI levels between 0 and 10 for buying and between 90 and 100 for selling. (Note that levels are based on closing prices.) He found that returns were higher when buying on an RSI dip below 5 than on one below 10. In other words, the lower RSI dipped, the higher the returns on subsequent long positions. For short positions, the returns were higher when selling short on an RSI surge above 95 than on a surge above 90. In other words, the more short-term overbought the security, the greater the subsequent returns on a short position. The third step involves the actual buy or sell-short order and the timing of its placement. Chartists watching the market can establish a position either just before the close or on the subsequent open. There are pros and cons to both approaches. Connors advocates the before-the-close approach. However, buying just before the close means traders are at the mercy of the next open, which could be with a gap. Obviously, this gap can enhance the new position or immediately detract with an adverse price move. Waiting for the open gives traders more flexibility and can improve the entry level. The fourth step is to set the exit point. In his example using the S&P 500, Connors advocates exiting long positions on a move above the 5-day SMA and short positions on a move below the 5-day SMA. This is clearly a short-term trading strategy that will produce quick exits. Chartists should also consider setting a trailing stop or employing the Parabolic SAR. Sometimes a strong trend takes hold and trailing stops will ensure that a position remains as long as the trend extends. Where are the stops? Connors does not advocate using stops. Yes, you read right. In his quantitative testing, which involved hundreds of thousands of trades, Connors found that stops actually “hurt” performance when it comes to stocks and stock indices. While the market does indeed have an upward drift, not using stops can result in outsized losses and large drawdowns. It is a risky proposition, but, then again, trading is a risky game. Chartists need to decide for themselves. [hashtag](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/rsi-2#trading_examples) Trading Examples -------------------------------------------------------------------------------------------------------------------------------------------------------------- The chart below shows the Dow Industrials SPDR (DIA) with the 200-day SMA (red), 5-period SMA (pink), and 2-period RSI. A bullish signal occurs when DIA is above the 200-day SMA and RSI(2) moves to 5 or lower. A bearish signal occurs when DIA is below the 200-day SMA and RSI(2) moves to 95 or higher. There were seven signals over this 12-month period, four bullish and three bearish. Of the four bullish signals, DIA moved higher three of the four times, which means these signals could have been profitable. Of the three bearish signals, DIA moved lower only once (5). DIA moved above the 200-day SMA after the bearish signals in October. Once above the 200-day SMA, the 2-period RSI did not move to 5 or lower to produce another buy signal. As far as a gain or loss, it would depend on the levels used for the stop-loss and profit taking. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FuMRqWiE8Hc3E21X1JQGy%252Frsi2-01-dia-bullbear.png%3Falt%3Dmedia%26token%3D11aaad4f-5e76-4644-920e-bc7c7a06382b&width=768&dpr=4&quality=100&sign=1aa9ca0&sv=2) Chart 2 - RSI(2) The second example shows Apple (AAPL) trading above its 200-day SMA for most of the timeframe. There were at least ten buy signals during this period. It would have been difficult to prevent losses on the first five because AAPL zigzagged lower from late February to mid-June 2011. The second five signals fared much better as AAPL zigzagged higher from August to January. Looking at this chart, it is clear that many of these signals were early. In other words, Apple moved to new lows after the initial buy signal and then rebounded. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FzCQVqbYLntHiB5eNBUBA%252Frsi2-02-aapl-bullbear.png%3Falt%3Dmedia%26token%3D523d5402-b601-4f21-b296-344ae382fa15&width=768&dpr=4&quality=100&sign=d5966103&sv=2) Chart 3 - RSI(2) [hashtag](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/rsi-2#tweaking_the_2-period_rsi_strategy) Tweaking the 2-Period RSI Strategy -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- As with all trading strategies, it is important to study the signals and look for ways to improve the results. The key is to avoid curve fitting, which decreases the odds of success in the future. As noted above, the RSI(2) strategy can be early because the existing moves often continue after the signal. The security can continue higher after RSI(2) surges above 95 or lower after RSI(2) plunges below 5. In an effort to remedy this situation, chartists should look for some sort of clue that prices have reversed after RSI(2) hits its extreme. This could involve candlestick analysis, intraday chart patterns, other momentum oscillators, or even tweaks to RSI(2). ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FB9mQOIMNf6DVZIoAckKG%252Frsi2-03-goog-cross50.png%3Falt%3Dmedia%26token%3D2a28b173-2bdf-44a2-8309-cd063d3356e7&width=768&dpr=4&quality=100&sign=1fa7b0f1&sv=2) Chart 4 - RSI(2) RSI(2) surges above 95 because prices are moving up. Establishing a short position while prices are moving up can be dangerous. Chartists could filter this signal by waiting for RSI(2) to move back below its centerline (50). Similarly, when a security trades above its 200-day SMA and RSI(2) moves below 5, chartists could filter this signal by waiting for RSI(2) to move above 50. This would signal that prices have indeed made some sort of short-term turn. The chart above shows Google with RSI(2) signals filtered with a cross of the centerline (50). There were good signals and bad signals. Notice that the October sell signal did not go into effect because GOOG was above the 200-day SMA by the time RSI moved below 50. Also, note that gaps can wreak havoc on trades. The mid-July, mid-October and mid-January gaps occurred during earnings season. [hashtag](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/rsi-2#the_bottom_line) The Bottom Line ------------------------------------------------------------------------------------------------------------------------------------------------------------ The RSI(2) strategy allows traders to partake in an ongoing trend. Connors states that traders should buy pullbacks, not breakouts. Conversely, traders should sell oversold bounces, not support breaks. This strategy fits with his philosophy. Even though Connors' tests show that stops hurt performance, it would be prudent for traders to develop an exit and stop-loss strategy for any trading system. Traders could exit longs when conditions become overbought or set a trailing stop. Similarly, traders could exit shorts when conditions become oversold. Remember that this article is designed as a starting point for developing a trading system. Use these ideas to augment your trading style, risk-reward preferences and personal judgments. [Click herearrow-up-right](https://stockcharts.com/h-sc/ui?s=$SPX&p=D&yr=0&mn=6&dy=0&id=p75665509237&listNum=30&a=256742750) for a chart of the S&P 500 with RSI(2). [hashtag](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/rsi-2#suggested_scans) Suggested Scans ------------------------------------------------------------------------------------------------------------------------------------------------------------ ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/rsi-2#rsi_2_buy_signal) RSI(2) Buy Signal This scan searches for stocks that have just had an RSI(2) Buy Signal. ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/rsi-2#rsi_2_sell_signal) RSI(2) Sell Signal This scan searches for stocks that have just had an RSI(2) Sell Signal. [hashtag](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/rsi-2#period_rsi_strategy_faqs) FAQs 2-Period RSI Strategy -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- chevron-rightWhat is the 2-period RSI strategy?[hashtag](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/rsi-2#what-is-the-2-period-rsi-strategy) The 2-period RSI strategy is a mean-reversion trading strategy developed by Larry Connors, designed to buy or sell securities after a corrective period within an ongoing trend. chevron-rightWhat does a 2-period RSI below 10 indicate?[hashtag](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/rsi-2#what-does-a-2-period-rsi-below-10-indicate) A 2-period RSI below 10 indicates that the security is deeply oversold and presents a potential buying opportunity. chevron-rightWhat does a 2-period RSI above 90 indicate?[hashtag](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/rsi-2#what-does-a-2-period-rsi-above-90-indicate) A 2-period RSI above 90 suggests the security is significantly overbought and may offer a short-selling opportunity. chevron-rightHow do I identify the major trend in the 2-period RSI strategy?[hashtag](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/rsi-2#how-do-i-identify-the-major-trend-in-the-2-period-rsi-strategy) The major trend is identified using a 200-day simple moving average (SMA). If the security is above its 200-day SMA, the trend is up, and you should look for buying opportunities. If it's below, the trend is down, and you should look for short-selling opportunities. chevron-rightCan the 2-period RSI strategy be used to find market tops or bottoms?[hashtag](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/rsi-2#can-the-2-period-rsi-strategy-be-used-to-find-market-tops-or-bottoms) No, the 2-period RSI strategy is not designed to identify major tops or bottoms; it's a short-term strategy aimed at trends. chevron-rightWhat is the suggested timing for placing orders using this strategy?[hashtag](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/rsi-2#what-is-the-suggested-timing-for-placing-orders-using-this-strategy) Orders can be placed just before the market close or on the subsequent open. Connors recommends the before-the-close approach. chevron-rightHow can false signals be filtered in this strategy?[hashtag](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/rsi-2#how-can-false-signals-be-filtered-in-this-strategy) False signals can be filtered by waiting for RSI(2) to move back below its centerline (50) for short positions, or above 50 for long positions after reaching extreme levels. chevron-rightWhat is Connors' philosophy regarding pullbacks and breakouts?[hashtag](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/rsi-2#what-is-connors-philosophy-regarding-pullbacks-and-breakouts) According to Connors, you should buy on pullbacks, not breakouts, and sell on oversold bounces, not support breaks. [PreviousThe Pre-Holiday Effectchevron-left](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/the-pre-holiday-effect) [NextSix-Month Cycle MACDchevron-right](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/six-month-cycle-macd) Last updated 1 year ago Was this helpful? * [What Is the 2-Period RSI Strategy?](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/rsi-2#what_is_the_2-period_rsi_strategy) * [Strategy](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/rsi-2#strategy) * [Trading Examples](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/rsi-2#trading_examples) * [Tweaking the 2-Period RSI Strategy](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/rsi-2#tweaking_the_2-period_rsi_strategy) * [The Bottom Line](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/rsi-2#the_bottom_line) * [Suggested Scans](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/rsi-2#suggested_scans) * [RSI(2) Buy Signal](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/rsi-2#rsi_2_buy_signal) * [RSI(2) Sell Signal](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/rsi-2#rsi_2_sell_signal) * [FAQs 2-Period RSI Strategy](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/rsi-2#period_rsi_strategy_faqs) Was this helpful? sun-brightdesktopmoon Copy [type = stock] and [today's sma(20,volume) > 40000] and [today's sma(60,close) > 20] and [today's close > today's sma(200,close)] and [5 x today's rsi(2)] Copy [type = stock] and [today's sma(20,volume) > 40000] and [today's sma(60,close) > 20] and [today's close < today's sma(200,close)] and [today's rsi(2) x 95] sun-brightdesktopmoon --- # Trading the Death Cross | ChartSchool | StockCharts.com It sounds a bit menacing, and perhaps that’s the point. It’s called the Death Cross, and traders have collectively referred to this particular moving average crossover as an endpoint for an uptrend or bullish conditions. [hashtag](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/moving-average-trading-strategies/trading-the-death-cross#what_is_a_death_cross) What is a Death Cross? ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- The Death Cross is a bearish chart pattern that forms when a short-term moving average, typically the 50-day simple moving average (SMA), crosses below a long-term moving average, most commonly a 200-day SMA. The Death Cross is a bearish signal as it indicates that an asset’s price may likely undergo further declines. It also indicates the possibility that an uptrend may have met its endpoint—a reversal toward an emerging downtrend or toward an indecisive (sideways) trading range. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FGVTsFYzUOLE8e0f2WuG3%252Fdeath-cross.jpg%3Falt%3Dmedia%26token%3D89841c5a-1668-4ad1-a71c-4f1531c388e8&width=768&dpr=4&quality=100&sign=8f4d7306&sv=2) Example of a Death Cross [hashtag](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/moving-average-trading-strategies/trading-the-death-cross#taking_a_broader_view_of_the_moving_average_crossovers) Taking a Broader View of the Moving Average Crossovers ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- To better understand the Death Cross in relation to its bullish twin, the Golden Cross, let’s view both in context using the more commonly adopted 50-day SMA and 200-day SMA. Note: The keyword here is “conditions.” * When the 50-day SMA is above the 200-day SMA, it generally indicates bullish conditions. * When the 50-day SMA is below the 200-day SMA, it generally indicates bearish conditions. While an asset is always in one of those two states, neither state can tell us that price is definitively in an uptrend or downtrend. Instead, it tells us that the general conditions based on these two moving averages are currently (or may still be) bullish or bearish. Bullish or bearish contexts can change, and that’s why it’s important to view the market from different angles to get a more accurate reading. [hashtag](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/moving-average-trading-strategies/trading-the-death-cross#what_happens_after_a_death_cross) What Happens After a Death Cross? --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- A bearish pattern or event, a Death Cross can indicate several potentialities whose outcomes may vary. * An uptrend may have reached a relative or a more significant peak. * Prices have declined with enough consistency or momentum to have brought the faster moving average below the slower moving average. * Selling activity has intensified enough to cause either a sudden drop in prices or a steady decline over a period of time. * Market sentiment may be increasingly bearish, as evidenced by falling prices. [hashtag](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/moving-average-trading-strategies/trading-the-death-cross#how_can_you_trade_with_the_death_cross) How Can You Trade With the Death Cross -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Generally, traders and investors alike use the Death Cross to identify or confirm a bearish reversal in the market. **Death Cross as a Confirmation Signal.** Traders seeking a broader view of trend conditions might look to the crossover event as a significant indicator that the market environment may be turning bearish. **Death Cross as a Signal to Reduce Exposure.** Longer term investors who actively rebalance their portfolios commonly use the crossover as a signal to potentially reduce their exposure to assets exhibiting this pattern. **Death Cross as a Short Entry Signal.** Traders looking to go short may use the Death Cross as a precondition for a “short” strategy. **Death Cross as a Stop-Loss Level.** Traders who are short a given market may look to the Death Cross price point or range to help determine appropriate stop-loss levels. [hashtag](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/moving-average-trading-strategies/trading-the-death-cross#what_to_watch_out_for_when_using_a_death_cross) What To Watch Out For When Using a Death Cross ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/moving-average-trading-strategies/trading-the-death-cross#not_all_crossovers_are_the_same) Not All Crossovers Are the Same Technical analyst Tom McClellan makes a distinction between two types of crossovers: * **Type 1 Crossing**, where prices are extended far from the actual crossover price point (and in the direction of the crossover); and * **Type 2 Crossing**, where prices retrace the actual price point in which the crossover event took place. McClellan advances the notion that type 1 crossover events can mark a temporary or more significant reversal (shown below). ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FEOpdANcyCLA1giH0fKcF%252Ftype1-golden-cross.jpg%3Falt%3Dmedia%26token%3D816d95c3-3f88-4fca-9ab8-67ae6d7be08e&width=768&dpr=4&quality=100&sign=556289b&sv=2) In contrast, a type 2 event may often indicate a resumption of the trend prior to the crossover (the Golden Cross example below shares the same principle as the Death Cross but in reverse). ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FNmXwPMKvIGp3Da5dNfaS%252Fgolden-cross-type2.jpg%3Falt%3Dmedia%26token%3D37246e9c-6fc6-499f-8510-76319516e3f8&width=768&dpr=4&quality=100&sign=15edbe3b&sv=2) **Price Action and Market Conditions Following a Death Cross Event** What happens after a Death Cross matters. If the price action shows indications of bullishness (meaning, prices are rising or spiking upward), it indicates a possibility that the bearish indication may or may not follow through. Furthermore, declines on low volume may indicate a lack of conviction on the part of sellers or market bears. Death Cross and Golden Cross events occasionally fail to follow through. It’s important to garner as much market and economic insight to better contextualize the price action that may be occurring, notably when the market betrays a sense of indecision following either of these major signals. * * * [hashtag](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/moving-average-trading-strategies/trading-the-death-cross#conclusion) Conclusion ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ Popular wisdom has it that the Death Cross is virtually a “death knell” to a given asset’s bullish conditions. While this may generally be true, at least on a superficial level, much more nuance goes into the interpretation of such an event. Be sure to view Death Crosses from a wider angle of interpretation. The pattern can “indicate” a potential condition, but it’s the trader’s job to fine-tune such insights into a more accurate read on the market. [PreviousHow To Trade Price-to-Moving Average Crossoverschevron-left](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/moving-average-trading-strategies/how-to-trade-price-to-moving-average-crossovers) [NextTrading Using the Golden Crosschevron-right](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/moving-average-trading-strategies/trading-using-the-golden-cross) Last updated 1 year ago Was this helpful? * [What is a Death Cross?](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/moving-average-trading-strategies/trading-the-death-cross#what_is_a_death_cross) * [Taking a Broader View of the Moving Average Crossovers](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/moving-average-trading-strategies/trading-the-death-cross#taking_a_broader_view_of_the_moving_average_crossovers) * [What Happens After a Death Cross?](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/moving-average-trading-strategies/trading-the-death-cross#what_happens_after_a_death_cross) * [How Can You Trade With the Death Cross](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/moving-average-trading-strategies/trading-the-death-cross#how_can_you_trade_with_the_death_cross) * [What To Watch Out For When Using a Death Cross](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/moving-average-trading-strategies/trading-the-death-cross#what_to_watch_out_for_when_using_a_death_cross) * [Not All Crossovers Are the Same](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/moving-average-trading-strategies/trading-the-death-cross#not_all_crossovers_are_the_same) * [Conclusion](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/moving-average-trading-strategies/trading-the-death-cross#conclusion) Was this helpful? sun-brightdesktopmoon sun-brightdesktopmoon --- # Stochastic Pop and Drop | ChartSchool | StockCharts.com The Stochastic Pop was developed by Jake Bernstein and modified by David Steckler, who wrote a corresponding article for _Stocks & Commodities Magazine_ in August 2000. Bernstein's original Stochastic Pop is a trading strategy that identifies price pops when the Stochastic Oscillator surges above 80. Steckler modified this strategy by adding conditional filters using the Average Directional Index (ADX) and the weekly Stochastic Oscillator. This article draws on both methodologies to present another modified version of the Stochastic Pop suited for SharpCharts. [hashtag](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/stochastic-pop-and-drop#trading_bias) Trading Bias ------------------------------------------------------------------------------------------------------------------------------------------------------------------------ Establishing a short-term trading bias with a long-term indicator is a recurring theme for trading strategies. Long-term indicators are used to define the path of least resistance, which forms the basis of the trading bias. Traders look for bullish setups when the bias is bullish and bearish setups when the bias is bearish. Trading in the direction of this bias is like riding a bike with the wind at your back. The chances of success are higher when the bigger trend is in your favor. Steckler used the weekly Stochastic Oscillator to define the trading bias. In particular, the trading bias was deemed bullish when the weekly 14-period Stochastic Oscillator was above 50 and rising. This article will use a 70-period daily Stochastic Oscillator so all indicators can be displayed on the chart. This timeframe is simply five times the 14-day timeframe. The trading bias will be considered bullish when above 50. The chart below shows F5 Networks (FFIV) with the 70-period Stochastic Oscillator defining the bullish and bearish periods. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FBSbngTqFVgnryUDUMA6n%252Fts-stopop-01-ffiv-sto70.png%3Falt%3Dmedia%26token%3D47852515-312e-4a52-8e60-463ce8ef44a8&width=768&dpr=4&quality=100&sign=297273f&sv=2) Chart 1 - Stochastic Pop [hashtag](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/stochastic-pop-and-drop#waiting_for_a_range) Waiting for a Range -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Once the trading bias is established, Steckler used the Average Directional Index (ADX) to define a slowdown in the trend. ADX measures the strength of the trend and a move below 20 signals a weak trend. Steckler preferred ADX below 15, but would use 20 as well. A high and rising ADX signals a strengthening trend, while a low and falling ADX indicates that the trend is weakening. On the chart below, 14-period ADX on the daily chart shows a weak trend when it moves below 20. Notice how Gap (GPS) moved into a trading range as ADX dipped below 20 twice (yellow areas). ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FXrNSmYVLqZsjH6dpvwVM%252Fts-stopop-02-gps-adx.png%3Falt%3Dmedia%26token%3D06d04d32-6b02-4488-b5ba-67e4d2737286&width=768&dpr=4&quality=100&sign=49768663&sv=2) Chart 2 - Stochastic Pop [hashtag](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/stochastic-pop-and-drop#buy_signal) Buy Signal -------------------------------------------------------------------------------------------------------------------------------------------------------------------- Once the bullish prerequisites are in place, a buy signal triggers when the 14-day Stochastic Oscillator surges above 80 and the stock breaks out on above-average volume. Steckler preferred consolidation breakouts when using this strategy, but chartists should still consider high volume signals that do not produce breakouts. Sometimes the initial high-volume surge is a precursor to a breakout. For volume assessment, chartists can compare current volume to the 250-day moving average of volume, which is essentially the one year average. Volume above the one-year average would be deemed strong. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FhdXJpzmh3I5RqNVdP9lo%252Fts-stopop-03-mar-bull.png%3Falt%3Dmedia%26token%3D6c6c90af-f9a9-4d6b-8381-a0c54fe59ea7&width=768&dpr=4&quality=100&sign=a39b44ec&sv=2) Chart 3 - Stochastic Pop The chart above shows Marriott (MAR) with a bullish Stochastic Pop signal in early January. Notice that this signal occurred before the actual breakout. High volume confirmed the surge off of support and acted as a precursor to the actual breakout. Traders acting on the Stochastic Pop signal would have had a better risk-reward ratio than those acting on the breakout. [hashtag](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/stochastic-pop-and-drop#stops_and_targets) Stops and Targets ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Once a signal triggers, traders need to work out the stop-loss and price target, preferably before a position is taken. Plan your trade and trade your plan. Traders must plan for the worst because not all signals will work out profitably. If a consolidation formed, the stop-loss can be set just below consolidation support. Because the Stochastic Pop occurs with an upward surge in prices, there is usually a trough or reaction low just before this surge. A stop-loss can also be placed just below this trough. The chart below shows JB Hunt (JBHT) with two Stochastic Pop signals. The stop-loss for the first signal is based on the low just before Pop 1. The stop-loss for the second signal is based on the low just below Pop 2. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FNTDrGwB3h1tR1vF4BZIt%252Fts-stopop-04-jbht-stop.png%3Falt%3Dmedia%26token%3D976f0fcb-426b-48a6-8627-6285879c8258&width=768&dpr=4&quality=100&sign=3dedc21&sv=2) Chart 4 - Stochastic Pop Should prices continue higher, traders can set a trailing stop-loss to lock in profits. The pink line shows the Parabolic SAR being used to set a trailing stop-loss. The 14-day Stochastic Oscillator can also be used to define a stall or downturn in short-term momentum. A move below 50 signals a momentum shift that can also be used to take profits or tighten a stop. [hashtag](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/stochastic-pop-and-drop#sell_signal) Sell Signal ---------------------------------------------------------------------------------------------------------------------------------------------------------------------- Astute chartists will realize that this buy signal can easily be reverse-engineered to produce sell signals. In fact, we can name the sell version the “Stochastic Drop.” A sell signal is indicated by the following elements: * 70-day Stochastic Oscillator is below 50. * 14-day Average Directional Index (ADX) is below 20. * 14-day Stochastic Oscillator plunges below 20. * Stock declines on high volume and/or breaks consolidation support. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252F1JTFNrUSIYxpAGcHlKip%252Fts-stopop-05-hrb-sell.png%3Falt%3Dmedia%26token%3Dbf25edee-c35e-4fb9-b40e-f1401b017784&width=768&dpr=4&quality=100&sign=39a385a7&sv=2) Chart 5 - Stochastic Pop The chart above shows HR Block (HRB) with a Stochastic Drop signal in mid-July 2011. The trading bias was bearish because the 70-day Stochastic Oscillator was below 50 and the Average Directional Index (ADX) was below 20. The Stochastic Drop triggered when the Stochastic Oscillator plunged below 20. Even though volume did not expand and the stock did not break support, this signal foreshadowed a sharp decline in late July and early August. Volume confirmation is not as important for bear signals. [hashtag](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/stochastic-pop-and-drop#indicator_tweaks) Indicator Tweaks -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- While a consolidation does not always form when ADX moves below 20, a move below this level usually coincides with a flattening of the trend. Requiring ADX to move below 15 will improve the chances of catching a consolidation on the price chart. Also note that securities with relatively low volatility, such as utilities, may have relatively low ADX ranges and require a move below 10 to identify consolidations. The 14-day Stochastic Oscillator is a relatively active momentum indicator that moves from oversold (20) to overbought (80) quite frequently. This means there will be plenty of signals to choose from. Chartists should be careful of signals that occur after short dips in the Stochastic Oscillator. In other words, a surge from 65 to 85 (20 points) is not as potent as a surge from 35 to 85 (50 points). [hashtag](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/stochastic-pop-and-drop#conclusion) The Bottom Line ------------------------------------------------------------------------------------------------------------------------------------------------------------------------- The Stochastic Pop and Drop signals are designed to catch a continuation move within the bigger trend. While the signals are easy to quantify, chartists should also consult the price chart and look for confirming patterns. A bull flag or falling wedge breakout can be used to confirm a bullish Stochastic Pop, while a bear flag or rising wedge breakdown can be used to confirm a bearish Stochastic Drop. Chartists should also consult the price chart to determine the risk-reward ratio and make sure it is acceptable before taking a position. Keep in mind that this article is designed as a starting point for trading system development. Use these ideas to augment your trading style, risk-reward preferences and personal judgments. [Click herearrow-up-right](https://stockcharts.com/h-sc/ui?s=SPY&p=D&b=5&g=0&id=p77540024268) for a chart of the S&P 500 ETF (SPY) with the Stochastic Pop and Drop indicators already set up. [hashtag](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/stochastic-pop-and-drop#suggested_scans) Suggested Scans ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/stochastic-pop-and-drop#bullish_stochastic_pop) Bullish Stochastic Pop This scan searches for stocks that have just had a Stochastic Pop buy signal. ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/stochastic-pop-and-drop#bearish_stochastic_drop) Bearish Stochastic Drop This scan searches for stocks that have just had a Stochastic Drop sell signal. [PreviousSlope Performance Trendchevron-left](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/slope-performance-trend) [NextSwing Chartingchevron-right](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/swing-charting) Last updated 1 year ago Was this helpful? * [Trading Bias](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/stochastic-pop-and-drop#trading_bias) * [Waiting for a Range](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/stochastic-pop-and-drop#waiting_for_a_range) * [Buy Signal](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/stochastic-pop-and-drop#buy_signal) * [Stops and Targets](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/stochastic-pop-and-drop#stops_and_targets) * [Sell Signal](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/stochastic-pop-and-drop#sell_signal) * [Indicator Tweaks](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/stochastic-pop-and-drop#indicator_tweaks) * [The Bottom Line](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/stochastic-pop-and-drop#conclusion) * [Suggested Scans](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/stochastic-pop-and-drop#suggested_scans) * [Bullish Stochastic Pop](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/stochastic-pop-and-drop#bullish_stochastic_pop) * [Bearish Stochastic Drop](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/stochastic-pop-and-drop#bearish_stochastic_drop) Was this helpful? sun-brightdesktopmoon Copy [type = stock] and [today's sma(20,volume) > 40000] and [today's sma(60,close) > 20] and [Slow Stoch %K (70,3) > 50] and [ADX Line (14) < 20] and [today's Slow Stoch %K (14,3) x 80] Copy [type = stock] and [today's sma(20,volume) > 40000] and [today's sma(60,close) > 20] and [Slow Stoch %K (70,3) < 50] and [ADX Line (14) < 20] and [20 x today's Slow Stoch %K (14,3)] sun-brightdesktopmoon --- # Trend Quantification and Asset Allocation | ChartSchool | StockCharts.com Long-term trend reversals are often processes, not sudden events. Think of the long-term trend as a super tanker, which requires time to reverse direction. Speedboats, on the other hand, represent the short-term trend, which can quickly reverse. Moreover, the long-term trend can range from several months to a few years. With this in mind, chartists should consider more than one long-term timeframe when defining the long-term trend. This article will show how to use an array of [moving averages](https://chartschool.stockcharts.com/table-of-contents/technical-indicators-and-overlays/technical-overlays/moving-averages-simple-and-exponential) to define the long-term trend and identify the trend reversals with fewer whipsaws. [hashtag](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/trend-quantification-and-asset-allocation#moving_averages) Moving Averages ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ Despite their lag, moving averages are the most popular indicator for trend identification. Chartists often look at price levels relative to a specific moving average. The trend is considered up when prices are above a particular moving average and down when below it. That's what you'd think, anyway—a shame it isn't that easy. The chart below shows the S&P 500 ETF (SPY) with four long-term exponential moving averages (EMAs). Chartists can define the trend by comparing the price level to the 125-day EMA, 150-day EMA, 175-day EMA, and 200-day EMA. However, the trend does not always reverse when prices move above or below these moving averages. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FsSSeWJn1XTrytM2YJeLk%252Fts-trend-01-spy-mova.png%3Falt%3Dmedia%26token%3D47c2afa8-a380-4ca6-8b3b-955ab3fbaca4&width=768&dpr=4&quality=100&sign=541bdeab&sv=2) Applying long-term exponential moving averages to a price chart. There was a clear downtrend from the 2007 high until the March 2009 low, but SPY broke above these moving averages at the end of 2007 and again in the first half of 2008. These breakouts did not signal a trend reversal because the ETF soon peaked and continued lower. After this downtrend, there was an extended uptrend from March 2009 to April 2012. Again, the ETF broke below these moving averages in 2010 and again in 2011. These breaks did not signal a trend reversal because the ETF quickly recovered and continued higher. [hashtag](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/trend-quantification-and-asset-allocation#smoothing_the_closing_price) Smoothing the Closing Price ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ The chart above shows that daily price data can be volatile, meaning moving average breaks are prone to false signals. A long-term trend identification system should be able to capture the long-term trend without so many whipsaws (false signals). It is impossible to totally eliminate whipsaws, but you can reduce them by smoothing the price data and then using the long-term moving averages. The chart below shows the Dow Industrials SPDR (DIA) as a 50-day EMA (black). Four exponential moving averages are also displayed to define the trend. Note that the actual price plot for DIA is invisible on this SharpChart. This allows you to focus on the smoothed 50-day EMA for signals. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FEfoLX7gMtVzWTQubWd1P%252Fts-trend-02-dia-50ema.png%3Falt%3Dmedia%26token%3D0ae5cc8f-ae4b-4c68-9b43-ae6686119c60&width=768&dpr=4&quality=100&sign=3f2f4b69&sv=2) Smoothing the price data with exponential moving averages. Smoothing the price data with a 50-day EMA increases the lag factor but also decreases the number of whipsaws. The blue arrow shows where DIA held the moving averages and maintained the trend. The blue circle shows a whipsaw towards the end of 2011. There were fewer whipsaws on this chart compared to the SPY chart, meaning this system did a better job with trend identification. [hashtag](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/trend-quantification-and-asset-allocation#using_the_percent_price_oscillator) Using the Percentage Price Oscillator ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Chartists can also use the [Percentage Price Oscillator](https://chartschool.stockcharts.com/table-of-contents/technical-indicators-and-overlays/technical-indicators/percentage-price-oscillator-ppo) (PPO) to determine if the 50-day EMA is above or below a long-term EMA. For example, the PPO set at (50,200,1) measures the percentage difference between the 50-day EMA and 200-day EMA. The PPO is positive when the shorter EMA is above the longer EMA and negative when the shorter EMA is below the longer EMA. This indicator makes it easy to identify moving average crossovers. The chart below shows four versions of the PPO comparing the 50-day EMA to longer EMAs. When all four PPOs are positive, the trend is strong and bullish. The trend slowly weakens as the PPOs turn negative, and it becomes full-blown bearish when all four are negative. Trend reversals are a process and usually take a few weeks. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252Fo51af0AiUdsl8CKJtjhW%252Fts-trend-03-spy-ppo.png%3Falt%3Dmedia%26token%3D6deb5bad-818b-488e-ab6d-503963e092ed&width=768&dpr=4&quality=100&sign=c66752d7&sv=2) Four versions of the PPO comparing the EMA(50) to longer-term EMAs. [hashtag](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/trend-quantification-and-asset-allocation#fixing_the_long-term_ema) Fixing the Long-term EMA ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ The example in the above chart uses a fixed medium-term exponential moving average (50-day EMA) and variable long-term EMAs. You can also fix the long-term EMA and make the shorter EMAs variable. For example, the long-term EMA could be fixed at 150 days, and the other EMAs could scale up in equal increments. The chart below shows four Percent Price Oscillators with a fixed long-term EMA (150 days) and four variable EMAs (20, 40, 60 and 80 days). ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FfwekSEyg0wBOapxWBqJe%252Fts-trend-04-mdy-ltfixed.png%3Falt%3Dmedia%26token%3D4991e914-64c8-4d06-b000-0059fd807cd9&width=768&dpr=4&quality=100&sign=ae3e9dfa&sv=2) PPO with fixed long-term EMA and four variable EMAs. Chartists can use positive and negative readings to assess the trend. The PPO (20,150,1) will be the most sensitive and the first to change, while the PPO (80,150,1) will be the least sensitive and the last to change. Chartists can then quantify trend direction and strength based on the number of indicators in positive or negative territory. Again, the trend is full-blown bullish when all four PPOs are positive and full-blown bearish when all four are negative. [hashtag](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/trend-quantification-and-asset-allocation#asset_allocation) Asset Allocation -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Many investing strategies scale into positions as the evidence turns bullish and scale out as the evidence turns bearish. Chartists can use these four PPOs to develop a scaling system based on a strengthening or weakening trend. For example, the four PPOs could represent one-quarter of the trend and one-quarter of the portfolio allocation. When one PPO turns positive and the trend is one-quarter bullish, investors could invest 25 percent in the stock market. The second tranche could be invested when a second PPO turns positive and so forth. An investor would be 100 percent invested by the time all four are in positive territory. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FI1YNQZ4Gr9Wbw2lkaMnp%252Fts-trend-05-dia-alloc.png%3Falt%3Dmedia%26token%3De57f9c4c-219b-49d6-9570-24ffd0d6c84a&width=768&dpr=4&quality=100&sign=76c6b4b8&sv=2) Using the Percentage Price Oscillator indicator for asset allocation. In a similar fashion, an investor could reduce long positions by 25% when the first PPO turns negative. Market exposure would be subsequently reduced as the other PPOs turn negative; the investor would be out of the market when all four are negative. [hashtag](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/trend-quantification-and-asset-allocation#indicator_tweaks) Indicator Tweaks -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Other indicators can help define the trend and determine asset allocation. For example, the slope indicator can be used similarly, though you will most likely want to adjust the timeframe. The chart below shows four versions of the slope indicator (50-day, 75-day, 100-day and 125-day). The trend is up when the slope is positive and down when the slope is negative. The degree of strength depends on how many slope indicators are positive. A strong uptrend is in play when all four are positive, while a strong downtrend is present when all four are negative. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252F6EWOas6mcjY0ZGTNuFdk%252Fts-trend-06-spy-slope.png%3Falt%3Dmedia%26token%3Df83f858c-0d66-48a1-bc91-862757c5a658&width=768&dpr=4&quality=100&sign=73995aa&sv=2) Chart 6 - Trend Composite [hashtag](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/trend-quantification-and-asset-allocation#conclusion) The Bottom Line ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Trend identification is often the starting point for many trading and investing strategies. Relatively passive investors can use a long-term trend following strategy to define the trend and allocate funds accordingly. Active traders can use these trend indicators to define the long-term trend and then look for trades in the direction of that trend. This article shows examples using long-term exponential moving averages and long-term settings for the Percent Price Oscillator (PPO). These settings can, of course, be tweaked to suit your trading or investing style. Keep in mind that this article is designed as a starting point for trading system development. Use these ideas to augment your trading style, risk-reward preferences and personal judgments. [Click herearrow-up-right](https://stockcharts.com/h-sc/ui?s=SPY&p=D&yr=1&mn=6&dy=0&id=p23212476121) for a chart of the S&P 500 ETF (SPY) with the four exponential moving averages and Percent Price Oscillators used above. [hashtag](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/trend-quantification-and-asset-allocation#suggested_scans) Suggested Scans to Identify Trends ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/trend-quantification-and-asset-allocation#long-term_downtrend) Long-term Downtrend This scan finds stocks that are in a long-term downtrend. ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/trend-quantification-and-asset-allocation#long-term_uptrend) Long-term Uptrend This scan finds stocks that are in a long-term uptrend. [hashtag](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/trend-quantification-and-asset-allocation#further_study) Further Study -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- John Murphy's _Technical Analysis of the Financial Markets_ has a chapter devoted to stock market indicators (breadth) and their various uses. Murphy also covers moving averages and other signals that can be used to augment this system. [**Technical Analysis of the Financial Markets**arrow-up-right](https://www.amazon.com/dp/0735200661?k=technical%20analysis%20of%20the%20financial%20markets&ref_=nb_sb_ss_w_scx-ent-pd-bk-d_l_k0_1_10&crid=SPAISH7NQBQW&sprefix=Technical%20) John J. Murphy [PreviousSwing Chartingchevron-left](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/swing-charting) [NextIndex & Market Indicator Catalogchevron-right](https://chartschool.stockcharts.com/table-of-contents/index-and-market-indicator-catalog) Last updated 1 year ago Was this helpful? * [Moving Averages](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/trend-quantification-and-asset-allocation#moving_averages) * [Smoothing the Closing Price](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/trend-quantification-and-asset-allocation#smoothing_the_closing_price) * [Using the Percentage Price Oscillator](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/trend-quantification-and-asset-allocation#using_the_percent_price_oscillator) * [Fixing the Long-term EMA](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/trend-quantification-and-asset-allocation#fixing_the_long-term_ema) * [Asset Allocation](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/trend-quantification-and-asset-allocation#asset_allocation) * [Indicator Tweaks](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/trend-quantification-and-asset-allocation#indicator_tweaks) * [The Bottom Line](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/trend-quantification-and-asset-allocation#conclusion) * [Suggested Scans to Identify Trends](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/trend-quantification-and-asset-allocation#suggested_scans) * [Long-term Downtrend](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/trend-quantification-and-asset-allocation#long-term_downtrend) * [Long-term Uptrend](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/trend-quantification-and-asset-allocation#long-term_uptrend) * [Further Study](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models/trading-strategies/trend-quantification-and-asset-allocation#further_study) Was this helpful? sun-brightdesktopmoon Copy [type = stock] and [today's sma(20,volume) > 40000] and [today's sma(60,close) > 20] and [today's ema(20,close) > today's ema(150,close) ] and [today's ema(40,close) > today's ema(150,close) ] and [today's ema(60,close) > today's ema(150,close) ] and [today's ema(80,close) > today's ema(150,close) ] Copy [type = stock] and [today's sma(20,volume) > 40000] and [today's sma(60,close) > 20] and [today's ema(20,close) < today's ema(150,close) ] and [today's ema(40,close) < today's ema(150,close) ] and [today's ema(60,close) < today's ema(150,close) ] and [today's ema(80,close) < today's ema(150,close) ] sun-brightdesktopmoon --- # Sector Rotation Analysis | ChartSchool | StockCharts.com Sector Rotation Analysis attempts to link current strengths and weaknesses in the stock market with the general business cycle based on the relative performance of the eleven S&P Sector SPDR ETFs. Once you have identified the strong and weak sectors, you can then compare the results to a theoretical business cycle chart and - hopefully - determine the part of the business cycle the market is in. That information, in turn, may help you predict which sectors will strengthen in the coming weeks and months. [hashtag](https://chartschool.stockcharts.com/table-of-contents/market-analysis/sector-rotation-analysis#the_business_cycle) The Business Cycle ---------------------------------------------------------------------------------------------------------------------------------------------------- The graph below shows the idealized business cycle and the intermarket relationships during a normal inflationary environment. This cycle map is based on one shown in the _Intermarket Review_ by Martin J. Pring (www.pring.com). The business cycle is shown as a sine wave. The first three stages are part of an economic contraction (weakening, bottoming and strengthening). Stage 3 shows the economy in a contraction phase, beginning to strengthen after a bottom. As the sine wave crosses the centerline, the economy moves from contraction to the three phases of economic expansion (strengthening, topping and weakening). Stage 6 shows the economy in an expansion phase, starting to weaken after a top. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252F53RrIMo9QQSEvbrPu5yJ%252Fim-10-cycle.png%3Falt%3Dmedia%26token%3D069179ae-3b24-484e-a05e-e779b54bc128&width=768&dpr=4&quality=100&sign=8ef76fdf&sv=2) Sector Rotation Analysis * **Stage 1** shows the economy contracting and bonds turning up as interest rates decline. Economic weakness favors loose monetary policy and the lowering of interest rates, which is bullish for bonds. * **Stage 2** marks a bottom in the economy and the stock market. Even though economic conditions have stopped deteriorating, the economy is still not at an expansion stage or actually growing. However, stocks anticipate an expansion phase by bottoming before the contraction period ends. * **Stage 3** shows a vast improvement in economic conditions as the business cycle prepares to move into an expansion phase. Stocks are rising and commodities are anticipating an expansion phase by turning up. * **Stage 4** marks a period of full expansion. Both stocks and commodities are rising, but bonds turn lower because the expansion increases inflationary pressures. To combat this, interest rates start to move higher. * **Stage 5** marks a peak in economic growth and the stock market. Even though the expansion continues, the economy grows at a slower pace because rising interest rates and rising commodity prices take their toll. Stocks anticipate a contraction phase by peaking before the expansion actually ends. Commodities remain strong and peak after stocks. * **Stage 6** marks a deterioration in the economy as the business cycle prepares to move from an expansion phase to a contraction phase. Stocks have already been moving lower and commodities now turn lower in anticipation of decreased demand from the deteriorating economy. Keep in mind that this is the ideal business cycle in an inflationary environment. Stocks and bonds advance together in stages 2 and 3. Similarly, both decline in stages 5 and 6. This would not be the case in a deflationary environment, when bonds and stocks would move in opposite directions. [hashtag](https://chartschool.stockcharts.com/table-of-contents/market-analysis/sector-rotation-analysis#sector_rotation) Sector Rotation ---------------------------------------------------------------------------------------------------------------------------------------------- Unsurprisingly, the business cycle influences the rotation of stock market sectors and industry groups. Certain sectors perform better than others during specific phases of the business cycle. Knowing the stage of the business cycle can help investors position themselves in the right sectors and avoid the wrong ones. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FqFILaNHLDTXbqQIdsNt7%252Fsectorcycle.png%3Falt%3Dmedia%26token%3Db63cf92c-c3bb-46a2-9a12-d0e3a4ebc47f&width=768&dpr=4&quality=100&sign=81a6faa3&sv=2) Sector Rotation Model The graph above shows the economic cycle in blue, the stock market cycle in orange and the best performing sectors at the top. The blue economic cycle corresponds to the business cycle shown above. The centerline marks the contraction/expansion threshold for the economy. Notice how the orange market cycle leads the business cycle. The market turns up and crosses the centerline before the economic cycle turns. Similarly, the market turns down and crosses below the centerline ahead of the economic cycle. The technology sector is the first to turn up in anticipation of a bottom in the economy. Consumer discretionary stocks are not far behind. These two groups are the big leaders at the beginning of a bull run in the stock market. The top of the market cycle is marked by relative strength in materials and energy. These sectors benefit from a rise in commodity prices and a rise in demand from an expanding economy. The tipping point for the market comes when leadership shifts from energy to consumer staples. This is a sign that commodity prices are starting to hurt the economy. The market peak and downturn are followed by a contraction in the economy. At this stage, the Fed starts to lower interest rates and the yield curve steepens. Falling interest rates benefit debt-laden utilities and business at banks. The steepening yield curve also improves profitability at banks and encourages lending. Low interest rates and easy money eventually lead to a market bottom and the cycle repeats itself. The two sector PerfCharts below show relative performance for the (at that time, nine) sector SPDRs near the 2007 peak and after the 2003 bottom. The S&P 500 peaked from July to October 2007 and broke down in the fourth quarter of that year. In the summer of 2007, the Energy and Materials sectors were leading the market and showing relative strength. Also, notice that Consumer Discretionary was lagging the S&P 500. This sector action matches what is expected at a market top. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252Fa02ouOZfyEAYVktJbM6H%252Fim-12-perftop.png%3Falt%3Dmedia%26token%3Daf5e0d9c-cd29-493f-b579-5ac3193679c7&width=768&dpr=4&quality=100&sign=98101e0f&sv=2) Sector Rotation Analysis The S&P 500 bottomed in March 2003 and began a powerful bull run until the peak in the summer of 2007. The Consumer Discretionary and Technology sectors led the first move off the March 2003 low. These two showed relative strength that affirmed the importance of the 2003 bottom. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FW6cLKHHQjVfulBcpEiY7%252Fim-13-perfbottom.png%3Falt%3Dmedia%26token%3D4e7b438d-3812-4b57-b4b4-653480d8601f&width=768&dpr=4&quality=100&sign=ae897053&sv=2) Sector Rotation Analysis [hashtag](https://chartschool.stockcharts.com/table-of-contents/market-analysis/sector-rotation-analysis#staples_discretionary_ratio) Staples/Discretionary Ratio ---------------------------------------------------------------------------------------------------------------------------------------------------------------------- Chartists can also compare the performance of the consumer discretionary sector to the consumer staples sector for clues on the economy. Stocks in the consumer discretionary sector represent products that are optional. These industry groups include apparel retailers and producers, shoe retailers and producers, restaurants and autos. Stocks in the consumer staples sector represent products that are necessary, such as soap, toothpaste, groceries, beverages, and medicine. The consumer discretionary sector tends to outperform when the economy is buoyant and growing. This sector under-performs when the economy is struggling or contracting. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FblWuLzp7usfbDYNoDi29%252Fim-9-xlyxlp.png%3Falt%3Dmedia%26token%3Db42f7102-e388-4335-9e32-a5adbd928d81&width=768&dpr=4&quality=100&sign=bda02bad&sv=2) Stapes/Discretionary Ratio Chartists can compare the performance of these two with a simple ratio chart of the Consumer Discretionary SPDR (XLY) divided by the Consumer Staples SPDR (XLP). The chart above shows this ratio with the S&P 500. The ratio was rather choppy in 2004, 2005 and 2006. A strong downtrend took hold in 2007 as the consumer discretionary sector under-performed the consumer staples sector. Put another way, the consumer staples sector outperformed the consumer discretionary sector. Also, notice that this ratio peaked ahead of the S&P 500 in 2007 and broke support ahead of the market. The ratio bottomed ahead of the S&P 500 in late 2008 and broke resistance as the S&P 500 surged off the March 2009 low. circle-info **Explore.** [Click here for a live Sector PerfChartarrow-up-right](https://stockcharts.com/freecharts/perf.html?[SECT]) . [hashtag](https://chartschool.stockcharts.com/table-of-contents/market-analysis/sector-rotation-analysis#additional_resources) Additional Resources -------------------------------------------------------------------------------------------------------------------------------------------------------- ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/market-analysis/sector-rotation-analysis#articles) Articles * [StockCharts Historical Sector Data](https://help.stockcharts.com/data-and-ticker-symbols/data-availability/historical-data/stockcharts-historical-sector-data) . Learn how StockCharts provides historical data for analysis of the Real Estate and Communication Services sectors. ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/market-analysis/sector-rotation-analysis#further_study) Further Study [**Trading with Intermarket Analysis**arrow-up-right](https://store.stockcharts.com/products/trading-with-intermarket-analysis?_pos=1&_sid=424fd271a&_ss=r) John Murphy [![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2Fschool.stockcharts.com%2Flib%2Fexe%2Ffetch.php%3Fmedia%3Dmarket_analysis%3Asector_rotation_analysis%3Astore_murphy_tradingwithintermarketanalysis.jpg&width=300&dpr=4&quality=100&sign=ae8377dd&sv=2)arrow-up-right](https://store.stockcharts.com/products/trading-with-intermarket-analysis) [PreviousDow Theorychevron-left](https://chartschool.stockcharts.com/table-of-contents/market-analysis/dow-theory) [NextIntermarket Analysischevron-right](https://chartschool.stockcharts.com/table-of-contents/market-analysis/intermarket-analysis) Last updated 1 year ago Was this helpful? * [The Business Cycle](https://chartschool.stockcharts.com/table-of-contents/market-analysis/sector-rotation-analysis#the_business_cycle) * [Sector Rotation](https://chartschool.stockcharts.com/table-of-contents/market-analysis/sector-rotation-analysis#sector_rotation) * [Staples/Discretionary Ratio](https://chartschool.stockcharts.com/table-of-contents/market-analysis/sector-rotation-analysis#staples_discretionary_ratio) * [Additional Resources](https://chartschool.stockcharts.com/table-of-contents/market-analysis/sector-rotation-analysis#additional_resources) * [Articles](https://chartschool.stockcharts.com/table-of-contents/market-analysis/sector-rotation-analysis#articles) * [Further Study](https://chartschool.stockcharts.com/table-of-contents/market-analysis/sector-rotation-analysis#further_study) Was this helpful? sun-brightdesktopmoon sun-brightdesktopmoon --- # Intermarket Analysis | ChartSchool | StockCharts.com [hashtag](https://chartschool.stockcharts.com/table-of-contents/market-analysis/intermarket-analysis#what_is_intermarket_analysis) What is Intermarket Analysis? --------------------------------------------------------------------------------------------------------------------------------------------------------------------- Intermarket analysis is a branch of technical analysis that examines the correlations between four major asset classes: stocks, bonds, commodities, and currencies. In his classic book _Trading with Intermarket Analysis_, John Murphy notes that chartists can use these relationships to identify the stage of the business cycle and improve their forecasting abilities. There are clear relationships between stocks and bonds, bonds and commodities, and commodities and the Dollar. Knowing these relationships can help chartists determine the stage of the investing cycle, select the best sectors, and avoid the worst-performing sectors. Much of the material for this article comes from _Trading with Intermarket Analysis_ and [John Murphy's Market Messagearrow-up-right](https://stockcharts.com/members/index.html) articles at StockCharts.com. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FtpQDXANKKsBkjpc1UmBR%252Fim-1-intermarket.png%3Falt%3Dmedia%26token%3D01d515ab-44ee-4d09-8e67-1caf398743b5&width=768&dpr=4&quality=100&sign=6b5db584&sv=2) Intermarket Analysis [hashtag](https://chartschool.stockcharts.com/table-of-contents/market-analysis/intermarket-analysis#inflationary_relationships) Inflationary Relationships ---------------------------------------------------------------------------------------------------------------------------------------------------------------- The intermarket relationships depend on the forces of inflation or deflation. In a “normal” inflationary environment, stocks and bonds are positively correlated. This means they both move in the same direction. The world was in an inflationary environment from the 1970s to the late 1990s. These are the key intermarket relationships in an inflationary environment: * **Positive** relationship between bonds and stocks * Bonds changing direction ahead of stocks (typically) * **Inverse** relationship between bonds and commodities * **Inverse** relationship between the US dollar and commodities **POSITIVE:** When one goes up, the other goes up also. **INVERSE:** When one goes up, the other goes down. In an inflationary environment, stocks react positively to falling interest rates (rising bond prices). Low interest rates stimulate economic activity and boost corporate profits. Remember that an “inflationary environment” does not mean runaway inflation. It simply means the inflationary forces are stronger than the deflationary forces. [hashtag](https://chartschool.stockcharts.com/table-of-contents/market-analysis/intermarket-analysis#deflationary_relationships) Deflationary Relationships ---------------------------------------------------------------------------------------------------------------------------------------------------------------- Murphy notes that the world shifted from an inflationary environment to a deflationary environment around 1998. It started with the collapse of the Thai Baht in the summer of 1997 and quickly spread to neighboring countries, becoming known as the “Asian Currency Crisis.” Asian central bankers raised interest rates to support their currencies, but high interest rates choked their economies and compounded the problems. The subsequent threat of global deflation pushed money out of stocks and into bonds. Stocks fell sharply, Treasury bonds rose sharply and US interest rates declined. This marked a decoupling between stocks and bonds that would last for many years. Big deflationary events continued as the Nasdaq bubble burst in 2000, the housing bubble burst in 2006 and the financial crisis hit in 2007. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FxjyFm9a4JNAzZkc6hsph%252Fim-3-usbspxdefla.png%3Falt%3Dmedia%26token%3D71ba5820-9e87-49eb-98b1-15312f1461f3&width=768&dpr=4&quality=100&sign=28b0e8cb&sv=2) Intermarket Analysis The intermarket relationships during a deflationary environment are largely the same except for one. Stocks and bonds are inversely correlated during a deflationary environment. This means stocks rise when bonds fall and vice versa. By extension, this also means that stocks have a positive relationship with interest rates. Yes, stocks and interest rates rise together. Even though the two PerfCharts below look like exact opposites of each other, they are still both illustrating a deflationary environment, because stocks and bonds are inversely correlated in both charts. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252Fg2uJAWLUNJ7XOHC9xNEY%252Fim-4-spxusbinver1.png%3Falt%3Dmedia%26token%3D1fcdeef4-f49a-44e9-a6bf-36416e7fb2dc&width=768&dpr=4&quality=100&sign=11d95c6a&sv=2) Intermarket Analysis ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FQYHPgTv6exyOngiSxFGf%252Fim-5-spxusbinver2.png%3Falt%3Dmedia%26token%3Db8cc782a-647a-4468-9ed8-82cbe0791bcc&width=768&dpr=4&quality=100&sign=1c6de6e2&sv=2) Intermarket Analysis Obviously, deflationary forces change the whole dynamic. Deflation is negative for stocks and commodities but positive for bonds. A rise in bond prices and drop in interest rates increases the deflationary threat, putting downward pressure on stocks. Conversely, a decline in bond prices and rise in interest rates decreases the deflationary threat, which is positive for stocks. The list below summarizes the key intermarket relationships during a deflationary environment. * **Inverse** relationship between bonds and stocks * **Inverse** relationship between commodities and bonds * **Positive** relationship between stocks and commodities * **Inverse** relationship between the US Dollar and commodities [hashtag](https://chartschool.stockcharts.com/table-of-contents/market-analysis/intermarket-analysis#dollar_and_commodities) Dollar and Commodities -------------------------------------------------------------------------------------------------------------------------------------------------------- While the Dollar and currency markets are part of intermarket analysis, the Dollar is a bit of a wild card. As far as stocks are concerned, a weak Dollar is not bearish unless accompanied by a serious advance in commodity prices. Obviously, a big advance in commodities would be bearish for bonds. By extension, a weak Dollar is also generally bearish for bonds. A weak Dollar acts an economic stimulus by making US exports more competitive. This benefits large multinational stocks that derive a large portion of their sales overseas. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FVDW6mK2Uno67svPqvibD%252Fim-6-usdcrb.png%3Falt%3Dmedia%26token%3D678ed737-6676-4e88-86ea-282900f4e1e2&width=768&dpr=4&quality=100&sign=119d5b14&sv=2) Intermarket Analysis What are the effects of a rising Dollar? A country's currency is a reflection of its economy and national balance sheet. Countries with strong economies and strong balance sheets have stronger currencies. Countries with weak economies and big debt burdens are subject to weaker currencies. A rising Dollar puts downward pressure on commodity prices because many commodities are priced in Dollars, such as oil. Bonds benefit from a decline in commodity prices because this reduces inflationary pressures. Stocks can also benefit from a decline in commodity prices because this reduces the costs for raw materials. [hashtag](https://chartschool.stockcharts.com/table-of-contents/market-analysis/intermarket-analysis#industrial_metals_and_bonds) Industrial Metals and Bonds ------------------------------------------------------------------------------------------------------------------------------------------------------------------ Not all commodities are created equal. Oil, in particular, is prone to supply shocks. Unrest in oil-producing countries or regions usually causes oil prices to surge. A price rise due to a supply shock is negative for stocks, but a price rise due to rising demand can be positive for stocks. This is also true for industrial metals, which are less susceptible to these supply shocks. As a result, chartists can watch industrial metal prices for clues on the economy and the stock market. Rising prices reflect increasing demand and a healthy economy; falling prices reflect decreasing demand and a weak economy. The chart below shows a clear positive relationship between industrial metals and the S&P 500. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FUDCymZc8nkZg1qrCyQlG%252Fim-7-djainspx.png%3Falt%3Dmedia%26token%3D67c1c94b-1115-4489-965d-23d0564a1e96&width=768&dpr=4&quality=100&sign=3360b174&sv=2) Intermarket Analysis Industrial metals and bonds rise for different reasons. Metals move when the economy is growing and/or when inflationary pressures are building. Bonds decline under these circumstances and rise when the economy is weak and/or deflationary pressures are building. A ratio of the two can provide further insights into economic strength/weakness or inflation/deflation. The ratio of industrial metal prices to bond prices will rise when economic strength and inflation are prevalent; conversely, the ratio will decline when economic weakness and deflation are dominant. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252F2umN4Au46SxELmpxApNO%252Fim-8-djainusb.png%3Falt%3Dmedia%26token%3Dfe2fa4f3-6983-4ee4-a924-02c6bfae8c11&width=768&dpr=4&quality=100&sign=51fcd665&sv=2) Intermarket Analysis [hashtag](https://chartschool.stockcharts.com/table-of-contents/market-analysis/intermarket-analysis#conclusions) Conclusions ---------------------------------------------------------------------------------------------------------------------------------- Intermarket analysis is a valuable tool for long-term or medium-term analysis. While these intermarket relationships generally work over longer periods of time, they are subject to draw-downs or periods when the relationships do not work. Big events, such as the 2008 US financial crisis, can throw certain relationships out of whack for a few months. Furthermore, the techniques shown in this article should be used in conjunction with other technical analysis techniques. The Industrial Metals/Bond Ratio chart could be part of a basket of broad market indicators designed to assess the overall strength or weakness of the stock market. One indicator or one relationship should not be used on its own to make a sweeping assessment of market conditions. [hashtag](https://chartschool.stockcharts.com/table-of-contents/market-analysis/intermarket-analysis#perfchart) PerfChart ------------------------------------------------------------------------------------------------------------------------------ John Murphy's Intermarket Study PerfChart allows chartists to compare the performance of the S&P 500, CRB Index, US Dollar Index and the 30-Year US Treasury Bond. The slider at the bottom of the chart makes it easy to travel back in time and view the relationship changes as they happen. * * * ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FM8bHBTieqVGCRCmVMIYB%252Fscc-icon.png%3Falt%3Dmedia%26token%3D34ef3915-ca84-44cd-b0ba-a8c136fb9a8f&width=40&dpr=4&quality=100&sign=865c0383&sv=2)[Click here for a live Intermarket PerfChartarrow-up-right](https://stockcharts.com/freecharts/perf.html?[IM]) . * * * [hashtag](https://chartschool.stockcharts.com/table-of-contents/market-analysis/intermarket-analysis#additional_resources) Additional Resources ---------------------------------------------------------------------------------------------------------------------------------------------------- ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/market-analysis/intermarket-analysis#articles) Articles * [Sector Rotation Analysis](https://chartschool.stockcharts.com/table-of-contents/market-analysis/sector-rotation-analysis) [hashtag](https://chartschool.stockcharts.com/table-of-contents/market-analysis/intermarket-analysis#further_study) Further Study -------------------------------------------------------------------------------------------------------------------------------------- [**Trading with Intermarket Analysis**arrow-up-right](https://www.amazon.com/Trading-Intermarket-Analysis-Financial-Exchange-Traded/dp/1119210011) John Murphy [PreviousSector Rotation Analysischevron-left](https://chartschool.stockcharts.com/table-of-contents/market-analysis/sector-rotation-analysis) [NextThe DecisionPoint Chart Gallerychevron-right](https://chartschool.stockcharts.com/table-of-contents/market-analysis/the-decisionpoint-chart-gallery) Last updated 1 year ago Was this helpful? * [What is Intermarket Analysis?](https://chartschool.stockcharts.com/table-of-contents/market-analysis/intermarket-analysis#what_is_intermarket_analysis) * [Inflationary Relationships](https://chartschool.stockcharts.com/table-of-contents/market-analysis/intermarket-analysis#inflationary_relationships) * [Deflationary Relationships](https://chartschool.stockcharts.com/table-of-contents/market-analysis/intermarket-analysis#deflationary_relationships) * [Dollar and Commodities](https://chartschool.stockcharts.com/table-of-contents/market-analysis/intermarket-analysis#dollar_and_commodities) * [Industrial Metals and Bonds](https://chartschool.stockcharts.com/table-of-contents/market-analysis/intermarket-analysis#industrial_metals_and_bonds) * [Conclusions](https://chartschool.stockcharts.com/table-of-contents/market-analysis/intermarket-analysis#conclusions) * [PerfChart](https://chartschool.stockcharts.com/table-of-contents/market-analysis/intermarket-analysis#perfchart) * [Additional Resources](https://chartschool.stockcharts.com/table-of-contents/market-analysis/intermarket-analysis#additional_resources) * [Articles](https://chartschool.stockcharts.com/table-of-contents/market-analysis/intermarket-analysis#articles) * [Further Study](https://chartschool.stockcharts.com/table-of-contents/market-analysis/intermarket-analysis#further_study) Was this helpful? sun-brightdesktopmoon sun-brightdesktopmoon --- # The DecisionPoint Chart Gallery | ChartSchool | StockCharts.com [hashtag](https://chartschool.stockcharts.com/table-of-contents/market-analysis/the-decisionpoint-chart-gallery#scoreboard-header) DecisionPoint Market Scoreboard ----------------------------------------------------------------------------------------------------------------------------------------------------------------------- Below is a summary of the DecisionPoint signals from the Market Trend signals. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252F8nVLd7yr2BYma5053f9C%252Fspaces_ERtrZrZOhufFzk6ZQO4B_uploads_iiJTjWJNluPPC7mcbkya_dp-chart-gallery-header.webp%3Falt%3Dmedia%26token%3D860db9e1-d30c-4bd8-ade6-a6429037cacf&width=768&dpr=4&quality=100&sign=6c00257e&sv=2) circle-info **Learn More.** Check out the [LIVE ChartGalleryarrow-up-right](https://stockcharts.com/freecharts/dpgallery.html) Read on to learn more about all of the charts within the DecisionPoint ChartGallery, or [click herearrow-up-right](https://stockcharts.com/freecharts/dpgallery.html) to visit the LIVE ChartGallery now. [hashtag](https://chartschool.stockcharts.com/table-of-contents/market-analysis/the-decisionpoint-chart-gallery#market-trend-charts) Market Trend Charts ------------------------------------------------------------------------------------------------------------------------------------------------------------- ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/market-analysis/the-decisionpoint-chart-gallery#daily-trend-analysis) Daily Trend Analysis DP Trend Model rules: If the 50-day EMA (purple) is above the 200-day EMA (blue), the long-term trend is bullish. If the 20-day EMA (green) is above the 50-day EMA (purple), the intermediate-term trend is bullish. If the 20-day EMA (green) is moving higher, the short-term trend is bullish. When the black PMO line is moving higher, the trend is bullish. If the black PMO line is above the red signal line, the trend is strongly bullish. _Important: Wait until the market has closed for the day to ensure that any new signals are correct._ ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252Fl1KfyvVZpgGmItl05WQM%252Fdp-daily-trend-analysis.png%3Falt%3Dmedia%26token%3D5a303d12-5b7a-4ec2-a5a8-0b41d7b05217&width=768&dpr=4&quality=100&sign=2f90099d&sv=2) Click [HEREarrow-up-right](https://stockcharts.com/freecharts/dpgallery.html) to view the LIVE DecisionPoint ChartGallery ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/market-analysis/the-decisionpoint-chart-gallery#weekly-trend-analysis) Weekly Trend Analysis DP Trend Model rules: If the 17-week EMA (green) is above the 43-week EMA (purple), the long-term trend is bullish. When the black PMO line is moving higher, the trend is bullish. If the black PMO line is above the red signal line, the trend is strongly bullish. _Important: Wait until the end of the week to ensure that any new signals are correct._ ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FIxrJcjpzivKaBiyoSSo5%252Fdp-weekly-trend-analysis.png%3Falt%3Dmedia%26token%3Da7326c5f-7ab8-4b42-8898-9fceab9d2248&width=768&dpr=4&quality=100&sign=cf20f8db&sv=2) Click [HEREarrow-up-right](https://stockcharts.com/freecharts/dpgallery.html) to view the LIVE DecisionPoint ChartGallery ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/market-analysis/the-decisionpoint-chart-gallery#monthly-trend-analysis) Monthly Trend Analysis DP Trend Model rules: If the 6-month EMA (green) is above the 10-month EMA (purple), the very long-term trend is bullish. When the black PMO line is moving higher, the trend is bullish. If the black PMO line is above the red signal line, the trend is strongly bullish. _Important: Wait until the end of the month to ensure that any new signals are correct._ ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FlGnecNwdtT8Y0cOHk7Oo%252Fdp-monthly-trend-analysis.png%3Falt%3Dmedia%26token%3D96bf47f8-4af4-443a-aede-f7a110ae9316&width=768&dpr=4&quality=100&sign=f4f89198&sv=2) Click [HEREarrow-up-right](https://stockcharts.com/freecharts/dpgallery.html) to view the LIVE DecisionPoint ChartGallery * * * [hashtag](https://chartschool.stockcharts.com/table-of-contents/market-analysis/the-decisionpoint-chart-gallery#market-condition-charts) Market Condition Charts --------------------------------------------------------------------------------------------------------------------------------------------------------------------- The market's overbought/oversold condition can be identified by reviewing our Short-Term Oscillators and the more stable Intermediate-Term Oscillators. Two multi-period charts are also included - one based on EMA signals and one based on PMO signals. ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/market-analysis/the-decisionpoint-chart-gallery#short-term-oscillators) Short-Term Oscillators The Swenlin Trading Oscillator for Breadth (STO-B) and the Swenlin Trading Oscillator for Volume (STO-V) provide overbought/oversold readings that are useful for roughly 1 to 2 weeks. Watch for extreme readings that signal important overbought/oversold market conditions. Also watch for divergences between the breadth-based and volume-based oscillators. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FbI9uLXFHBC99Ay7bRBmm%252Fdp-shorterm-oscillators.png%3Falt%3Dmedia%26token%3D10478278-35c9-4b45-8529-b64debc7636e&width=768&dpr=4&quality=100&sign=70aaeeb8&sv=2) Click [HEREarrow-up-right](https://stockcharts.com/freecharts/dpgallery.html) to view the LIVE DecisionPoint ChartGallery ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/market-analysis/the-decisionpoint-chart-gallery#intermediate-term-oscillators) Intermediate-Term Oscillators The [Price Momentum Oscillator (PMO)](https://chartschool.stockcharts.com/table-of-contents/glossary/glossary-p#price_momentum_oscillator_pmo) , the Volume Trend Oscillator, the [Intermediate-Term Breadth Momentum oscillator (ITBM)](https://chartschool.stockcharts.com/table-of-contents/market-indicators/decisionpoint-intermediate-term-breadth-momentum-oscillator-itbm) , and [the Intermediate-Term Volume Momentum oscillator (ITVM)](https://chartschool.stockcharts.com/table-of-contents/market-indicators/decisionpoint-intermediate-term-volume-momentum-oscillator-itvm) can help identify significant overbought/oversold conditions that often precede important trend changes over several weeks/months. Watch for extreme readings in these oscillators that provide "early warnings" for market turns. Also, watch for intermediate-term buy/sell signals when these oscillators cross their 10-day EMAs. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252Fw6iE5p8Xl93PMrdtU6fA%252Fdp-intermediate-term-oscillators.png%3Falt%3Dmedia%26token%3Dccd19ecc-b9e7-430c-8808-e8bd94a72a4e&width=768&dpr=4&quality=100&sign=d1cb14ab&sv=2) Click [HEREarrow-up-right](https://stockcharts.com/freecharts/dpgallery.html) to view the LIVE DecisionPoint ChartGallery ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/market-analysis/the-decisionpoint-chart-gallery#stocks-above-their-20-day-50-day-200-day-ema) Stocks Above Their 20-day/50-day/200-day EMA These indicators show the market's short-term (green), intermediate-term (red), and long-term (blue) strengths. Watch for signs of weakness in all three lines before a major market downturn. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FklBKYw3YzmQN6dvV5NPL%252Fdp-stocks-above-ema.png%3Falt%3Dmedia%26token%3D1587cd13-5d19-4abe-925b-530c4e8912f3&width=768&dpr=4&quality=100&sign=c835f45e&sv=2) Click [HEREarrow-up-right](https://stockcharts.com/freecharts/dpgallery.html) to view the LIVE DecisionPoint ChartGallery ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/market-analysis/the-decisionpoint-chart-gallery#pmo-signal-analysis) PMO Signal Analysis These indicators show the percentage of stocks in the index that have one of three different signals based on the PMO. "% PMO Rising" (green) gives short-term, volatile signals. "% PMO Crossover Buy" (red) gives less volatile, longer-term signals. "% PMO Above Zero" (blue) gives the longest-term signals. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FpKtWTBDFoxl0pRWJuvkP%252Fdp-pmo-signal-analysis.png%3Falt%3Dmedia%26token%3D6b1a88b0-b489-4b8d-a17a-e173dbd23169&width=768&dpr=4&quality=100&sign=a253ade6&sv=2) Click [HEREarrow-up-right](https://stockcharts.com/freecharts/dpgallery.html) to view the LIVE DecisionPoint ChartGallery * * * [hashtag](https://chartschool.stockcharts.com/table-of-contents/market-analysis/the-decisionpoint-chart-gallery#breadth-charts) Breadth Charts --------------------------------------------------------------------------------------------------------------------------------------------------- Breadth Charts are generally based on statistics like Advancers vs. Decliners and New 52-Week Highs vs. New 52-Week Lows. ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/market-analysis/the-decisionpoint-chart-gallery#advance-decline-lines) Advance-Decline Lines The [Advance-Decline Line](https://chartschool.stockcharts.com/table-of-contents/market-indicators/advance-decline-line) and [Advancing-Declining Volume Line](https://chartschool.stockcharts.com/table-of-contents/market-indicators/advance-decline-volume-line) should confirm new market highs/lows. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FtomsBI5daYdvh1tngfOF%252Fdp-advance-decline-lines.png%3Falt%3Dmedia%26token%3D0b205964-31c2-40c8-8556-240b0961c6e1&width=768&dpr=4&quality=100&sign=408d3c90&sv=2) Click [HEREarrow-up-right](https://stockcharts.com/freecharts/dpgallery.html) to view the LIVE DecisionPoint ChartGallery ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/market-analysis/the-decisionpoint-chart-gallery#net-new-52-week-highs) Net New 52-Week Highs The [Net New 52-Week Highs Indicator](https://chartschool.stockcharts.com/table-of-contents/market-indicators/net-new-52-week-highs) should rise when the market moves higher. When New Highs fail to confirm new highs in the index, a reversal is possible. The "Average Price Relative to 52-Week Range" indicator shows the average "position" of all the stocks that make up the index, where each stock's position is measured relative to its 52-week high and low (using a scale of 0 to 100). This indicator should also be rising when the market is moving higher. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FKQVk66SlFhMteu31iKqh%252Fdp-net-new-52-week-high.png%3Falt%3Dmedia%26token%3D00afb019-671a-49a6-a3f5-53f829781278&width=768&dpr=4&quality=100&sign=750b0a87&sv=2) Click [HEREarrow-up-right](https://stockcharts.com/freecharts/dpgallery.html) to view the LIVE DecisionPoint ChartGallery ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/market-analysis/the-decisionpoint-chart-gallery#mcclellan-oscillator) McClellan Oscillator * The [McClellan Oscillator](https://chartschool.stockcharts.com/table-of-contents/market-indicators/mcclellan-oscillator) reflects the short-term strength and direction of the market. Readings above zero are bullish, readings below zero are bearish. Readings above +100 or below -100 are extreme and often signal a market turn. * The [McClellan Summation Index](https://chartschool.stockcharts.com/table-of-contents/market-indicators/mcclellan-summation-index) provides a longer-term view. In general, if the index is rising, it is bullish, and if it is falling, bearish. Typically, the index ranges from -1000 to +1000. In the bottom panel are the two different EMAs of the (invisible) Advance/Decline ratio that are used to calculate the McClellan Oscillator. The red 39-day EMA is called the "5% Index" and the blue 19-day EMA is called the "10% Index." If both the 5% and 10% Indexes are positive, the market is strengthening. If they are both negative, it is weakening. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FJf3LOEzElVqbfiKaoX5w%252Fdp-mcClellan_osc.png%3Falt%3Dmedia%26token%3D47acf525-ec7f-4298-8043-40162a4470ed&width=768&dpr=4&quality=100&sign=76394470&sv=2) Click [HEREarrow-up-right](https://stockcharts.com/freecharts/dpgallery.html) to view the LIVE DecisionPoint ChartGallery * * * [hashtag](https://chartschool.stockcharts.com/table-of-contents/market-analysis/the-decisionpoint-chart-gallery#sentiment-charts) Sentiment Charts ------------------------------------------------------------------------------------------------------------------------------------------------------- DecisionPoint uses both survey-based sentiment data and the Rydex Total Asset report as proxies for investor sentiment. Significant market tops and bottoms are normally accompanied by extremes of investor sentiment which often signal reversals. For example, market participants are extremely bullish at tops, just before the market starts to head down. Basically, once everyone gets on the bandwagon, the wheels will generally fall off. ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/market-analysis/the-decisionpoint-chart-gallery#investor-sentiment) Investor Sentiment Sentiment data is updated on Thursdays. Bullish signals occurs if the green bars fall below 35 (green line in upper section) or if the red bars exceed -50 (green line in lower section). Bearish signals occurs if the green bars exceed 55 (red line in upper section) or if the red bars don't cross -20 (red line in the lower section). ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252Feeo4XZ1t2rjMYI4ca2Ln%252Fdp-investor-sentiment.png%3Falt%3Dmedia%26token%3D33ac971d-4778-4ed9-9a18-580423b6d45e&width=768&dpr=4&quality=100&sign=781a72e5&sv=2) Click [HEREarrow-up-right](https://stockcharts.com/freecharts/dpgallery.html) to view the LIVE DecisionPoint ChartGallery ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/market-analysis/the-decisionpoint-chart-gallery#rydex-total-asset-ratio) Rydex Total Asset Ratio Using daily data from Rydex Mutual Funds inflows and outflows, this chart measures what real investors are doing with real money based on their opinion of the market. The Rydex Total Asset Ratio (black line) is calculated by adding together Rydex Money Market Assets (green) and Rydex Bear Funds Assets (blue) and then dividing that total by Rydex Bull Funds Assets (purple). The result is then plotted on an inverse scale so that bullish readings are up and bearish readings are down. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FR3Zj29DUQI97hTLkTxIh%252Fdp-rydex-total-asset-ratio.png%3Falt%3Dmedia%26token%3D5ec3325e-1f1e-477e-97ae-3c80f7de86a7&width=768&dpr=4&quality=100&sign=d36b9f4e&sv=2) Click [HEREarrow-up-right](https://stockcharts.com/freecharts/dpgallery.html) to view the LIVE DecisionPoint ChartGallery [PreviousIntermarket Analysischevron-left](https://chartschool.stockcharts.com/table-of-contents/market-analysis/intermarket-analysis) [NextDecisionPoint Rydex Asset Analysischevron-right](https://chartschool.stockcharts.com/table-of-contents/market-analysis/decisionpoint-rydex-asset-analysis) Last updated 1 year ago Was this helpful? * [DecisionPoint Market Scoreboard](https://chartschool.stockcharts.com/table-of-contents/market-analysis/the-decisionpoint-chart-gallery#scoreboard-header) * [Market Trend Charts](https://chartschool.stockcharts.com/table-of-contents/market-analysis/the-decisionpoint-chart-gallery#market-trend-charts) * [Daily Trend Analysis](https://chartschool.stockcharts.com/table-of-contents/market-analysis/the-decisionpoint-chart-gallery#daily-trend-analysis) * [Weekly Trend Analysis](https://chartschool.stockcharts.com/table-of-contents/market-analysis/the-decisionpoint-chart-gallery#weekly-trend-analysis) * [Monthly Trend Analysis](https://chartschool.stockcharts.com/table-of-contents/market-analysis/the-decisionpoint-chart-gallery#monthly-trend-analysis) * [Market Condition Charts](https://chartschool.stockcharts.com/table-of-contents/market-analysis/the-decisionpoint-chart-gallery#market-condition-charts) * [Short-Term Oscillators](https://chartschool.stockcharts.com/table-of-contents/market-analysis/the-decisionpoint-chart-gallery#short-term-oscillators) * [Intermediate-Term Oscillators](https://chartschool.stockcharts.com/table-of-contents/market-analysis/the-decisionpoint-chart-gallery#intermediate-term-oscillators) * [Stocks Above Their 20-day/50-day/200-day EMA](https://chartschool.stockcharts.com/table-of-contents/market-analysis/the-decisionpoint-chart-gallery#stocks-above-their-20-day-50-day-200-day-ema) * [PMO Signal Analysis](https://chartschool.stockcharts.com/table-of-contents/market-analysis/the-decisionpoint-chart-gallery#pmo-signal-analysis) * [Breadth Charts](https://chartschool.stockcharts.com/table-of-contents/market-analysis/the-decisionpoint-chart-gallery#breadth-charts) * [Advance-Decline Lines](https://chartschool.stockcharts.com/table-of-contents/market-analysis/the-decisionpoint-chart-gallery#advance-decline-lines) * [Net New 52-Week Highs](https://chartschool.stockcharts.com/table-of-contents/market-analysis/the-decisionpoint-chart-gallery#net-new-52-week-highs) * [McClellan Oscillator](https://chartschool.stockcharts.com/table-of-contents/market-analysis/the-decisionpoint-chart-gallery#mcclellan-oscillator) * [Sentiment Charts](https://chartschool.stockcharts.com/table-of-contents/market-analysis/the-decisionpoint-chart-gallery#sentiment-charts) * [Investor Sentiment](https://chartschool.stockcharts.com/table-of-contents/market-analysis/the-decisionpoint-chart-gallery#investor-sentiment) * [Rydex Total Asset Ratio](https://chartschool.stockcharts.com/table-of-contents/market-analysis/the-decisionpoint-chart-gallery#rydex-total-asset-ratio) Was this helpful? sun-brightdesktopmoon sun-brightdesktopmoon --- # Elliott Wave Analysis Articles | ChartSchool | StockCharts.com [**Introduction to Elliott Wave Theory**](https://chartschool.stockcharts.com/table-of-contents/market-analysis/elliott-wave-analysis-articles/introduction-to-elliott-wave-theory) The terminology, waves, rules, and fundamental concepts that define Elliott Wave Theory. [**Identifying Elliott Wave Patterns**](https://chartschool.stockcharts.com/table-of-contents/market-analysis/elliott-wave-analysis-articles/identifying-elliott-wave-patterns) An overview of Elliott Wave types and their identification criteria. [**Guidelines for Applying Elliott Wave Theory**](https://chartschool.stockcharts.com/table-of-contents/market-analysis/elliott-wave-analysis-articles/guidelines-for-applying-elliott-wave-theory) Six guidelines for applying Elliott Wave analysis, personality observations, and how to mark Elliott Waves on SharpCharts. [PreviousThe Wyckoff Method: A Tutorialchevron-left](https://chartschool.stockcharts.com/table-of-contents/market-analysis/wyckoff-analysis-articles/the-wyckoff-method-a-tutorial) [NextIntroduction to Elliott Wave Theorychevron-right](https://chartschool.stockcharts.com/table-of-contents/market-analysis/elliott-wave-analysis-articles/introduction-to-elliott-wave-theory) Last updated 1 year ago Was this helpful? Was this helpful? sun-brightdesktopmoon sun-brightdesktopmoon --- # Wyckoff Analysis Articles | ChartSchool | StockCharts.com [**Wyckoff Market Analysis**](https://chartschool.stockcharts.com/table-of-contents/market-analysis/wyckoff-analysis-articles/wyckoff-market-analysis) Describes how Richard D. Wyckoff approached broad market analysis. Learn how to define the broad market trend, identify major tops and bottoms, project prices and determine price position within a move. [**Wyckoff Stock Analysis**](https://chartschool.stockcharts.com/table-of-contents/market-analysis/wyckoff-analysis-articles/wyckoff-stock-analysis) Describes how Richard D. Wyckoff picked individual stocks. Learn how to isolate the strongest groups, cherry-pick stocks within these groups and manage the trade once it is underway. [**The Wyckoff Method: A Tutorial**](https://chartschool.stockcharts.com/table-of-contents/market-analysis/wyckoff-analysis-articles/the-wyckoff-method-a-tutorial) An alternate explanation of the Wyckoff analysis method with sections on Wyckoff's Five-Step Approach to the Market, his Price Cycle, his Supply/Demand analysis, his Buying and Selling tests and his P&F counting guide. [PreviousDecisionPoint Rydex Asset Analysischevron-left](https://chartschool.stockcharts.com/table-of-contents/market-analysis/decisionpoint-rydex-asset-analysis) [NextWyckoff Market Analysischevron-right](https://chartschool.stockcharts.com/table-of-contents/market-analysis/wyckoff-analysis-articles/wyckoff-market-analysis) Last updated 1 year ago Was this helpful? Was this helpful? sun-brightdesktopmoon sun-brightdesktopmoon --- # Introduction to Elliott Wave Theory | ChartSchool | StockCharts.com [hashtag](https://chartschool.stockcharts.com/table-of-contents/market-analysis/elliott-wave-analysis-articles/introduction-to-elliott-wave-theory#introduction) Introduction ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Elliott Wave Theory is a method of market analysis, based on the idea that the market forms the same types of patterns on a smaller timeframe (lesser degree) that it does on a longer timeframe (higher degree). These patterns provide clues as to what might happen next in the market. According to the theory, it does not depend on what timeframe you are analyzing; market movements follow the same types of patterns. The theory was developed by R.N. Elliott in the 1930s and was popularized by Robert Prechter in the 1970s. It claims that crowd behavior produces patterns and trends we see in markets; wave pattern, as defined by Elliott, is the physical manifestation of mass psychology in our world. These patterns not only appear in markets but anywhere humans make decisions en masse. Examples might include housing prices, fashion trends or how many people choose to ride the subway each day. In this section, we will introduce the rules of wave formation and the various patterns seen in Elliott Wave Theory. By the end of this section, you should have a good grasp on how Elliott Wave is applied and be able to form your own Elliott Wave analysis on charts. However, keep in mind that it takes practice to confidently apply Elliott Wave Theory. [hashtag](https://chartschool.stockcharts.com/table-of-contents/market-analysis/elliott-wave-analysis-articles/introduction-to-elliott-wave-theory#basic_sequence) Basic Sequence -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/market-analysis/elliott-wave-analysis-articles/introduction-to-elliott-wave-theory#motive_waves) Motive Waves ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252Fb0lkS9oiZ3ipqhk8ni1F%252Fwave1_3.png%3Falt%3Dmedia%26token%3D81abeb8d-59db-4616-a396-3277f2f49342&width=768&dpr=4&quality=100&sign=59bfd038&sv=2) The first half of an idealized Elliott Wave pattern is the Motive Wave, a wave that always advances in the direction of the trend of one larger degree. It is subdivided into five smaller waves, which are labeled 1, 2, 3, 4 and 5, as illustrated in the above chart. Within the motive wave, there are two types of smaller sub-waves: the Impulse Wave and the Diagonal Wave. You can read an explanation of each in the our ChartSchool article [Guidelines for Applying Elliott Wave Theory.](https://chartschool.stockcharts.com/table-of-contents/market-analysis/elliott-wave-analysis-articles/guidelines-for-applying-elliott-wave-theory) You will notice in the chart that three of these sub-waves advance (waves 1, 3 and 5) and two of them correct or move downward (2 and 4). Waves 1, 3 and 5 in the motive wave are called “actionary” sub-waves. These are usually motive waves themselves, in that they move in the same direction as the trend of one larger degree. Waves 2 and 4 are “corrective” sub-waves, moving in the opposite direction of the larger trend. The motive wave tends to move with relative ease in the direction of the larger trend. Consequently, it is easy to spot and interpret. There are three rules for Motive Wave formation that must be satisfied: * Wave 2 _always_ retraces (gives back) less than 100% of Wave 1. * Wave 4 _always_ retraces less than 100% of Wave 3. * Wave 3 _always_ travels beyond the end of Wave 1 and is _never_ the shortest wave. If we consider the actionary sub-waves as having five waves each, and the corrective sub-waves as having three waves each, then the larger motive wave would look something like the chart below. In this case, the actionary sub-waves are five waves each because they are in the direction of the trend of one larger degree - the larger motive wave. This type of pattern is labeled as a 5-3-5-3-5 structure. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FcdGBrxkbuHj6pGyRHvo3%252Fwave2.png%3Falt%3Dmedia%26token%3D885c2e90-5bdf-4c0b-b67b-c4dca25b2c3a&width=768&dpr=4&quality=100&sign=32a34d72&sv=2) ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/market-analysis/elliott-wave-analysis-articles/introduction-to-elliott-wave-theory#corrective_waves) Corrective Waves ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FgZsC8l5ZoeST8KFmx5XY%252Fwave3.png%3Falt%3Dmedia%26token%3D3e69461b-ed53-4e5f-8df5-5eed261048ed&width=768&dpr=4&quality=100&sign=e870739b&sv=2) In general, the corrective wave is depicted as a three-wave structure, as seen in the chart above. The three-wave structure has its sub-waves labeled as waves A, B and C. This can be misleading since not all corrective waves are exactly three-wave structures. The specifics of corrective wave structures will be discussed later, but for our general purpose, we will start with describing them as having three sub-waves. If we look at the structure, we will notice that Wave A and Wave C are both in the direction of the trend of one higher degree - in this case, the direction of the correction. Because of this (for this general example) we will show them as motive waves, each having a total of five waves. Wave B is traveling against the direction of the larger correction (trend of one higher degree) and will therefore be shown as having three waves. This type of pattern is labeled as a 5-3-5 structure. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FqxurA7X6YBO55jOqDBa8%252Fwave4.png%3Falt%3Dmedia%26token%3Dc4636ac1-74dd-4a94-bf08-f90ca25b7202&width=768&dpr=4&quality=100&sign=5983015c&sv=2) [hashtag](https://chartschool.stockcharts.com/table-of-contents/market-analysis/elliott-wave-analysis-articles/introduction-to-elliott-wave-theory#basic_cycle_structure) Basic Cycle Structure ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- The combination of a motive wave and a corrective wave is the general structure of the complete Elliott Wave cycle. This is illustrated as a structure with a total of eight waves. There is a five-wave advance (motive) in the direction of the trend of one larger degree, followed by a three-wave correction against the higher degree trend. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FDgRwH6H5rFNndeTdzpIi%252Fwave5.png%3Falt%3Dmedia%26token%3D8b54b7d1-6db1-4cf5-8d56-089e10c55fa8&width=768&dpr=4&quality=100&sign=aa728501&sv=2) The chart above shows the eight-wave sequence with a rising five-wave motive wave and a falling three-wave correction. You will notice that this movement, from beginning to end, finishes higher than it started (i.e., price increased). If you think about it, a 5-3 structure is the minimum requirement to achieve both fluctuation and progress in an up or down direction. Markets fluctuate - rise and fall - and they advance either up or down as they progress. Elliott noticed that the market repeated this 5-3 structure again and again. This was the foundation of his theory and is the general Elliott Wave cycle structure. Once the cycle ends, it begins again. It is expected that the market will make another five-wave advance after a correction ends. Please note that this does not necessarily mean five waves up and three waves down. In a declining trend, the pattern will advance down and correct higher. That means there will be a five-wave down sequence followed by a three-wave up sequence. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FTx9U5pfISjCBVWjIA4Kc%252Fwave6.png%3Falt%3Dmedia%26token%3D81a0113d-32d5-4a20-b9c5-2eef5b54be37&width=768&dpr=4&quality=100&sign=50a4e305&sv=2) The chart above shows this eight-wave structure in a declining market. Of course, it ends lower than where it started. If you saw this pattern on a chart, depending on the larger picture, you might expect another five waves down. Please keep in mind that this is simply a motive wave and a corrective wave. All markets advance and correct. The Elliott Wave Theory provides specific types of patterns that the market uses to do this, which we will cover below, but it all fits within this general cycle structure. [hashtag](https://chartschool.stockcharts.com/table-of-contents/market-analysis/elliott-wave-analysis-articles/introduction-to-elliott-wave-theory#fractal_nature) Fractal Nature -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- If we incorporate our expanded motive and corrective waves together, we will see that they make a more detailed general Elliott structure. We can see five advancing waves in the motive wave that make up Wave I, as well as three declining waves in the corrective wave that make up Wave II. However, notice that in Waves 1 and 2 of Wave I, the general Elliott structure forms. This structure forms on both a larger scale and a smaller scale within the same picture. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252Fs0GZBfxImXJmUBZdX7CP%252Fwave7.png%3Falt%3Dmedia%26token%3D14c05c68-47bb-4f75-9877-2c9bbc14cd3c&width=768&dpr=4&quality=100&sign=ea9877d2&sv=2) This is an example of the _fractal_ nature of the Elliott Wave patterns. A fractal is a curve or geometric figure, each part of which has the same statistical character as the whole, and anything that resembles this type of formation is said to be fractal. Within the Elliott Wave structure, this is evidenced by the expanding and contracting similarity of wave structures. Wave I is the next higher degree of trend for Wave 1, but within Wave 1 and 2 is the 5-3 pattern of the full Elliott Wave cycle. The 5-3 pattern then repeats for Waves 3 and 4, and for waves A and B as well (except in the declining direction). There are actually three degrees of trend shown in the chart above. Waves I and II form the larger degree cycle. The next degree down are the waves that are labeled 1, 2, 3, 4, 5, A, B, and C. And the next degree down are the waves labeled i, ii, iii, iv, v, a, b, and c. In theory, this pattern expands to infinity and shrinks to infinity and constitutes what is known as a fractal, an infinitely contracting and expanding pattern. Elliott discovered, by observation, that the markets were fractal in nature. No matter how big or small the wave degree, motive waves take on a 5-wave sequence and corrective waves usually take on a 3-wave sequence. He classified patterns that showed up in higher degrees of trend and saw that those same types of patterns repeated on lower degrees of trends. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FdhQGls6nVv9add9YHyaJ%252Fwave8.png%3Falt%3Dmedia%26token%3Db21b602a-dc32-4a14-916a-7f9765279d3d&width=768&dpr=4&quality=100&sign=406143f7&sv=2) The chart above shows the same picture in a declining market. See if you can spot the different degrees of trend. Elliott Wave is not a trading technique. There are no specific rules of entry or exit, nor is there one “right” way to use it in trading. As a result, the use of Elliott Wave has been avoided by many traders and technical analysts, not due to a lack of understanding but because of the apparently subjective nature of how it may be applied. Nonetheless, there are those who have successfully used Elliott Wave patterns in their trading. The Theory continues to attract a wide following, both with individual investors as well as professional traders. Advocates tend to apply various indicators to help them in trading specific Elliott Wave patterns, although those techniques are unique to the people who developed them. If you are going to perform Elliott Wave analysis, you will be making “wave-counts.” This simply means that you will be labeling the waves to see how they conform to the Elliott Wave pattern, allowing you to anticipate market movement. The next section will give you some guidelines on labeling the wave-counts. [PreviousElliott Wave Analysis Articleschevron-left](https://chartschool.stockcharts.com/table-of-contents/market-analysis/elliott-wave-analysis-articles) [NextIdentifying Elliott Wave Patternschevron-right](https://chartschool.stockcharts.com/table-of-contents/market-analysis/elliott-wave-analysis-articles/identifying-elliott-wave-patterns) Last updated 1 year ago Was this helpful? * [Introduction](https://chartschool.stockcharts.com/table-of-contents/market-analysis/elliott-wave-analysis-articles/introduction-to-elliott-wave-theory#introduction) * [Basic Sequence](https://chartschool.stockcharts.com/table-of-contents/market-analysis/elliott-wave-analysis-articles/introduction-to-elliott-wave-theory#basic_sequence) * [Motive Waves](https://chartschool.stockcharts.com/table-of-contents/market-analysis/elliott-wave-analysis-articles/introduction-to-elliott-wave-theory#motive_waves) * [Corrective Waves](https://chartschool.stockcharts.com/table-of-contents/market-analysis/elliott-wave-analysis-articles/introduction-to-elliott-wave-theory#corrective_waves) * [Basic Cycle Structure](https://chartschool.stockcharts.com/table-of-contents/market-analysis/elliott-wave-analysis-articles/introduction-to-elliott-wave-theory#basic_cycle_structure) * [Fractal Nature](https://chartschool.stockcharts.com/table-of-contents/market-analysis/elliott-wave-analysis-articles/introduction-to-elliott-wave-theory#fractal_nature) Was this helpful? sun-brightdesktopmoon sun-brightdesktopmoon --- # Guidelines for Applying Elliott Wave Theory | ChartSchool | StockCharts.com [hashtag](https://chartschool.stockcharts.com/table-of-contents/market-analysis/elliott-wave-analysis-articles/guidelines-for-applying-elliott-wave-theory#introduction) Introduction ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ A guideline is not a hard and fast rule that can't be broken. It is a tendency - something that happens so often that it can almost qualify as a rule, but at times doesn't work as expected. The guidelines described below are useful ways of applying Elliott Wave analysis that have shown their validity over time. However, as they are not rules, they may not work out every time. * * * [hashtag](https://chartschool.stockcharts.com/table-of-contents/market-analysis/elliott-wave-analysis-articles/guidelines-for-applying-elliott-wave-theory#guideline_of_equality) Guideline of Equality ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ The **Guideline of Equality** says that two of the motive sub-waves in a five wave sequence will tend toward equality, which is generally true of the non-extended waves. This means that, when Wave 3 of an impulse wave is the extended wave, Wave 5 will approximately equal Wave 1 in price. This is useful for potentially projecting the end of Wave 5 in an impulse if you recognize Wave 3 as an extended wave. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FQe9fxm8EfiI6DyB5biRQ%252Fwave22.png%3Falt%3Dmedia%26token%3Da14af9e1-0369-414c-b1d9-7816720c862f&width=768&dpr=4&quality=100&sign=cdcabef&sv=2) * * * [hashtag](https://chartschool.stockcharts.com/table-of-contents/market-analysis/elliott-wave-analysis-articles/guidelines-for-applying-elliott-wave-theory#guideline_of_alternation_within_an_impulse) Guideline of Alternation Within an Impulse ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ The **Guideline of Alternation within an Impulse** says that the forms for Wave 2 and Wave 4 will alternate. If Wave 2 is a sharp style of correction, Wave 4 will be a sideways style of correction. If Wave 2 is sideways, Wave 4 will be sharp. This is useful for anticipating the end of a Wave 4 correction within a suspected impulse. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FSJDUIf3T2b1o8mUVIkoQ%252Fwave23.png%3Falt%3Dmedia%26token%3D7bbb21dc-c802-4c99-a23f-cf68f88d9b44&width=768&dpr=4&quality=100&sign=c54349e&sv=2) * * * [hashtag](https://chartschool.stockcharts.com/table-of-contents/market-analysis/elliott-wave-analysis-articles/guidelines-for-applying-elliott-wave-theory#guideline_of_alternation_within_a_correction) Guideline of Alternation Within a Correction ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- The **Guideline of Alternation Within a Correction** says that the forms for Wave A and Wave B will alternate within a 3-wave correction. If Wave A is a flat type of correction, Wave B may be a zigzag type of correction and vice versa. It also states that if the correction begins with a more simple wave for Wave A, expect the following Waves B and C to be more complex. * * * [hashtag](https://chartschool.stockcharts.com/table-of-contents/market-analysis/elliott-wave-analysis-articles/guidelines-for-applying-elliott-wave-theory#guideline_of_depth_of_corrective_waves) Guideline of Depth of Corrective Waves ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- The **Guideline of Depth of Corrective Waves** says that when the market goes into a correction, it often will correct to the territory of the previous Wave 4 of lesser degree. This does not necessarily mean that it will reach the bottom of the previous 4th wave, but rather that we should expect it to reach the span of the previous Wave 4 of lesser degree. This is often a good place for a market to find support (or resistance) before the trend moves on. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FVzA7MBA1fdUD3FJucXnL%252Fwave25.png%3Falt%3Dmedia%26token%3Df0a99c76-590c-4427-b2e0-2c8dcd961079&width=768&dpr=4&quality=100&sign=248a36e6&sv=2) * * * [hashtag](https://chartschool.stockcharts.com/table-of-contents/market-analysis/elliott-wave-analysis-articles/guidelines-for-applying-elliott-wave-theory#guideline_of_channeling) Guideline of Channeling ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- The **Guideline of Channeling** is a technique to project the potential end of waves within impulses. Although channeling can be used for corrective waves, it really boils down to the application of trend lines and doesn't have any hard tendencies for corrective applications. As for impulse waves, Elliott noticed that channel lines often mark their boundaries with sometimes dramatic precision. There are three ways that channeling can be used for projecting the end of waves, but they all use the same technique. They all require three points - beginning and ending of waves - to create their channels. This technique can be used for projecting the ends of Waves 3, 4 and 5. * **Projecting the end of Wave 3:** Draw a trend line from the beginning of Wave 1 to the end of Wave 2. Project a parallel line off the end of Wave 1. There is a potential for Wave 3 to end when it reaches the projected trend line. * **Projecting the end of Wave 4:** Draw a trend line from the beginning of Wave 2 to the end of Wave 3. Project a parallel line off the end of Wave 2. There is a potential for the Wave 4 correction to end when it reaches the projected trend line. * **Projecting the end of Wave 5:** Draw a trend line from the beginning of Wave 3 to the end of Wave 4. Project a parallel line off the end of Wave 3. There is a potential for Wave 5 to end when it reaches the projected trend line. * * * [hashtag](https://chartschool.stockcharts.com/table-of-contents/market-analysis/elliott-wave-analysis-articles/guidelines-for-applying-elliott-wave-theory#guideline_of_scale) Guideline of Scale ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ The **Guideline of Scale** is a technique of looking at the market and that is often applied when creating channel projections. It simply states that one should use both an arithmetic scale chart and a semi-log scale chart when looking at Elliott Waves. Arithmetic scale charts are good for looking at waves on lower degrees, but semi-log scale charts are good for bringing large trends (higher degrees) into perspective. A channel may work nicely on a semi-log scale, whereas on an arithmetic scale it may not work as well. * * * [hashtag](https://chartschool.stockcharts.com/table-of-contents/market-analysis/elliott-wave-analysis-articles/guidelines-for-applying-elliott-wave-theory#the_personality_of_elliott_waves) The Personality of Elliott Waves ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Wave “personality” is the reflection of mass psychology acting in the market - the emotions that flow from optimism to pessimism, creating the market structures we frequently observe. The personality of each wave type is the same whether it is a higher-degree wave or a lesser one. This section will expand on the characteristics of some of the waves. Please keep in mind the eight-wave cycle when going over this section. ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/market-analysis/elliott-wave-analysis-articles/guidelines-for-applying-elliott-wave-theory#first_waves_wave_1) First Waves (Wave 1) About half of the first waves seen are part of the basing process and tend to be heavily corrected by Wave 2. Many people feel that this is one more opportunity to trade in the direction of the previous trend, and, if that was down, many will sell short. However, market breadth and volume will subtly increase. The other 50% of first waves will rise from large basing price movement formed by the previous correction. These tend to be dynamic and only moderately retraced. This is a good probable spot to have a Wave 1 extension. ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/market-analysis/elliott-wave-analysis-articles/guidelines-for-applying-elliott-wave-theory#second_waves_wave_2) Second Waves (Wave 2) Second waves tend to retrace so much of Wave 1 that most of the profits gained are eroded, usually ending on low volume and low volatility. In a bear market, this indicates a drying up of selling pressure. However, during Wave 2, most investors are convinced that the bear market is here to stay. ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/market-analysis/elliott-wave-analysis-articles/guidelines-for-applying-elliott-wave-theory#third_waves_wave_3) Third Waves (Wave 3) Third waves tend to be strong and broad. They are typically unmistakable, as confidence in the direction of the new trend is clearly evident. Wave 3 usually generates the most volume and price movement, and they are the most likely wave to extend. The third wave of an extended third wave will likely be the most volatile point of strength in the new trend and things like price breakouts, continuation gaps, volume expansions and increased breadth will accompany it. In Wave 3 for a stock index, nearly all stocks will participate. Because of the dynamics of this wave, it will provide the greatest clues to the correct wave count as it unfolds. ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/market-analysis/elliott-wave-analysis-articles/guidelines-for-applying-elliott-wave-theory#fourth_waves_wave_4) Fourth Waves (Wave 4) Fourth waves can be predictable in both depth and form because of the guideline of alternation. They tend to differ with the previous Wave 2 of the same degree. They often trend sideways, building a base for the final Wave 5 to spring from. In Wave 4 for a stock index, lagging stocks will tend to build their tops and start declining. ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/market-analysis/elliott-wave-analysis-articles/guidelines-for-applying-elliott-wave-theory#fifth_waves_wave_5) Fifth Waves (Wave 5) Fifth waves tend to be less dynamic and display slower speed of price change than the previous waves. They will usually be accompanied by lesser volume and breadth. Of course, if the fifth wave is the extended wave, this will not be the case in terms of price change. In advancing fifth waves, optimism is extremely high despite a narrowing of breadth. However, the fifth wave of an extended fifth will lack the change of the previous waves and give clues about a change in direction. ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/market-analysis/elliott-wave-analysis-articles/guidelines-for-applying-elliott-wave-theory#a_waves_wave_a) A Waves (Wave A) During Wave A, the public is convinced that this is just a correction of the previous trend and will rush in to capitalize on it, despite any technically damaging signals. This sets things up for the next wave to follow. If Wave A is divided into five sub-waves, it will be a zigzag. If it is divided into three sub-waves, it will be a flat or triangle. ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/market-analysis/elliott-wave-analysis-articles/guidelines-for-applying-elliott-wave-theory#b_waves_wave_b) B Waves (Wave B) Wave B catches people in the wrong direction. It performs the task of enticing the suckers to jump into the market. This is where bear or bull traps happen. As a general rule, B Waves tend to show lower volume. ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/market-analysis/elliott-wave-analysis-articles/guidelines-for-applying-elliott-wave-theory#c_waves_wave_c) C Waves (Wave C) Wave C tends to break the illusions of Wave A and Wave B. In a declining market, it can be devastating and fear takes over with broad participation. An advancing Wave C as an upward correction in a larger bear market can be just as dynamic, fooling investors into thinking that it is the start of a new upswing. The fact that Wave C may do this in five sub-waves helps the deception. ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/market-analysis/elliott-wave-analysis-articles/guidelines-for-applying-elliott-wave-theory#d_waves_wave_d) D Waves (Wave D) Wave D shows up in horizontal triangles. If the triangle is contracting, it is often accompanied by an increase in volume. This is because it does not fully retrace the previous wave and is moving in the direction that the market is about to take after the following Wave E. ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/market-analysis/elliott-wave-analysis-articles/guidelines-for-applying-elliott-wave-theory#e_waves_wave_e) E Waves (Wave E) Wave E shows up as the last wave in horizontal triangles. It will often stage a false break of the trend line on the boundary of the triangle before the market takes off in the opposite direction. If the triangle was a Wave 4 in a rising impulse, it would instill a bearish conviction before the market shot up to produce Wave 5. Thus Wave E is often attended with emotional psychology playing against the investor. * * * [hashtag](https://chartschool.stockcharts.com/table-of-contents/market-analysis/elliott-wave-analysis-articles/guidelines-for-applying-elliott-wave-theory#conclusion) Conclusion -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- These three articles have gone over the rules of Elliott Wave Theory in some detail. However, as stated before, putting Elliott Wave to use will take some practice. Nevertheless, if you persist in applying the rules, eliminating non-conforming counts and looking at the personality of the waves you are counting, you will find satisfaction in applying Elliott Wave Theory. You will often find that it is necessary to adjust the count you made to conform to new data. Don't get frustrated by having to make adjustments – it paves the way to a more accurate wave-count and helps to refine your skills. This is something that is expected in doing Elliott Wave analysis as the skills in applying it come through practice. Not every nuance of Elliott Wave Theory has been discussed here. There are many books written on the subject. Here are a few book recommendations that are considered by many to be excellent resources in helping one to apply Elliott Wave: * [_The Elliott Wave Principle_arrow-up-right](https://store.stockcharts.com/products/elliott-wave-principle-key-to-market-behavior) by Frost and Prechter: This is considered to be the main primer for the theory. * [_Mastering Elliott Wave Principle_arrow-up-right](https://www.amazon.com/Mastering-Elliott-Wave-Principle-Elementary/dp/0470923539) by Constance Brown: this book offers excellent techniques in recognizing the wave. * [_Visual Guide to Elliott Wave Trading_arrow-up-right](https://store.stockcharts.com/products/visual-guide-to-elliott-wave-trading) by Wayne Gorman and Jeffrey Kennedy: This book offers good advice on how Elliott Wave can be used in trading. One subject that has not been discussed is the application of Fibonacci counts and ratios to Elliott Waves. This is a broad and important subject, but it is not only applied to Elliott Waves, and it is too large to cover here. The books mentioned above will detail how this subject can help when applying Elliott Wave. * * * [hashtag](https://chartschool.stockcharts.com/table-of-contents/market-analysis/elliott-wave-analysis-articles/guidelines-for-applying-elliott-wave-theory#adding_elliott_wave_notation_to_sharpcharts) Adding Elliott Wave Notation to SharpCharts -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- You can use our [ChartNotes annotation tool](https://help.stockcharts.com/charts-and-tools/sharpcharts/chartnotes) to add Elliott Wave notations to your charts. Below, you'll find an example of a chart annotated with Elliott Wave notations. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FkEF455c2Eipbtr3jYkh3%252Fwave27.png%3Falt%3Dmedia%26token%3D115538a1-02d8-4c68-93ff-9085c1e56be3&width=768&dpr=4&quality=100&sign=52fc0366&sv=2) circle-info **Learn More.** To add these annotations to your charts, check out our Support Center article on [ChartNotes' Text Annotation Tools](https://help.stockcharts.com/charts-and-tools/sharpcharts/chartnotes/chartnotes-annotation-tool-reference/text-annotation-tools) . * * * [hashtag](https://chartschool.stockcharts.com/table-of-contents/market-analysis/elliott-wave-analysis-articles/guidelines-for-applying-elliott-wave-theory#further_study) Further Study -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- [**Elliott Wave Principle**arrow-up-right](https://www.amazon.com/Elliott-Wave-Principle-Market-Behavior/dp/1616041056/ref=sr_1_1?crid=23P4WD924JUUT&dib=eyJ2IjoiMSJ9.HHDfFD-yrldetVEzOesWLH55tIR8pIA6aNsx4KoJ3IlrjBOmTyneNx0LC9JHdQKO2ekmzazdPby1tmMztfDVEbI0hfy3e8068KxXZnTZJlViRL79C4d2go2-Huiu4MYa9eQ2L-fCr-tQQQbCg3MQWGPcuBrMUb0t_Kq5NOBiKQP0dvNyev1UkgENvjP7gGvJHz3CNVW5_uVL2b9Dym5c7oll_-4eEWE6H7dvI14kDt0.t09VMVDlWtiAHb_xu2uc5xPQEcxZ3szKtPFSqYLj1Kg&dib_tag=se&keywords=elliott+Wave+Principle&qid=1720545412&sprefix=elliott+wave+principle%2Caps%2C115&sr=8-1) Robert Prechter [PreviousIdentifying Elliott Wave Patternschevron-left](https://chartschool.stockcharts.com/table-of-contents/market-analysis/elliott-wave-analysis-articles/identifying-elliott-wave-patterns) [NextTrading Strategies & Modelschevron-right](https://chartschool.stockcharts.com/table-of-contents/trading-strategies-and-models) Last updated 1 year ago Was this helpful? * [Introduction](https://chartschool.stockcharts.com/table-of-contents/market-analysis/elliott-wave-analysis-articles/guidelines-for-applying-elliott-wave-theory#introduction) * [Guideline of Equality](https://chartschool.stockcharts.com/table-of-contents/market-analysis/elliott-wave-analysis-articles/guidelines-for-applying-elliott-wave-theory#guideline_of_equality) * [Guideline of Alternation Within an Impulse](https://chartschool.stockcharts.com/table-of-contents/market-analysis/elliott-wave-analysis-articles/guidelines-for-applying-elliott-wave-theory#guideline_of_alternation_within_an_impulse) * [Guideline of Alternation Within a Correction](https://chartschool.stockcharts.com/table-of-contents/market-analysis/elliott-wave-analysis-articles/guidelines-for-applying-elliott-wave-theory#guideline_of_alternation_within_a_correction) * [Guideline of Depth of Corrective Waves](https://chartschool.stockcharts.com/table-of-contents/market-analysis/elliott-wave-analysis-articles/guidelines-for-applying-elliott-wave-theory#guideline_of_depth_of_corrective_waves) * [Guideline of Channeling](https://chartschool.stockcharts.com/table-of-contents/market-analysis/elliott-wave-analysis-articles/guidelines-for-applying-elliott-wave-theory#guideline_of_channeling) * [Guideline of Scale](https://chartschool.stockcharts.com/table-of-contents/market-analysis/elliott-wave-analysis-articles/guidelines-for-applying-elliott-wave-theory#guideline_of_scale) * [The Personality of Elliott Waves](https://chartschool.stockcharts.com/table-of-contents/market-analysis/elliott-wave-analysis-articles/guidelines-for-applying-elliott-wave-theory#the_personality_of_elliott_waves) * [First Waves (Wave 1)](https://chartschool.stockcharts.com/table-of-contents/market-analysis/elliott-wave-analysis-articles/guidelines-for-applying-elliott-wave-theory#first_waves_wave_1) * [Second Waves (Wave 2)](https://chartschool.stockcharts.com/table-of-contents/market-analysis/elliott-wave-analysis-articles/guidelines-for-applying-elliott-wave-theory#second_waves_wave_2) * [Third Waves (Wave 3)](https://chartschool.stockcharts.com/table-of-contents/market-analysis/elliott-wave-analysis-articles/guidelines-for-applying-elliott-wave-theory#third_waves_wave_3) * [Fourth Waves (Wave 4)](https://chartschool.stockcharts.com/table-of-contents/market-analysis/elliott-wave-analysis-articles/guidelines-for-applying-elliott-wave-theory#fourth_waves_wave_4) * [Fifth Waves (Wave 5)](https://chartschool.stockcharts.com/table-of-contents/market-analysis/elliott-wave-analysis-articles/guidelines-for-applying-elliott-wave-theory#fifth_waves_wave_5) * [A Waves (Wave A)](https://chartschool.stockcharts.com/table-of-contents/market-analysis/elliott-wave-analysis-articles/guidelines-for-applying-elliott-wave-theory#a_waves_wave_a) * [B Waves (Wave B)](https://chartschool.stockcharts.com/table-of-contents/market-analysis/elliott-wave-analysis-articles/guidelines-for-applying-elliott-wave-theory#b_waves_wave_b) * [C Waves (Wave C)](https://chartschool.stockcharts.com/table-of-contents/market-analysis/elliott-wave-analysis-articles/guidelines-for-applying-elliott-wave-theory#c_waves_wave_c) * [D Waves (Wave D)](https://chartschool.stockcharts.com/table-of-contents/market-analysis/elliott-wave-analysis-articles/guidelines-for-applying-elliott-wave-theory#d_waves_wave_d) * [E Waves (Wave E)](https://chartschool.stockcharts.com/table-of-contents/market-analysis/elliott-wave-analysis-articles/guidelines-for-applying-elliott-wave-theory#e_waves_wave_e) * [Conclusion](https://chartschool.stockcharts.com/table-of-contents/market-analysis/elliott-wave-analysis-articles/guidelines-for-applying-elliott-wave-theory#conclusion) * [Adding Elliott Wave Notation to SharpCharts](https://chartschool.stockcharts.com/table-of-contents/market-analysis/elliott-wave-analysis-articles/guidelines-for-applying-elliott-wave-theory#adding_elliott_wave_notation_to_sharpcharts) * [Further Study](https://chartschool.stockcharts.com/table-of-contents/market-analysis/elliott-wave-analysis-articles/guidelines-for-applying-elliott-wave-theory#further_study) Was this helpful? sun-brightdesktopmoon sun-brightdesktopmoon --- # Wyckoff Market Analysis | ChartSchool | StockCharts.com [hashtag](https://chartschool.stockcharts.com/table-of-contents/market-analysis/wyckoff-analysis-articles/wyckoff-market-analysis#introduction) Introduction ----------------------------------------------------------------------------------------------------------------------------------------------------------------- Richard D. Wyckoff, a perpetual stock market student, was a great trader and a pioneer of technical analysis. Based on his theories, studies and real-life experiences, Wyckoff developed a trading methodology that has stood the test of time. Wyckoff started with a broad market assessment and then drilled down to find stocks with the most profit potential. This article, the first of two, details Wyckoff's approach to broad market analysis. It is important to understand the broad market trend and the position within this trend before selecting individual stocks. [hashtag](https://chartschool.stockcharts.com/table-of-contents/market-analysis/wyckoff-analysis-articles/wyckoff-market-analysis#about) About --------------------------------------------------------------------------------------------------------------------------------------------------- ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FAFqRXZG3TBpRCpblez3V%252Fwy-00-picture.png%3Falt%3Dmedia%26token%3D61592127-7674-495b-94fe-0e69bf7109b7&width=768&dpr=4&quality=100&sign=4bce6a3f&sv=2) Richard D. Wyckoff Richard Wyckoff began his Wall Street career in 1888 as a runner, scurrying back and forth between firms carrying documents. As with Jesse Livermore in the bucket shops, Wyckoff learned to trade by watching the action firsthand. His first trade occurred in 1897, when he bought one share of St. Louis & San Francisco common stock. After successfully trading his own account several years, he opened a brokerage house and started publishing research in 1909. _The Magazine of Wall Street_ was one of the first, and most successful, newsletters of the time. As an active trader and analyst in the early 1900s, his career coincided with other Wall Street greats including Jesse Livermore, [Charles Dow](https://chartschool.stockcharts.com/table-of-contents/market-analysis/dow-theory) and JP Morgan. Many have called this the “golden age of technical analysis.” As his stature grew, Wyckoff published two books on his methodology: _Studies in Tape Reading_ (1910) and _How I Trade and Invest in Stocks and Bonds_ (1924). In 1931, Wyckoff published a correspondence course detailing the methodology he developed over his illustrious career. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252F460GfDtOp7Y4RJPBcf7S%252Fwy-01-accumdist.png%3Falt%3Dmedia%26token%3D983aa1e2-e04b-4cd9-b698-2b13f668a2f0&width=768&dpr=4&quality=100&sign=d7d9bc6d&sv=2) Wyckoff [hashtag](https://chartschool.stockcharts.com/table-of-contents/market-analysis/wyckoff-analysis-articles/wyckoff-market-analysis#two_rules) Two Rules ----------------------------------------------------------------------------------------------------------------------------------------------------------- Wyckoff focused exclusively on price action. Earnings and other fundamental information were simply too esoteric and imprecise to be used effectively. Moreover, this information was usually already factored into the price by the time it became available to the average speculator. Before looking at the details, there are two rules to keep in mind. These rules come directly from the book _Charting the Stock Market: The Wyckoff Method_ by Jack K. Hutson, David H. Weiss and Craig F. Schroeder. _**Rule One:**_ _Don't expect the market to behave exactly the same way twice. The market is an artist, not a computer. It has a repertoire of basic behavior patterns that it subtly modifies, combines and springs unexpectedly on its audience. A trading market is an entity with a mind of its own._ _**Rule Two:**_ _Today's market behavior is significant only when it's compared to what the market did yesterday, last week, last month or even last year. There are no predetermined, never-fail levels where the market always changes. Everything the market does today must be compared to what it did before._ Instead of steadfast rules, Wyckoff advocated broad guidelines when analyzing the stock market. Nothing in the stock market is definitive. After all, stock prices are driven by human emotions. We cannot expect the exact same patterns to repeat over time. There will, however, be similar patterns or behaviors that astute chartists can profit from. Chartists should keep the following guidelines in mind and apply their own judgments to develop a trading strategy. [hashtag](https://chartschool.stockcharts.com/table-of-contents/market-analysis/wyckoff-analysis-articles/wyckoff-market-analysis#broad_market_trend) Broad Market Trend ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------- By definition, the vast majority of stocks move in harmony with the broader market. Chartists, therefore, should first understand the direction and position of the broad market trend. With this in mind, Wyckoff developed a “wave chart,” which was simply a composite average of five or more stocks. Note that Charles Dow developed the Dow Jones Industrial Average and Dow Jones Transportation Average around the same time. While the Dow Industrials is perhaps the most famous “wave chart,” chartists today can choose among several indices to analyze the broad market. These include the S&P 500, the S&P 100, the Nasdaq, the NY Composite and the Russell 2000. Wyckoff used the daily high, low and close to create a series of price bars and construct a classic bar chart. The objective was to determine the underlying trend for the broader market and identify the position within this trend. Trend is important because it tells us the path of least resistance for the majority of stocks. Position is important because it tells us the current location within this trend. For example, trend position helps chartists determine if the market is overbought or oversold to time buy and sell decisions. There are three possible trends in action: up, down or flat. There are also three different timeframes: short-term, medium-term and long-term. For the purposes of this article, daily charts are used for the medium-term trend. An uptrend is present when the composite index forms a series of rising peaks and rising troughs. Conversely, a downtrend is present when the index forms a series of falling peaks and troughs. A series of equal troughs and equal peaks forms a trading range. Chartists must then wait for a break from this range to determine trend direction. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FBJsHmCnnr5FJuz1BuQny%252Fwy-02-rut-uptrend.png%3Falt%3Dmedia%26token%3D8857d9e7-518e-45e2-87f4-c169979e8662&width=768&dpr=4&quality=100&sign=c83fcfcc&sv=2) Wyckoff Uptrend Chart ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FU61Idy2JDK1x36zqOK28%252Fwy-03-spx-downtrend.png%3Falt%3Dmedia%26token%3D1413d4d9-be78-4783-a539-91415040b56f&width=768&dpr=4&quality=100&sign=6cec9640&sv=2) Wyckoff Downtrend Chart The charts above show examples of an uptrend and downtrend. Within the trend, prices can be positioned at oversold levels, overbought levels or somewhere in the middle of the trend. Trend position is important to determine the risk-reward ratio of a new position. Ideally, chartists should look for long positions when the trend is up and the index is oversold. This means a pullback or correction has occurred. The risk-reward ratio is less attractive if buying in an uptrend when prices are overbought. Similarly, the risk-reward ratio is less attractive if selling in a downtrend when an index is in an oversold position. It is best to establish a new short position when the index is either overbought within a downtrend or in the middle of said downtrend. [hashtag](https://chartschool.stockcharts.com/table-of-contents/market-analysis/wyckoff-analysis-articles/wyckoff-market-analysis#major_tops_and_bottoms) Major Tops and Bottoms ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- In between trending periods, the broad market indices form major tops and bottoms that reverse existing trends. Wyckoff noted that tops and bottoms were different. Market tops were often long, drawn-out affairs, while market bottoms were relatively short, violent beasts. Wyckoff identified specific characteristics some 100 years ago; said characteristics can still be seen in today's markets. Bear markets often end with a selling climax or spring, which is a failed support break. First, the major stock index is in a downtrend because it has been moving lower for an extended period. With sentiment quite negative, many investors become thoroughly discouraged with their mounting losses and, at some point, discouraged investors finally throw in the towel and unload their stocks. Prices fall sharply and often break a key support level. Prices appear to be in a free fall at this stage, but the “smart” money is waiting in the wings. Smart money buying pressure suddenly reverses the free fall and prices surge to close well above their lows. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FtdilFjHtgmJoJhfu82AA%252Fwy-04-spx-bot.png%3Falt%3Dmedia%26token%3D5274a003-a7d0-4234-a381-37e86a991494&width=768&dpr=4&quality=100&sign=d77e884d&sv=2) Wyckoff - Chart 1 Wyckoff used volume to confirm the validity of a reversal, breakout or trend. A selling climax or spring should be accompanied by an increase in volume to show expanding participation. It is important that big money (i.e. institutions) support a market move for it to have staying power. Low volume suggests limited participation and increases the chances of failure. The example above shows a high volume selling climax and spring in early October 2011. Notice how the S&P 500 broke support as selling pressure pushed prices below 1100. Prices dipped below 1080 intraday, but buyers stepped in and pushed the index back above 1120 by the close. The support break did not hold and the selling climax occurred on high volume. This bullish signal was enough to carry the S&P 500 above its late August high by the end of October. As noted above, market tops are different than market bottoms. Tops often form with an extended period of sideways price movement, which is a consolidation. This is known as a distribution period where the smart money (institutions) distributes shares to the dumb money (public). In other words, the smart money sells their shares to the dumb money just before the market breaks down. On the price chart, the market top is often not clear until the second half of the pattern unfolds. This often involves a failed breakout or a failure at resistance. This is not so negative at the time, but prices then return all the way to support. Such a sharp decline reflects a marked increase in selling pressure. There is then some sort of bounce off support that forms a lower peak, which shows diminished buying pressure. At this point, the chart shows an increase in selling pressure on the support test and a decrease in buying pressure on the subsequent bounce. The reversal is completed with a final support break on increasing volume. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252Fwrh4LVNhhnWBGFUKoIja%252Fwy-05-indu-top.png%3Falt%3Dmedia%26token%3Ddb6f52c2-5c55-4832-ba60-17d1fdd0b5e5&width=768&dpr=4&quality=100&sign=d5e01486&sv=2) Wyckoff - Chart 2 The example above shows the Dow Industrials with a peak in 2007. Notice how prices moved sideways for around seven months. There are five points on this chart to define the topping process. The first point, which occurred in the second half of the pattern, shows the Dow failing to hold above its prior peak. There is nothing bearish about this failed breakout until prices decline all the way back to the August trough. This is the first sign that selling pressure (supply) is increasing. Prices bounce off support, but a lower peak forms in early December. This is the first signal that buying pressure (demand) is diminishing. An increase in selling pressure and decrease in buying pressure combine to mark an important top that is confirmed when prices break support with a sharp decline in January 2008. Wyckoff used volume to confirm price movements. Notice how volume on down days exceeded volume on up days in October and November as prices declined to support. This showed an increase in selling pressure that validated the support break. [hashtag](https://chartschool.stockcharts.com/table-of-contents/market-analysis/wyckoff-analysis-articles/wyckoff-market-analysis#price_projections) Price Projections --------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Once a market top or bottom took shape, Wyckoff would turn to figure charts to calculate price projections. Figure charts later evolved into Point & Figure charts. In general, Wyckoff based his price projections on the width of the pattern. The wider the pattern, the higher the ultimate price projection. In other words, a long base extending over ten P&F columns would project a relatively high target upon a breakout. Conversely, a narrow base covering just six columns would project a relatively low target. It is important to make sure the base is big enough and the breakout robust enough to assure a suitably high price target. The converse is true for market tops. An extended top covering over ten P&F columns would project a much deeper decline than a narrow top extending less than ten columns. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252Ft6AhhGjfFhKkZFKoAzrU%252Fwy-06-spx-pnfdown.png%3Falt%3Dmedia%26token%3Dbf5a43b6-5eb5-4668-ad66-a1a29ac6976d&width=768&dpr=4&quality=100&sign=e8edc942&sv=2) Wyckoff Wyckoff based his projections on the width of the entire topping pattern. As with most aspects of technical analysis, the width of the pattern can be subjective. Wyckoff liked to look for the row with the most filled boxes and count the entire width of this row, including the empty boxes. Chartists can employ this method or simply measure the entire width from start to finish. First, start by finding the key support break. Once the support break is found, extend a support line across the chart. Chartists can then identify the column leading into the pattern (start) and the column leading out (end). These two define the entire pattern. The example above shows the S&P 500 top in 2007, with the column count extending from November 2007 (red B) to January 2008 (red 1). Note that February starts with the red 2 and O-Column breaks support before this red 2 is printed. This is a long and extended top covering 34 columns. At 10 points per box on a 3-box reversal, the estimated decline is around 1020 points (34 x 3 x 10 = 1050). This amount is subtracted from the pattern peak for a downside target in the 520 area (1570 - 1020 = 550). The ultimate low in the S&P 500 was around 666 in March 2009. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FIxkGcgW8xCZnHdXytvA7%252Fwy-07-spx-pnfup.png%3Falt%3Dmedia%26token%3D026cb45e-c1c2-4be9-bc30-db23fa7b6954&width=768&dpr=4&quality=100&sign=fd54b462&sv=2) Wyckoff The second chart shows the S&P 500 bottom in 2009 with two bottoming patterns. Notice that there are two breakouts: one in May (red 5) and another in July (red 7). Both patterns share the same low point (670). Based on the resistance break, the smaller pattern extends 20 columns, which is from the entry column to the exit column. Based on 10 points per box and a 3-box reversal setting, the projected advance would be 600 points (20 x 10 x 3 = 600) and the target would be around 1270 (670 + 600 = 1270). The second pattern is much bigger and extends some 42 columns for a projected advance of 1260 points (42 x 3 x 10). This targets a move to around 1930, which would be one heck of a bull market. Even though Wyckoff used horizontal counts to make projections, he also cautioned against taking these projections too seriously. As noted above, nothing is definitive when it comes to the stock market and technical analysis. Chartists are given broad guidelines and must make their own judgments as price action unfolds. Some counts fall short of their targets, while some counts exceed their targets. You can read more on [traditional P&F counting techniques in our ChartSchool](https://chartschool.stockcharts.com/table-of-contents/chart-analysis/point-and-figure-charts) . [hashtag](https://chartschool.stockcharts.com/table-of-contents/market-analysis/wyckoff-analysis-articles/wyckoff-market-analysis#position_in_trend) Position in Trend --------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Before making a trading or investment decision, chartists need to know where the market is within its trend. Overbought markets are at risk of a pullback; taking a position in overbought conditions creates risk of a significant drawdown. Similarly, the chances of a bounce are high when the market is oversold, even if the bigger trend is down. Selling short when market conditions are oversold can also result in a significant drawdown and adversely affect the risk-reward ratio. Wyckoff notes that an uptrend starts with an accumulation phase, entering a markup phase as prices move steadily higher. There are five possible buy points during the entire uptrend. First, aggressive players can buy on the spring or selling climax. This area offers the highest reward potential, but the risk of failure is above average because the downtrend has not yet reversed. The second buy point comes with the breakout above resistance, provided it is confirmed by expanding volume. Chartists missing the breakout buy point are sometimes given a second chance with a throwback to broken resistance, which turns into support. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FfqtTUqM34UwROZHb2VEg%252Fwy-08-accummarkup.png%3Falt%3Dmedia%26token%3D6366fd97-0565-4169-88c3-32a0d45226f9&width=768&dpr=4&quality=100&sign=114ab3b7&sv=2) Wyckoff Once the markup stage is fully underway, chartists must then rely on corrections, which can form as consolidations or pullbacks. Wyckoff referred to a flat consolidation within an uptrend as a re-accumulation phase. A break above consolidation resistance signals a continuation of the markup phase. In contrast to a consolidation, a pullback is a corrective decline that retraces a portion of the prior move. Chartists should look for support levels using trend lines, prior resistance breaks or prior consolidations. Alternatively, Wyckoff also looked for support or reversal signs when the correction retraced 50% of the last up leg. A downtrend starts with a distribution phase and then enters a markdown phase as prices move steadily lower. Note that Wyckoff did not shy away from shorting the market. He looked for opportunities to make money on the way up and on the way down. As with the accumulation and markup phase, there are five potential selling points during this extended downtrend. First, a lower peak within a distribution pattern offers a chance to short the market before the actual support break and trend change. Such aggressive tactics offer the highest reward potential, but also risk failure because the downtrend has not officially started. The breakdown point is the second level to short the market, provided the support break is validated with expanding volume. After a breakdown and oversold conditions, there is sometimes a throwback to broken support, which turns into resistance. This offers players a second chance to partake in the support break. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FdRymACUro6MycWraXs8n%252Fwy-09-distmarkdown.png%3Falt%3Dmedia%26token%3Deb4572de-cb4d-42fc-88f6-d06bc5c75832&width=768&dpr=4&quality=100&sign=cfc1b645&sv=2) Once the markdown phase begins in earnest, chartists should wait for flat consolidations or oversold bounces. Wyckoff referred to flat consolidations as re-distribution periods. A break below consolidation support signals a continuation of the markdown phase. In contrast to a consolidation, an oversold bounce is a corrective advance that retraces a portion of the prior decline. Chartists can look for resistance areas using trend lines, prior support levels or prior consolidations. Wyckoff also looked for resistance or reversal signs when the correction retraced 50% of the last down leg. [hashtag](https://chartschool.stockcharts.com/table-of-contents/market-analysis/wyckoff-analysis-articles/wyckoff-market-analysis#conclusion) Conclusion ------------------------------------------------------------------------------------------------------------------------------------------------------------- There are four key areas of the Wyckoff market method: trend identification, reversal patterns, price projections and trend position. Getting the trend correct is half the battle, as the majority of stocks move in conjunction with the broad market trend. This trend continues until a major top or bottom pattern forms. Aggressive players can act before these reversal patterns are complete, but the existing trend does not officially reverse until price breaks a key support or resistance level on good volume. Once a top or bottom is complete, chartists can use a horizontal count method on P&F charts to project the length of the ensuing advance or decline. A trend is considered mature and ripe for a reversal once prices reach these target areas. Provided the trend has further room to run, chartists can then determine the position of prices within this trend to ensure a healthy risk-reward ratio when taking positions. Chartists should avoid new long positions when the market is overbought and avoid new short positions when the market is oversold. As noted at the beginning, these are broad guidelines for interpreting market movements. The final judgment call is up to you. [PreviousWyckoff Analysis Articleschevron-left](https://chartschool.stockcharts.com/table-of-contents/market-analysis/wyckoff-analysis-articles) [NextWyckoff Stock Analysischevron-right](https://chartschool.stockcharts.com/table-of-contents/market-analysis/wyckoff-analysis-articles/wyckoff-stock-analysis) Last updated 1 year ago Was this helpful? * [Introduction](https://chartschool.stockcharts.com/table-of-contents/market-analysis/wyckoff-analysis-articles/wyckoff-market-analysis#introduction) * [About](https://chartschool.stockcharts.com/table-of-contents/market-analysis/wyckoff-analysis-articles/wyckoff-market-analysis#about) * [Two Rules](https://chartschool.stockcharts.com/table-of-contents/market-analysis/wyckoff-analysis-articles/wyckoff-market-analysis#two_rules) * [Broad Market Trend](https://chartschool.stockcharts.com/table-of-contents/market-analysis/wyckoff-analysis-articles/wyckoff-market-analysis#broad_market_trend) * [Major Tops and Bottoms](https://chartschool.stockcharts.com/table-of-contents/market-analysis/wyckoff-analysis-articles/wyckoff-market-analysis#major_tops_and_bottoms) * [Price Projections](https://chartschool.stockcharts.com/table-of-contents/market-analysis/wyckoff-analysis-articles/wyckoff-market-analysis#price_projections) * [Position in Trend](https://chartschool.stockcharts.com/table-of-contents/market-analysis/wyckoff-analysis-articles/wyckoff-market-analysis#position_in_trend) * [Conclusion](https://chartschool.stockcharts.com/table-of-contents/market-analysis/wyckoff-analysis-articles/wyckoff-market-analysis#conclusion) Was this helpful? sun-brightdesktopmoon sun-brightdesktopmoon --- # Identifying Elliott Wave Patterns | ChartSchool | StockCharts.com [hashtag](https://chartschool.stockcharts.com/table-of-contents/market-analysis/elliott-wave-analysis-articles/identifying-elliott-wave-patterns#labeling_wave_degrees) Labeling Wave Degrees -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Before one can begin to identify the types of patterns Elliott discovered and the rules that govern them, it is a good idea to first learn about the labeling of wave degrees. Counting waves is a skill that comes with practice and proper application of the rules described below. It is a good idea to start applying a wave-count to a market you are familiar with and update it from time to time as practice. In an Elliott Wave chart, notice that smaller wave structures are labeled differently than the larger wave structures to help distinguish between the degrees of the waves. There is a formal way to label the degrees of Elliott Wave Theory, the details of which can be found in [_Elliott Wave Principle_arrow-up-right](http://store.stockcharts.com/products/elliott-wave-principle-key-to-market-behavior) by Frost and Prechter. For now, we will give a practical description of the labeling and what StockCharts offers. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252Ffx3W8vMlJ8jhuRHCjFWU%252Fwave9.png%3Falt%3Dmedia%26token%3D0993397d-0c5d-481e-bd5b-f29db80c798f&width=768&dpr=4&quality=100&sign=13c15241&sv=2) The labeling convention shown above is a hybrid between that shown in the Elliott Wave book and the Elliott tools available in the SharpCharts annotations. In Elliott-speak, this labeling convention is used to identify the degree or level of the wave, which represents the size of the underlying trend. The uppercase Roman numerals represent the large-degree waves, the simple numbers represent the medium-degree waves and the lowercase Roman numerals represent the small-degree waves. The trends start with the largest degree (Grand Supercycle) and work their way down to waves of lesser degree. For example, the Cycle wave is one larger degree than the Primary wave. Conversely, the Primary wave is one lesser degree than the Cycle wave. Wave 1 of (1) would indicate that Wave 1 is part of a larger degree Wave (1). Wave 1 is a lesser degree than Wave (1). In reality, most chartists will only use 1-3 wave degrees on their charts. It can get quite complicated trying to apply all nine wave degrees on one chart! Chartists using 1 to 3 wave degrees can simply label the highest-degree waves with uppercase Roman numerals (I,II,III,IV,V,a,b,c), the middle-degree waves with numbers (1,2,3,4,5,A,B,C) and the lowest-degree waves with lowercase Roman numerals (i,ii,iii,iv,v,a.b,c). This provides three distinct groups for labeling various waves. [hashtag](https://chartschool.stockcharts.com/table-of-contents/market-analysis/elliott-wave-analysis-articles/identifying-elliott-wave-patterns#types_of_motive_waves) Types of Motive Waves -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- There are two types of motive waves: the Impulse and the Diagonal. We will now describe both of these types of waves in more detail. ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/market-analysis/elliott-wave-analysis-articles/identifying-elliott-wave-patterns#impulse_waves) Impulse Waves The Impulse Wave is the type of wave we have used so far to illustrate how the structure of Elliott Wave is put together. It is the most common motive wave and the easiest to spot in a market. Like all motive waves, five sub-waves: three motive waves and two corrective waves. This is labeled as a 5-3-5-3-5 structure. However, it has three unbreakable rules that define its formation. If one of these rules is violated, then the structure is not an impulse wave and one would need to re-label the suspected impulse wave. The three rules are: 1. Wave 2 cannot retrace more than 100% of Wave 1. 2. Wave 3 can never be the shortest of waves 1, 3, and 5. 3. Wave 4 can never overlap Wave 1. The goal of a motive wave is to move the market. Out of all the various types of motive waves, impulse waves are the best at accomplishing this. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252Fg5A6jDf6MZx2jpekVY0l%252Fwave10.png%3Falt%3Dmedia%26token%3Dae860fc6-21b5-4a98-9130-0cd27723b8ef&width=768&dpr=4&quality=100&sign=91be7aaf&sv=2) The chart above shows an impulse wave. Notice that Wave 4 does not cross into the price territory of Wave 2, nor does Wave 2 correct below the beginning of Wave 1. Also, see that Wave 3 is not the shortest. Wave 3 can never be the shortest wave; it is usually the longest of the five waves and the most likely to extend (which is covered in the next section). Sub-wave 3 of an impulse wave will always be another impulse-type motive wave. Wave 2 cannot move below the beginning of Wave 1. Wave 2 is often known to retrace much of Wave 1, but if it retraces it completely, it is not a Wave 2. A break in price below the low of Wave 1 would invalidate the suspected wave-count and imply that one should look for an alternative way to label the pattern. #### [hashtag](https://chartschool.stockcharts.com/table-of-contents/market-analysis/elliott-wave-analysis-articles/identifying-elliott-wave-patterns#wave-extensions) **Wave Extensions** In the majority of cases, impulse waves will exhibit what is called an “extension” to their normal pattern. This means that one of the impulse wave's three motive sub-waves will be an elongated impulse with exaggerated subdivisions. This can happen in either Wave 1, 3 or 5, typically happening in only one of said waves. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252Fb6oTWwpuIPDJoWuDlMVx%252Fwave11.png%3Falt%3Dmedia%26token%3Dba7c627e-23e2-4e10-8e14-1e402cb9f9b3&width=768&dpr=4&quality=100&sign=3cbb01ec&sv=2) At times, the subdivisions of the extended sub-wave look almost the same in amplitude and time duration as the four other waves in the higher degree impulse wave of which they are a part. Instead of having a wave-count of 5 for the impulse, it is tempting to count 9 waves, as it may not be clear as to which wave is the extended wave. However, it does not really matter in the long run as the technical significance would be the same, even if one had assigned the wrong count. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252Ff0uof94X23KxW5QQGRJD%252Fwave12.png%3Falt%3Dmedia%26token%3D5cd30f6e-e379-4a37-9090-b07fa3a2864d&width=768&dpr=4&quality=100&sign=64a02be6&sv=2) If you run into difficulty seeing the extended wave, try your best to label the overall impulse and move on. A small guideline may help in this situation: if the potential Wave 1 and Wave 5 of the larger degree impulse look equal in length, then it is most likely Wave 3 which is extended, as it is the wave that most commonly does so. As an extended wave is also an impulse, extensions can occur within extensions. You may have a few degrees of extensions within one impulse wave. #### [hashtag](https://chartschool.stockcharts.com/table-of-contents/market-analysis/elliott-wave-analysis-articles/identifying-elliott-wave-patterns#impulse-wave-truncation-truncated-fifth) **Impulse Wave Truncation (Truncated Fifth)** There are times when the market has become so over-extended in Wave 3 that there is not much force left for the impulse wave to come to a proper completion. When this happens, there is a chance that the last wave of the impulse, Wave 5, will not reach the end of Wave 3 before the market starts correcting in the opposite direction. At this point, the market is just too exhausted. This condition is often called a “failure” or a “Truncation.” A Truncation, or truncated fifth, consists of 5 sub-waves, like all motive waves. It often occurs after a particularly strong third wave, although there is also a chance that sentiment, for whatever reason, has become so strong in the opposite direction of the trend that a Wave 5 will not terminate beyond the price of Wave 3. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FeGhco3zDe6UAJGwIUHxV%252Fwave13.png%3Falt%3Dmedia%26token%3Dc45840e7-1a73-458e-ac27-e37316bce539&width=768&dpr=4&quality=100&sign=3ced49d1&sv=2) ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/market-analysis/elliott-wave-analysis-articles/identifying-elliott-wave-patterns#diagonal_waves) Diagonal Waves A Diagonal Wave is the second type of motive wave. It is not an impulse wave. However, like all motive waves, it consists of five sub-waves and aims to move the market in the direction of the trend. The difference is that the diagonal looks like a wedge - either expanding or contracting. Also, the sub-waves of the diagonal may not have a count of five, depending on what type of diagonal is being observed. This is explained below. As with all motive waves, each actionary sub-wave of the diagonal never fully retraces the previous actionary sub-wave; furthermore, sub-wave 3 of the diagonal can never be the shortest wave. #### [hashtag](https://chartschool.stockcharts.com/table-of-contents/market-analysis/elliott-wave-analysis-articles/identifying-elliott-wave-patterns#ending-diagonals) **Ending Diagonals** The ending diagonal is a special type of wave that occurs in Wave 5 of an impulse, or the last wave of a correction pattern - Wave C of an A, B, C correction. This wave often occurs when the preceding move of the trend has gone too far, too fast and has run out of steam. In all cases, they are found at the end of the higher degree motive or corrective wave. This wave pattern indicates the termination of the previous trend of one higher degree. The wave-structure of an ending diagonal is different from the impulse wave. Where the impulse wave had a general structure count of 5-3-5-3-5, the ending diagonal has a structure count of 3-3-3-3-3. All five of the waves of an ending diagonal break down to only three waves each, indicating exhaustion of the larger degree trend. Also, Wave 2 and Wave 4 may overlap each other. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FUj9Q63kAcQHx9xyPx542%252Fwave14.png%3Falt%3Dmedia%26token%3D95af4463-5294-42eb-8109-14ab838d4b1a&width=768&dpr=4&quality=100&sign=45e4215a&sv=2) Most ending diagonals have a wedge shape to them where they fit within two converging lines. However, there are cases where the wedge is expanding (though it is rare). Please keep in mind that the sub-waves of the ending diagonal, consisting of three waves each, are corrective in nature. See the section on corrective waves for more detail on their formation. #### [hashtag](https://chartschool.stockcharts.com/table-of-contents/market-analysis/elliott-wave-analysis-articles/identifying-elliott-wave-patterns#leading-diagonals) **Leading Diagonals** Leading diagonals, which are quite rare, are found in either the Wave 1 position of an impulse wave or in the Wave A position of a zigzag correction. They have a 5-3-5-3-5 wave structure like an impulse wave, but, in this case, Wave 2 and Wave 4 overlap and form a wedge pattern with converging boundary lines. Because of the five-wave subdivisions of Waves 1, 3, and 5, this pattern indicates continuation of the trend, whereas the ending diagonal pattern of 3-3-3-3-3 indicates termination of the trend. After the market corrects - and does not correct beyond the beginning of the leading diagonal - one can expect the trend to continue in the direction of the leading diagonal. [hashtag](https://chartschool.stockcharts.com/table-of-contents/market-analysis/elliott-wave-analysis-articles/identifying-elliott-wave-patterns#types_of_corrective_waves) Types of Corrective Waves ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- When markets move against the trend of one higher degree, they do so with an apparent struggle. This resistance prevents the pattern that forms from developing a motive type of structure; the patterns that do form are more varied than in the motive wave type. An analyst must exercise patience and flexibility when dealing with corrective waves. There are two styles of corrective waves, the “sharp” correction and the “sideways” correction. The sharp corrections move steeply against the trend of one higher degree, while the sideways correction appears to form a flat type of structure that often goes back to the price of where it began before ending the correction. More details on these are given below, broken down into four main categories. Please keep in mind that although corrections are often seen as declining in price, the reality is that the market can correct up or down, depending on the trend of higher degree. ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/market-analysis/elliott-wave-analysis-articles/identifying-elliott-wave-patterns#zigzag_corrections) Zigzag Corrections A single zigzag is a three-wave corrective structure that is labeled as A-B-C. The sub-wave sequence is 5-3-5. We have seen this above in our expanded corrective wave pattern. The A and C waves are motive waves (with 5 sub-waves), while the B wave is corrective (often with 3 sub-waves). The zigzag is known to form a sharp style of correction and, in an impulse wave, usually shows up in the second wave position. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FvrygWGxWXsmV7aou1grY%252Fwave15.png%3Falt%3Dmedia%26token%3D53a518ac-f2be-4927-9843-5972ba0bdd14&width=768&dpr=4&quality=100&sign=25281839&sv=2) Zigzags may also form in combination and form what is called a double (or triple) zigzag, where two or three zigzags form connected by another corrective wave between them. More detail on the rules for these are given below when we talk about combination corrections. ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/market-analysis/elliott-wave-analysis-articles/identifying-elliott-wave-patterns#flat_corrections) Flat Corrections The flat correction is another three-wave correction where the sub-waves form a 3-3-5 structure. Like the zigzag, it is also labeled as an A-B-C structure. In this case, both Waves A and B are of the corrective variety and Wave C is motive (with 5 sub-waves). It is called a “flat” because the pattern moves in a sideways direction. Within an impulse wave, the fourth wave often has a flat while the second wave rarely does. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252F33pZORhm304cqlS7daUX%252Fwave17_1.png%3Falt%3Dmedia%26token%3D028ee1db-2b63-404a-bcd7-24a991560e25&width=768&dpr=4&quality=100&sign=c2803ec1&sv=2) Most flats, however, don't look as neat as this, but are variations on the theme. A flat that has the B wave terminate beyond the start of the A wave and the C wave terminate beyond the start of the B wave is called an expanded flat. This is actually more common in markets than the normal flat shown above. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FYuWjqqhI5e1uwC9MMiev%252Fwave18.png%3Falt%3Dmedia%26token%3D4a731b2a-5bc5-4875-a266-6b0cca812682&width=768&dpr=4&quality=100&sign=9d8f3c1&sv=2) A running flat, which often occurs in strong trends of one higher degree, will have Wave B terminate beyond the beginning of Wave A, but Wave C will fail to reach the beginning of Wave A. This is a rare case, but it has been known to happen and usually forms in strong trends. ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/market-analysis/elliott-wave-analysis-articles/identifying-elliott-wave-patterns#horizontal_triangles) Horizontal Triangles The horizontal triangle is a pattern that consists of five sub-waves that form a 3-3-3-3-3 structure, labeled as A-B-C-D-E. Unlike the motive wave, which also has five waves, this pattern reflects a balance of forces and travels in a sideways pattern. The sub-waves are corrective and form patterns of threes. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FRxNf0gBZmU08eguHeRU9%252Fwave19.png%3Falt%3Dmedia%26token%3D33834215-e789-4879-beba-8a357c30bc1b&width=768&dpr=4&quality=100&sign=2e4caf15&sv=2) The horizontal triangle can either be expanding, where each following sub-wave gets bigger in amplitude, or contracting, forming a wedge. The triangles may also be categorized as symmetrical, descending or ascending, depending on whether they seem to be pointing sideways (as in the above example), up with a flat top and rising bottoms (ascending) or down with descending tops and a flat bottom. The sub-waves may be composed of complex combinations, not just of zigzags (shown) or flats. Although it may look easy in theory to spot a triangle, it may take a little practice to become familiar with them in the market. A triangle may extend by having its fifth wave also be a triangle of lesser degree. Instead of Wave E being a three-wave structure, it will be another horizontal triangle. This just demonstrates the level of complexity that Elliott Wave Theory can reach. One thing to remember about horizontal triangles is that they always appear in the position prior to the final move of the pattern, or as the final pattern in a combination (described below). This means that they will appear as Wave 4 in an impulse wave or as Wave B in a zigzag. This one fact can help alert an analyst to a change in trend. ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/market-analysis/elliott-wave-analysis-articles/identifying-elliott-wave-patterns#correction_combinations) Correction Combinations Markets do not always form the relatively simple patterns seen above. The structure is often complex and confusing. The way Elliott Wave categorizes these structures is what is called a combination. A combination is composed of the corrective waves seen above and seems to be a corrective wave's way of extending sideways for the most part. Combinations are mostly sideways types of corrections, but can be sharp in the case of the double or triple zigzag. The structure is labeled as W-X-Y, for a double combination, or as W-X-Y-X-Z for a triple combination. The diagram below shows the theoretical breakdown of the wave structure. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FEB3YdtlaLtvTi62VxyId%252Fwave20_1.png%3Falt%3Dmedia%26token%3D61d6b98a-1c2d-4d58-a91d-55146a367ccd&width=768&dpr=4&quality=100&sign=938d5344&sv=2) Wave W is any flat or zigzag, Wave X is usually a flat or zigzag (except in the case where a triangle forms, which indicates that the next wave will be the last of the combination) and the rest of the waves may be any corrective type. The only thing to watch out for is the horizontal triangle, which can be either in the last position or the next to the last position - the last Wave X. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FdwpR7WYFGIwOY6KhLWW8%252Fwave21.png%3Falt%3Dmedia%26token%3Dd7f29458-672c-4ea0-b164-1a710bc06128&width=768&dpr=4&quality=100&sign=d3080741&sv=2) Earlier, we mentioned the double or triple zigzag. Here is what a double zigzag looks like; it also has the W-X-Y labeling. For a triple zigzag, add another Wave X and a final zigzag to form Wave Z. [PreviousIntroduction to Elliott Wave Theorychevron-left](https://chartschool.stockcharts.com/table-of-contents/market-analysis/elliott-wave-analysis-articles/introduction-to-elliott-wave-theory) [NextGuidelines for Applying Elliott Wave Theorychevron-right](https://chartschool.stockcharts.com/table-of-contents/market-analysis/elliott-wave-analysis-articles/guidelines-for-applying-elliott-wave-theory) Last updated 1 year ago Was this helpful? * [Labeling Wave Degrees](https://chartschool.stockcharts.com/table-of-contents/market-analysis/elliott-wave-analysis-articles/identifying-elliott-wave-patterns#labeling_wave_degrees) * [Types of Motive Waves](https://chartschool.stockcharts.com/table-of-contents/market-analysis/elliott-wave-analysis-articles/identifying-elliott-wave-patterns#types_of_motive_waves) * [Impulse Waves](https://chartschool.stockcharts.com/table-of-contents/market-analysis/elliott-wave-analysis-articles/identifying-elliott-wave-patterns#impulse_waves) * [Diagonal Waves](https://chartschool.stockcharts.com/table-of-contents/market-analysis/elliott-wave-analysis-articles/identifying-elliott-wave-patterns#diagonal_waves) * [Types of Corrective Waves](https://chartschool.stockcharts.com/table-of-contents/market-analysis/elliott-wave-analysis-articles/identifying-elliott-wave-patterns#types_of_corrective_waves) * [Zigzag Corrections](https://chartschool.stockcharts.com/table-of-contents/market-analysis/elliott-wave-analysis-articles/identifying-elliott-wave-patterns#zigzag_corrections) * [Flat Corrections](https://chartschool.stockcharts.com/table-of-contents/market-analysis/elliott-wave-analysis-articles/identifying-elliott-wave-patterns#flat_corrections) * [Horizontal Triangles](https://chartschool.stockcharts.com/table-of-contents/market-analysis/elliott-wave-analysis-articles/identifying-elliott-wave-patterns#horizontal_triangles) * [Correction Combinations](https://chartschool.stockcharts.com/table-of-contents/market-analysis/elliott-wave-analysis-articles/identifying-elliott-wave-patterns#correction_combinations) Was this helpful? sun-brightdesktopmoon sun-brightdesktopmoon --- # Wyckoff Stock Analysis | ChartSchool | StockCharts.com [hashtag](https://chartschool.stockcharts.com/table-of-contents/market-analysis/wyckoff-analysis-articles/wyckoff-stock-analysis#introduction) Introduction ---------------------------------------------------------------------------------------------------------------------------------------------------------------- After analyzing the broad market and establishing a trading bias, Wyckoff turned to individual stock selection, focusing on stocks trading in harmony with the broad market trend. By definition, the vast majority of stocks move in the same direction as the broader market. Wyckoff, therefore, focused exclusively on potential long positions when the broad market index was trending up. Conversely, he focused on potential short positions when the broad market index was trending down. In general, there are four steps in the stock selection process. First, single out a particular group or sector within the broader market that shows relative strength. Second, look for stocks within this group that are showing relative strength. Third, look for signals using chart patterns and volume. Fourth, calculate risk and reward to ascertain the feasibility of a trade. [hashtag](https://chartschool.stockcharts.com/table-of-contents/market-analysis/wyckoff-analysis-articles/wyckoff-stock-analysis#four_phases) Four Phases -------------------------------------------------------------------------------------------------------------------------------------------------------------- Before looking at the stock selection process in detail, keep in mind the four phases of price movement: accumulation, markup, distribution and markdown. It is important to understand the price position for the broad market and the individual stock before initiating a trade. Long positions are preferred when the broad market is in a markup stage. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252F9715xygMu3liA4L07J4d%252Fwyss-01-markup.png%3Falt%3Dmedia%26token%3D90134fe7-c98f-40a2-bda0-ff9cecedb08a&width=768&dpr=4&quality=100&sign=59e0cd4b&sv=2) Wyckoff Outside of the markup stage, there are five other buy points that offer a good risk-reward ratio. Aggressive traders would attempt to pick a bottom by buying on the spring. Trend followers would buy on the breakout that signals the start of an uptrend. Once the breakout has taken place, chartists can also look to establish long positions during throwbacks, corrections or re-accumulation phases. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FKu1jK0GdADkzbEYARnvv%252Fwyss-02-markdown.png%3Falt%3Dmedia%26token%3Df0cc2769-05bb-40a6-a764-af2067414469&width=768&dpr=4&quality=100&sign=757477c8&sv=2) Wyckoff Short positions are preferred when the broader market is in a markdown stage. Aggressive traders would become active when a lower peak or a thrust pattern forms, which is a failed resistance breakout. This is clearly a top-picking exercise with an above-average risk of failure. Trend followers would be most apt to sell on a support break that signals a clear trend reversal. After the breakdown, chartists can look to establish short positions during throwbacks, corrections or re-distribution phases. [hashtag](https://chartschool.stockcharts.com/table-of-contents/market-analysis/wyckoff-analysis-articles/wyckoff-stock-analysis#sector_group_behavior) Sector Group Behavior ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Once chartists understand the broader market and the position of the market, it is time to analyze the groups that make up the market. There are several sectors in the stock market, each of which can be broken down into different industry groups. For example, you can use the 11 sector SPDRs to compare sector charts with the broad market chart. There are also dozens of Dow Jones industry group indices and industry group ETFs that can be used to measure performance for specific groups. Even though the broad market governs the general trend for all stocks, Wyckoff understood that certain groups lead the market and certain groups lag the market. The objective is to find groups showing relative strength when broad market conditions are bullish and relative weakness when broad market conditions are bearish. Keep in mind that Wyckoff was active in the early 20th century, well before calculators and computers. Everything was done by hand with pencil, paper and eraser. Even plotting a simple ratio chart to compare two securities would have been a real chore, especially if following dozens of securities. Instead of ratio charts, Wyckoff simply compared the actual price charts to determine relative strength or relative weakness. Groups that hold up when the market moves lower show relative strength. Groups that fail to rally when the market advances show relative weakness. It is as simple as that. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FldZJUW5BzVSWnt7wgqPL%252Fwyss-03-xlk-relstg.png%3Falt%3Dmedia%26token%3Dd2695a04-18b4-492d-8ddc-83e2420fed58&width=768&dpr=4&quality=100&sign=39629fdc&sv=2) Wyckoff The chart above shows the Technology SPDR (XLK) and the S&P 500 ETF (SPY). XLK started showing relative strength in mid-September by breaking above its late August high. Notice that SPY did not break above this corresponding high. While SPY moved to a new low in early October, XLK held above its prior low and showed relative strength again. With SPY forming a spring in early October and breaking out in mid-October, Wyckoff chartists would be focusing on stocks in the technology sector because of relative strength in XLK. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FB0dZFAUYOfaBGeYQyKYU%252Fwyss-04-xlf-relweak.png%3Falt%3Dmedia%26token%3Db689a7da-bfc1-4a52-8865-ce074093f86d&width=768&dpr=4&quality=100&sign=3308361c&sv=2) Wyckoff The second example shows the Finance SPDR (XLF) and the S&P 500 ETF (SPY). XLF started showing relative strength in April-May as it failed to exceed its February high. Notice that SPY did exceed this high. Relative weakness continued to materialize as XLF broke below the March-April lows in May and continued lower in June. SPY, on the other hand, did not come close to its March low in April-May and held above this low in June. The finance sectors clearly showed relative weakness. [hashtag](https://chartschool.stockcharts.com/table-of-contents/market-analysis/wyckoff-analysis-articles/wyckoff-stock-analysis#relative_performance) Relative Performance -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- In addition to following the broader market, Wyckoff Theory advocates a relative strength approach to stock picking. This means buying stocks showing relative strength and avoiding stocks showing relative weakness. There are three ways to show relative strength. First, the stock can advance at a steeper rate than the index. Second, the stock can advance when the index moves sideways. Third, the stock can advance or trade flat when the index corrects. The example below shows Consolidated Edison (ED) forming a higher low and breaking resistance as the S&P 500 corrects. The ability advance as the market corrected showed relative strength. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FHf5pEfavTNgM4OLC8Cpi%252Fwyss-05-ed-relstg.png%3Falt%3Dmedia%26token%3D62cff9e6-044d-46be-912f-567864049bd4&width=768&dpr=4&quality=100&sign=8440035f&sv=2) Wyckoff Wyckoff was not afraid of short positions and advocated shorting stocks when the broad market index was trending lower. In keeping in harmony with the broad market downtrend, Wyckoff would look for short positions in stocks showing relative weakness. There are three ways to show relative weakness. First, a stock can decline at a faster rate than the broad market index. Second, a stock can decline when the index is trading flat. Third, a stock can decline or trade flat when the index is bouncing within a bigger downtrend. The example below shows Nucor (NUE) moving lower as the S&P 500 bounces in July-August. Nucor showed relative weakness because it was unable to bounce along with the broad market index. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FYCL3Egu5e1pyWrnpsp8s%252Fwyss-06-nue-relweak.png%3Falt%3Dmedia%26token%3D474b8a17-30cf-4df8-a46c-f4c6ab01b7c4&width=768&dpr=4&quality=100&sign=7cc5f303&sv=2) Wyckoff [hashtag](https://chartschool.stockcharts.com/table-of-contents/market-analysis/wyckoff-analysis-articles/wyckoff-stock-analysis#price_volume_patterns) Price Volume Patterns ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Wyckoff used price patterns and volume to generate signals for individual stocks. Bullish patterns include the springboard near consolidation support, the pullback that retraces 50% of the prior advance and the high volume consolidation. Bearish patterns include the thrust near consolidation resistance, the corrective bounce that retraces 50% of the prior decline and the high volume consolidation. Let's look at some bullish patterns first. ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/market-analysis/wyckoff-analysis-articles/wyckoff-stock-analysis#high_volume_springboard) High Volume Springboard First, note that the broad market and the stock should be in uptrends. With the exception of a spring (failed support break), the idea is to participate in an ongoing uptrend, not to pick a bottom. The high volume springboard was perhaps a favorite for Wyckoff. After a move higher, the stock moves into a flat consolidation with a clear support level. Chartists should watch action closely as prices approach support. A high volume surge off of support, also known as a springboard, is the first sign that the bigger uptrend is set to continue and a consolidation breakout is imminent. The example with Boeing (BA) shows a high volume spring off consolidation support. BA surged in October and then consolidated in November. Support was around 62 and resistance around 68 for the entire month. After dipping in late November, the stock sprung off support with high volume and ultimately broke resistance on its way to the mid-70s. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FNljhxyAhTOYOhPNYrjBZ%252Fwyss-07-ba-bullspring.png%3Falt%3Dmedia%26token%3D2f3283d8-c608-414e-b769-fb48c98e74eb&width=768&dpr=4&quality=100&sign=304a4816&sv=2) Wyckoff In addition to this bullish pattern, BA showed relative strength by outperforming the S&P 500. The indicator window shows the S&P 500 moving lower in November. Notice that BA held its early November low and showed relative strength. This is a classic example of a stock holding firm as the market corrects, which further reinforced the Wyckoff spring and buy signal. ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/market-analysis/wyckoff-analysis-articles/wyckoff-stock-analysis#retracement) 50% Retracement An uptrend often takes shape as a zigzag advance, with two steps forward and one step backward. Wyckoff used the 50% retracement level as his line in the sand for pullbacks. A shallower pullback shows relatively weak selling pressure and underlying strength, while a deeper pullback reflects relatively strong selling pressure and underlying weakness. Once a stock hits the 50% sweet spot, Wyckoff would look for a high volume reversal surge to signal a continuation of the prior advance. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FbTrPgIzn5s2G0Ws4nbCj%252Fwyss-08-gci-bull50r.png%3Falt%3Dmedia%26token%3Da9a41a71-dd18-4cec-a078-84aa13ab9baa&width=768&dpr=4&quality=100&sign=af537686&sv=2) Wyckoff The example above shows Gannet (GCI) retracing around 50% of the prior advance, before then surging with high volume to start another leg up. Gannet hit the 50% mark around 10.28 and firmed for a few days. The first reversal clue came with the initial surge above 10.50 on above-average volume. In fact, volume on this surge was the highest in four weeks. Further confirmation came with a follow-through above 11.50 on even higher volume (second green arrow). The stock quickly moved above its October high and continued to 15.50 in January. ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/market-analysis/wyckoff-analysis-articles/wyckoff-stock-analysis#high_volume_consolidation) High Volume Consolidation Wyckoff notes that chartists should heighten their attention when a stock consolidates and volume expands. High volume reflects a high level of interest, but the consolidation reflects a stalemate. Such conditions can lead to an explosive move. Admittedly, the consolidation break can go either way. Chartists should examine the overall chart for directional clues and act when confirmed with a directional break. The example below shows Amgen (AMGN) with a high volume consolidation just before a breakout. First, note that Amgen showed relative strength in August-September and again in November. The S&P 500 moved lower during these periods, but Amgen moved higher in August-September and traded flat during November. Relative strength was the first clue that any breakout would be to the upside. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252F6uamPIGHZk9EYYFtzUcE%252Fwyss-09-amgn-bullcon.png%3Falt%3Dmedia%26token%3D7cc378f5-5fab-472f-8a5d-64ee9cfe8691&width=768&dpr=4&quality=100&sign=970ac46c&sv=2) Wyckoff After the August-September advance, Amgen moved into a consolidation from early October to mid-December. There was a high volume springboard off support at the end of November, but the stock did not break resistance. Instead, Amgen consolidated and volume expanded even further. Something was up here. Even though the consolidation is technically neutral, the bias was bullish because of relative strength and the high volume springboard. Amgen made its move with a gap and breakout on high volume. This signal foreshadowed a surge from 60 to 68. ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/market-analysis/wyckoff-analysis-articles/wyckoff-stock-analysis#bearish_patterns) Bearish Patterns Chartists can reverse engineer these bullish patterns to get the bearish equivalents. In a bearish situation, chartists would look for stocks showing relative weakness, negative volume flows and bearish chart patterns. A stock is relatively weak when it fails to bounce along with the market for fails to confirm a higher high in the broad market index. Negative volume flows occur when volume on down days expands or exceeds volume on up days. The three bullish patterns have bearish counterparts. Instead of a high volume springboard off consolidation support, look for a high volume decline from consolidation resistance. After a counter-trend advance retraces 50% of the prior decline, look for a high volume down thrust or reversal to signal the start of another leg lower. [hashtag](https://chartschool.stockcharts.com/table-of-contents/market-analysis/wyckoff-analysis-articles/wyckoff-stock-analysis#risk-reward_and_stops) Risk-Reward and Stops ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- The final Wyckoff steps are to calculate reward potential, identify potential risk and set appropriate stops. Wyckoff believed that profit potential should be at least three times the risk. In other words, he would risk $5 for the chance to make $15 or more. Using such a risk-reward ratio, it would be possible to make profits 50% of the time and still make money. Wyckoff used Point & Figure charts to calculate price objectives or profit potential. In particular, the width of the pattern is used to project the target. In the Amgen example, the stock traded sideways for a period and then broke resistance. In Point & Figure terms, the stock forged a Triple Top Breakout. The pattern is 5 columns wide, this is a 3-box reversal chart and each box is worth 1, which makes the upside target 69 (5 x 3 x 1 = 15, 54 + 15 = 69). ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252F3z1rYmHClC5SQfLeNvJr%252Fwyss-11-amgn-pnf2.png%3Falt%3Dmedia%26token%3D3aec31eb-e893-4d28-8311-8385e6ecf65f&width=768&dpr=4&quality=100&sign=4cf6b2da&sv=2) ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FR8WdumSQZhgYXcgroMuh%252Fwyss-10-amgn-pnf1.png%3Falt%3Dmedia%26token%3Dd3488508-a6a9-40a5-a4d9-bbbfe289ac0d&width=768&dpr=4&quality=100&sign=a6d24a94&sv=2) StockCharts.com also computes P&F targets using reversal and breakout methods. As shown on the chart, the Triple Top Breakout projects a move to 72 using the reversal method. You can read more on P&F targets in our [ChartSchool article](https://chartschool.stockcharts.com/table-of-contents/chart-analysis/point-and-figure-charts/p-and-f-price-objectives/p-and-f-price-objectives-breakout-and-reversal-method) . Even though Wyckoff made price projections, he used these projections as guidelines, not definitive targets. Chartists must continually reassess the chart and the validity of the current move. The technical situation can change before the target is reached. Chartists should recognize these changes and adjust their trading plan accordingly. A stop-loss is the final piece of the Wyckoff trading plan. In general, Wyckoff thought stops should be placed at obvious danger points. In other words, look for key support or resistance levels that, when broken, would change the initial assessment. Once a move is underway, chartists should trail their stop-loss to lock in profits. Wyckoff advised against placing stops too tight, feeling chartists should allow for wiggle room and exercise judgment when adjusting their stops. Stops should, however, be quite tight once a price objective is reached. [hashtag](https://chartschool.stockcharts.com/table-of-contents/market-analysis/wyckoff-analysis-articles/wyckoff-stock-analysis#conclusion) Conclusion ------------------------------------------------------------------------------------------------------------------------------------------------------------ Richard D. Wyckoff presents a systematic approach to identifying the market trend, isolating strong groups and picking stocks within that group. This relative strength approach, which has stood the test of time, is just as applicable today as it was 10 and 50 years ago. Remember, the Wyckoff methodology is based on broad guidelines, not an exact science. Individual chartists must make their own judgments based on the charts. Forget about the fundamentals and financial media; focus on price action and let the charts speak for themselves. [hashtag](https://chartschool.stockcharts.com/table-of-contents/market-analysis/wyckoff-analysis-articles/wyckoff-stock-analysis#further_study) Further Study ------------------------------------------------------------------------------------------------------------------------------------------------------------------ [**Charting the Stock Market: The Wyckoff Method**arrow-up-right](https://a.co/d/3y5Mq6e) Jack K. Hutson [PreviousWyckoff Market Analysischevron-left](https://chartschool.stockcharts.com/table-of-contents/market-analysis/wyckoff-analysis-articles/wyckoff-market-analysis) [NextThe Wyckoff Method: A Tutorialchevron-right](https://chartschool.stockcharts.com/table-of-contents/market-analysis/wyckoff-analysis-articles/the-wyckoff-method-a-tutorial) Last updated 1 year ago Was this helpful? * [Introduction](https://chartschool.stockcharts.com/table-of-contents/market-analysis/wyckoff-analysis-articles/wyckoff-stock-analysis#introduction) * [Four Phases](https://chartschool.stockcharts.com/table-of-contents/market-analysis/wyckoff-analysis-articles/wyckoff-stock-analysis#four_phases) * [Sector Group Behavior](https://chartschool.stockcharts.com/table-of-contents/market-analysis/wyckoff-analysis-articles/wyckoff-stock-analysis#sector_group_behavior) * [Relative Performance](https://chartschool.stockcharts.com/table-of-contents/market-analysis/wyckoff-analysis-articles/wyckoff-stock-analysis#relative_performance) * [Price Volume Patterns](https://chartschool.stockcharts.com/table-of-contents/market-analysis/wyckoff-analysis-articles/wyckoff-stock-analysis#price_volume_patterns) * [High Volume Springboard](https://chartschool.stockcharts.com/table-of-contents/market-analysis/wyckoff-analysis-articles/wyckoff-stock-analysis#high_volume_springboard) * [50% Retracement](https://chartschool.stockcharts.com/table-of-contents/market-analysis/wyckoff-analysis-articles/wyckoff-stock-analysis#retracement) * [High Volume Consolidation](https://chartschool.stockcharts.com/table-of-contents/market-analysis/wyckoff-analysis-articles/wyckoff-stock-analysis#high_volume_consolidation) * [Bearish Patterns](https://chartschool.stockcharts.com/table-of-contents/market-analysis/wyckoff-analysis-articles/wyckoff-stock-analysis#bearish_patterns) * [Risk-Reward and Stops](https://chartschool.stockcharts.com/table-of-contents/market-analysis/wyckoff-analysis-articles/wyckoff-stock-analysis#risk-reward_and_stops) * [Conclusion](https://chartschool.stockcharts.com/table-of-contents/market-analysis/wyckoff-analysis-articles/wyckoff-stock-analysis#conclusion) * [Further Study](https://chartschool.stockcharts.com/table-of-contents/market-analysis/wyckoff-analysis-articles/wyckoff-stock-analysis#further_study) Was this helpful? sun-brightdesktopmoon sun-brightdesktopmoon --- # The Wyckoff Method: A Tutorial | ChartSchool | StockCharts.com [hashtag](https://chartschool.stockcharts.com/table-of-contents/market-analysis/wyckoff-analysis-articles/the-wyckoff-method-a-tutorial#wyckoff_methodthe_origins) Wyckoff Method: The Origins --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FJzZkjBeEjTsKsA3Co0VH%252Fwyckoff.png%3Falt%3Dmedia%26token%3D044b40b9-aca0-4ae5-88d3-02f1b026a6a0&width=768&dpr=4&quality=100&sign=ebc652d&sv=2) Richard D. Wyckoff **Richard Demille Wyckoff** (1873–1934) was an early 20th-century pioneer in the technical approach to studying the stock market. He is considered one of the five “titans” of technical analysis, along with Dow, Gann, Elliott, and Merrill. At age 15, he worked as a stock runner for a New York brokerage. Afterward, while still in his 20s, he became the head of his firm. He also founded and, for nearly two decades, wrote and edited _The Magazine of Wall Street_, which, at one point, had more than 200,000 subscribers. Wyckoff was an avid student of the markets, as well as an active tape reader and trader. He observed the market activities and campaigns of the legendary stock operators of his time, including JP Morgan and Jesse Livermore. From his observations and interviews with those big-time traders, Wyckoff codified the best practices of Livermore and others into laws, principles, and techniques of trading methodology, money management, and mental discipline. Mr. Wyckoff observed numerous retail investors being repeatedly fleeced. Consequently, he dedicated himself to instructing the public about “the real rules of the game” as played by the large interests, or “smart money.” In the 1930s, he founded a school that would later become the Stock Market Institute. The school's central offering was a course that integrated the concepts that Wyckoff had learned about identifying large operators' accumulation and distribution of stock with how to take positions in harmony with these big players. His time-tested insights are as valid today as they were when first articulated. This article provides an overview of Wyckoff's theoretical and practical approaches to the markets, including guidelines for identifying trade candidates and entering long and short positions, analysis of accumulation and distribution trading ranges, and an explanation of using Point and Figure charts to identify price targets. Although this article focuses exclusively on stocks, Wyckoff's methods can be applied to any freely-traded market in which large institutional traders operate, including commodities, bonds and currencies. [hashtag](https://chartschool.stockcharts.com/table-of-contents/market-analysis/wyckoff-analysis-articles/the-wyckoff-method-a-tutorial#a_five-step_approach_to_the_market) A Five-Step Approach to the Market ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- The Wyckoff Method involves a five-step approach to stock selection and trade entry, which can be summarized as follows: **1\. Determine the present position and probable future trend of the market.** Is the market consolidating or trending? Does your analysis of market structure, supply, and demand indicate the direction that is likely in the near future? This assessment should help you decide whether to be in the market at all and, if so, whether to take long or short positions. Use bar charts and Point and Figure charts of the major market indices for Step 1. **2\. Select stocks in harmony with the trend.** In an uptrend, select stocks that are stronger than the market. For instance, look for stocks demonstrating greater percentage increases than the market during rallies and smaller decreases during reactions. In a downtrend, do the reverse—choose stocks weaker than the market. If you aren't sure about a specific issue, drop it and move on to the next one. Use bar charts of individual stocks to compare with those of the most relevant market index for Step 2. **3\. Select stocks with a “cause” that equals or exceeds your minimum objective.** A critical component of Wyckoff's trade selection and management was his unique method of identifying price targets using Point and Figure (P&F) projections for long and short trades. In Wyckoff's fundamental law of “Cause and Effect,” the horizontal P&F count within a trading range represents the cause, while the subsequent price movement represents the effect. So, if you're planning to take long positions, choose stocks that are under accumulation or re-accumulation and have built a sufficient cause to satisfy your objective. Step 3 relies on the use of Point and Figure charts of individual stocks. **4\. Determine the stocks' readiness to move.** Apply the nine tests for buying or selling (described below). For instance, in a trading range after a prolonged rally, does the evidence from the nine selling tests suggest that significant supply is entering the market and that a short position may be warranted? Or in an apparent accumulation trading range, do the nine buying tests indicate that supply has been successfully absorbed, as evidenced further by a low-volume spring and an even lower-volume test of that spring? Use bar charts and Point and Figure charts of individual stocks for Step 4. **5\. Time your commitment with a turn in the stock market index.** Three-quarters or more of individual issues move in sync with the overall market. So, you improve the odds of a successful trade by having the power of the overall market behind it. Specific Wyckoff principles help anticipate potential market turns, including a change of character of price action (such as the largest down-bar on the highest volume after a long uptrend), and manifestations of Wyckoff's three laws (see below). Put your stop-loss in place and trail it, as appropriate, until you close out the position. Use bar and Point and Figure charts for Step 5. [hashtag](https://chartschool.stockcharts.com/table-of-contents/market-analysis/wyckoff-analysis-articles/the-wyckoff-method-a-tutorial#wyckoff_s_composite_man) Wyckoff's "Composite Man" ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Wyckoff proposed a heuristic device to help understand price movements in individual stocks and the market as a whole, which he dubbed the “Composite Man.” _“…all the fluctuations in the market and in all the various stocks should be studied as if they were the result of one man’s operations. Let us call him the Composite Man, who, in theory, sits behind the scenes and manipulates the stocks to your disadvantage if you do not understand the game as he plays it; and to your great profit if you do understand it.”_ (_The Richard D. Wyckoff Course in Stock Market Science and Technique_, section 9, p. 1-2) Wyckoff advised retail traders to try to play the market game as the Composite Man played it. He claimed that it doesn't matter if market moves “are real or artificial; that is, the result of actual buying and selling by the public and bona fide investors or artificial buying and selling by larger operators.” (_The Richard D. Wyckoff Method of Trading and Investing in Stocks_, section 9M, p. 2) Based on his years of observations of the market activities of large operators, Wyckoff taught that: * The Composite Man carefully plans, executes, and concludes his campaigns. * The Composite Man attracts the public to buy a stock in which he has accumulated a sizeable line of shares by making many transactions involving many shares, in effect advertising his stock by creating the appearance of a “broad market.” * One must study individual stock charts with the purpose of judging the behavior of the stock and the motives of those large operators who dominate it. * With study and practice, one can acquire the ability to interpret the motives behind the action that a chart portrays. Wyckoff and his associates believed that if you could understand the market behavior of the Composite Man, you could identify many trading and investment opportunities early enough to profit from them. [hashtag](https://chartschool.stockcharts.com/table-of-contents/market-analysis/wyckoff-analysis-articles/the-wyckoff-method-a-tutorial#wyckoff_price_cycle) Wyckoff Price Cycle ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- According to Wyckoff, the market can be understood and anticipated through detailed analysis of supply and demand, which can be ascertained from studying price action, volume and time. As a broker, he was in a position to observe the activities of highly successful individuals and groups who dominated specific issues; consequently, he was able to decipher, via the use of what he called vertical (bar) and figure (Point and Figure) charts, the future intentions of those large interests. An idealized schematic of how he conceptualized the large interests' preparation for and execution of bull and bear markets is depicted in the figure below. The time to enter long orders is towards the end of the preparation for a price markup or bull market (accumulation of large lines of stock), while the time to initiate short positions is at the end of the preparation for price markdown. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FzvhYWL8U1s3CeMrCkNDS%252Fwyckoffpricecycle.jpg%3Falt%3Dmedia%26token%3D463481d0-c792-45a5-a969-7edd222a0180&width=768&dpr=4&quality=100&sign=b3a72108&sv=2) Wyckoff Price Cycle [hashtag](https://chartschool.stockcharts.com/table-of-contents/market-analysis/wyckoff-analysis-articles/the-wyckoff-method-a-tutorial#the_basic_principlesthree_wyckoff_laws) The Basic Principles: Three Wyckoff Laws ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Wyckoff's chart-based methodology rests on three fundamental “laws” that affect many aspects of analysis. These include determining the market's and individual stocks' current and potential future directional bias; selecting the best stocks to trade long or short; identifying the readiness of a stock to leave a trading range; projecting price targets in a trend from a stock’s behavior in a trading range. These laws inform the analysis of every chart and the selection of every stock to trade. **1\. The law of supply and demand** determines price direction. This principle is central to Wyckoff's method of trading and investing. When demand is greater than supply, prices rise, and when supply is greater than demand, prices fall. The trader/analyst can study the balance between supply and demand by comparing price and volume bars. This law is deceptively simple, but learning to accurately evaluate supply and demand on bar charts, as well as understanding the implications of supply and demand patterns, takes considerable practice. **2\. The law of cause and effect** helps the trader and investor set price objectives by gauging the potential extent of a trend emerging from a trading range. Wyckoff's “cause” can be measured by the horizontal point count in a Point and Figure chart. The “effect” is the distance price moves corresponding to the point count. This law's operation can be seen as the force of accumulation or distribution within a trading range, as well as how it works itself out in a subsequent trend or movement up or down. Point and Figure chart counts are used to measure a cause and project the extent of its effect. (See “Point and Figure Count Guide” below for an illustration of this law.) **3\. The law of effort versus result** provides an early warning of a possible trend change in the near future. Divergences between volume and price often signal a change in the direction of a price trend. For example, when there are several high-volume (large effort) but narrow-range price bars after a substantial rally, with the price failing to make a new high (little or no result), it suggests that big interests are unloading shares in anticipation of a change in trend. [hashtag](https://chartschool.stockcharts.com/table-of-contents/market-analysis/wyckoff-analysis-articles/the-wyckoff-method-a-tutorial#analyses_of_trading_ranges) Analyses of Trading Ranges --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- One objective of the Wyckoff method is to improve market timing when putting on a position by anticipating a coming move that has a favorable reward/risk ratio. Trading ranges (TRs) are places where the previous trend (up or down) has been halted, and there is relative equilibrium between supply and demand. Institutions and other large professional interests prepare for their next bull (or bear) campaign as they accumulate (or distribute) shares within the TR. In accumulation and distribution TRs, the Composite Man is actively buying and selling. The difference is that in accumulation, the shares purchased outnumber those sold, while in distribution, the opposite is true. The extent of accumulation or distribution determines the cause that unfolds in the subsequent move out of the TR. [hashtag](https://chartschool.stockcharts.com/table-of-contents/market-analysis/wyckoff-analysis-articles/the-wyckoff-method-a-tutorial#wyckoff_schematics) Wyckoff Schematics ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- A successful Wyckoff analyst must be able to anticipate and correctly judge the direction and magnitude of the move out of a TR. Fortunately, Wyckoff offers time-tested guidelines for identifying and delineating the phases and events within a TR, which, in turn, provide the basis for estimating price targets in the subsequent trend. These concepts are illustrated in the following four schematics; two depicting common variants of accumulation TRs, followed by two examples of distribution TRs. [hashtag](https://chartschool.stockcharts.com/table-of-contents/market-analysis/wyckoff-analysis-articles/the-wyckoff-method-a-tutorial#accumulationwyckoff_events) Accumulation: Wyckoff Events ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FlkRlzRrgfyYw8IaVt1Cy%252Fwyckoffaccumulation.png%3Falt%3Dmedia%26token%3Dd702e0e7-9428-465d-8f93-8a6250305617&width=768&dpr=4&quality=100&sign=f264ed71&sv=2) * **PS—preliminary support**, where substantial buying begins to provide pronounced support after a prolonged down-move. Volume increases and price spread widens, signaling that the down-move may be approaching its end. * **SC—selling climax**, the point at which widening spread and selling pressure usually climaxes and heavy or panicky selling by the public is being absorbed by larger professional interests at or near a bottom. Often price will close well off the low in a SC, reflecting the buying by these large interests. * **AR—automatic rally**, which occurs because intense selling pressure has greatly diminished. A wave of buying easily pushes prices up; this is further fueled by short covering. The high of this rally will help define the upper boundary of an accumulation TR. * **ST—secondary test**, in which price revisits the area of the SC to test the supply/demand balance at these levels. If a bottom is to be confirmed, volume and price spread should be significantly diminished as the market approaches support in the area of the SC. It is common to have multiple STs after a SC. circle-exclamation **Note:** _**Springs or shakeouts**_ usually occur late within a TR and allow the stock’s dominant players to make a definitive test of available supply before a markup campaign unfolds. A “spring” takes price below the low of the TR and then reverses to close within the TR; this action allows large interests to mislead the public about the future trend direction and to acquire additional shares at bargain prices. A terminal shakeout at the end of an accumulation TR is like a spring on steroids. Shakeouts may also occur once a price advance has started, with rapid downward movement intended to induce retail traders and investors in long positions to sell their shares to large operators. However, springs and terminal shakeouts are not required elements: Accumulation Schematic 1 depicts a spring, while Accumulation Schematic 2 shows a TR without a spring. * **Test**—Large operators always test the market for supply throughout a TR (e.g., STs and springs) and at key points during a price advance. If considerable supply emerges on a test, the market is often not ready to be marked up. A spring is often followed by one or more tests; a successful test (indicating that further price increases will follow) typically makes a higher low on lesser volume. * **SOS—sign of strength**, a price advance on increasing spread and relatively higher volume. Often a SOS takes place after a spring, validating the analyst’s interpretation of that prior action. * **LPS—last point of support**, the low point of a reaction or pullback after a SOS. Backing up to an LPS means a pullback to support that was formerly resistance, on diminished spread and volume. On some charts, there may be more than one LPS, despite the ostensibly singular precision of this term. * **BU—“back-up”**. This term is short-hand for a colorful metaphor coined by Robert Evans, one of the leading teachers of the Wyckoff method from the 1930s to the 1960s. Evans analogized the SOS to a “jump across the creek” of price resistance, and the “back up to the creek” represented both short-term profit-taking and a test for additional supply around the area of resistance. A back-up is a common structural element preceding a more substantial price mark-up, and can take on a variety of forms, including a simple pullback or a new TR at a higher level. * * * [hashtag](https://chartschool.stockcharts.com/table-of-contents/market-analysis/wyckoff-analysis-articles/the-wyckoff-method-a-tutorial#accumulationwyckoff_phases) Accumulation: Wyckoff Phases ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FxEFvtdO2kkxi8Yer3h2p%252Fwyckoffaccumulation2.png%3Falt%3Dmedia%26token%3D76baba43-6ccb-4a59-987e-2f3c9b29fc7d&width=768&dpr=4&quality=100&sign=b85ec585&sv=2) **Phase A.** Phase A marks the stopping of the prior downtrend. Up to this point, supply has been dominant. The approaching diminution of supply is evidenced in preliminary support (PS) and a selling climax (SC). These events are often very obvious on bar charts, where widening spread and heavy volume depict the transfer of huge numbers of shares from the public to large professional interests. Once these intense selling pressures have been relieved, an automatic rally (AR), consisting of both institutional demand for shares as well as short-covering, typically ensues. A successful secondary test (ST) in the area of the SC will show less selling than previously and a narrowing of spread and decreased volume, generally stopping at or above the same price level as the SC. If the ST goes lower than that of the SC, one can anticipate either new lows or prolonged consolidation. The lows of the SC and the ST and the high of the AR set the boundaries of the TR. Horizontal lines may be drawn to help focus attention on market behavior, as seen in the two Accumulation Schematics above. Sometimes the downtrend may end less dramatically, without climactic price and volume action. In general, however, it is preferable to see the PS, SC, AR and ST, as these provide not only a more distinct charting landscape but a clear indication that large operators have definitively initiated accumulation. In a re-accumulation TR (which occurs during a longer-term uptrend), the points representing PS, SC and ST are not evident in Phase A. Rather, in such cases, Phase A resembles that more typically seen in distribution (see below). Phases B-E generally have a shorter duration and smaller amplitude than, but are ultimately similar to, those in the primary accumulation base. **Phase B.** In Wyckoffian analysis, Phase B serves the function of “building a cause” for a new uptrend (see Wyckoff Law #2 – “Cause and Effect”). In Phase B, institutions and large professional interests are accumulating relatively low-priced inventory in anticipation of the next markup. The process of institutional accumulation may take a long time (sometimes a year or more) and involves purchasing shares at lower prices and checking advances in price with short sales. There are usually multiple STs during Phase B, as well as upthrust-type actions at the upper end of the TR. Overall, the large interests are net buyers of shares as the TR evolves, with the goal of acquiring as much of the remaining floating supply as possible. Institutional buying and selling imparts the characteristic up-and-down price action of the trading range. Early on in Phase B, the price swings tend to be wide and accompanied by high volume. As the professionals absorb the supply, however, the volume on downswings within the TR tends to diminish. When it appears that supply is likely to have been exhausted, the stock is ready for Phase C. **Phase C.** It is in Phase C that the stock price goes through a decisive test of the remaining supply, allowing the “smart money” operators to ascertain whether the stock is ready to be marked up. As noted above, a spring is a price move below the support level of the TR (established in Phases A and B) that quickly reverses and moves back into the TR. It is an example of a bear trap because the drop below support appears to signal resumption of the downtrend. In reality, though, this marks the beginning of a new uptrend, trapping the late sellers (bears). In Wyckoff's method, a successful test of supply represented by a spring (or a shakeout) provides a high-probability trading opportunity. A low-volume spring (or a low-volume test of a shakeout) indicates that the stock is likely to be ready to move up, so this is a good time to initiate at least a partial long position. The appearance of a SOS shortly after a spring or shakeout validates the analysis. As noted in Accumulation Schematic #2, however, the testing of supply can occur higher up in the TR without a spring or shakeout; when this occurs, the identification of Phase C can be challenging. **Phase D.** If we are correct in our analysis, what should follow is the consistent dominance of demand over supply. This is evidenced by a pattern of advances (SOSs) on widening price spreads and increasing volume, as well as reactions (LPSs) on smaller spreads and diminished volumes. During Phase D, the price will move at least to the top of the TR. LPSs in this phase are generally excellent places to initiate or add to profitable long positions. **Phase E.** In Phase E, the stock leaves the TR, demand is in full control and the markup is obvious to everyone. Setbacks, such as shakeouts and more typical reactions, are usually short-lived. New, higher-level TRs comprising both profit-taking and acquisition of additional shares (“re-accumulation”) by large operators can occur at any point in Phase E. These TRs are sometimes called “stepping stones” on the way to even higher price targets. [hashtag](https://chartschool.stockcharts.com/table-of-contents/market-analysis/wyckoff-analysis-articles/the-wyckoff-method-a-tutorial#distributionwyckoff_events) Distribution: Wyckoff Events ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FsvRDOoS9B6sZSwG1NtYs%252Fwyckoffdistribution1.png%3Falt%3Dmedia%26token%3D51e948b0-6ded-4c39-ab5f-f466654e166e&width=768&dpr=4&quality=100&sign=82cb48d9&sv=2) **PSY—preliminary supply**, where large interests begin to unload shares in quantity after a pronounced up-move. Volume expands and price spread widens, signaling that a change in trend may be approaching. **BC—buying climax**, during which there are often marked increases in volume and price spread. The force of buying reaches a climax, with heavy or urgent buying by the public being filled by professional interests at prices near a top. A BC often coincides with a great earnings report or other good news, since the large operators require huge demand from the public to sell their shares without depressing the stock price. **AR—automatic reaction**. With intense buying substantially diminished after the BC and heavy supply continuing, an AR takes place. The low of this selloff helps define the lower boundary of the distribution TR. **ST—secondary test**, in which price revisits the area of the BC to test the demand/supply balance at these price levels. For a top to be confirmed, supply must outweigh demand; volume and spread should thus decrease as price approaches the resistance area of the BC. An ST may take the form of an upthrust (UT), in which price moves above the resistance represented by the BC and possibly other STs before quickly reversing to close below resistance. After a UT, price often tests the lower boundary of the TR. **SOW—sign of weakness**, observable as a down-move to (or slightly past) the lower boundary of the TR, usually occurring on increased spread and volume. The AR and the initial SOW(s) indicate a change of character in the price action of the stock: supply is now dominant. **LPSY—last point of supply**. After testing support on a SOW, a feeble rally on narrow spread shows that the market is having considerable difficulty advancing. This inability to rally may be due to weak demand, substantial supply or both. LPSYs represent exhaustion of demand and the last waves of large operators’ distribution before markdown begins in earnest. **UTAD—upthrust after distribution.** A UTAD is the distributional counterpart to the spring and terminal shakeout in the accumulation TR. It occurs in the latter stages of the TR and provides a definitive test of new demand after a breakout above TR resistance. Analogous to springs and shakeouts, a UTAD is not a required structural element: the TR in Distribution Schematic #1 contains a UTAD, while the TR in Distribution Schematic #2 does not. [hashtag](https://chartschool.stockcharts.com/table-of-contents/market-analysis/wyckoff-analysis-articles/the-wyckoff-method-a-tutorial#distributionwyckoff_phases) Distribution: Wyckoff Phases ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FnC5mKN9VlkPrAPH4WQeT%252Fwyckoffdistribution2.png%3Falt%3Dmedia%26token%3D27f2ef2e-2e43-48ac-8a64-82df4ba7401b&width=768&dpr=4&quality=100&sign=f29b1c51&sv=2) **Phase A.** Phase A in a distribution TR marks the stopping of the prior uptrend. Up to this point, demand has been dominant and the first significant evidence of supply entering the market is provided by preliminary supply (PSY) and the buying climax (BC). These events are usually followed by an automatic reaction (AR) and a secondary test (ST) of the BC, often upon diminished volume. However, the uptrend may also terminate without climactic action, instead demonstrating exhaustion of demand with decreasing spread and volume; less upward progress is made on each rally before significant supply emerges. In a redistribution TR within a larger downtrend, Phase A may look more like the start of an accumulation TR (e.g., with climactic price and volume action to the downside). However, Phases B through E of a re-distribution TR can be analyzed in a similar manner to the distribution TR at the market top. **Phase B.** The function of Phase B is to build a cause in preparation for a new downtrend. During this time, institutions and large professional interests are disposing of their long inventory and initiating short positions in anticipation of the next markdown. The points about Phase B in distribution are similar to those made for Phase B in accumulation, except that the large interests are net sellers of shares as the TR evolves, with the goal of exhausting as much of the remaining demand as possible. This process leaves clues that the supply/demand balance has tilted toward supply instead of demand. For instance, SOWs are usually accompanied by significantly increased spread and volume to the downside. **Phase C.** In distribution, Phase C may reveal itself via an upthrust (UT) or UTAD. As noted above, a UT is the opposite of a spring. It is a price move above TR resistance that quickly reverses and closes in the TR. This is a test of the remaining demand. It is also a bull trap—it appears to signal the resumption of the uptrend but in reality is intended to “wrong-foot” uninformed break-out traders. A UT or UTAD allows large interests to mislead the public about the future trend direction and, subsequently, sell additional shares at elevated prices to such break-out traders and investors before the markdown begins. In addition, a UTAD may induce smaller traders in short positions to cover and surrender their shares to the larger interests who have engineered this move. Aggressive traders may wish to initiate short positions after a UT or UTAD. The risk/reward ratio is often quite favorable. However, the “smart money” repeatedly stops out traders who initiate such short positions with one UT after another, so it is often safer to wait until Phase D and an LPSY. Often demand is so weak in a distribution TR that price does not reach the level of the BC or initial ST. In this case, Phase C's test of demand may be represented by a UT of a lower high within the TR. **Phase D.** Phase D arrives after the tests in Phase C show us the last gasps of demand. During Phase D, price travels to or through TR support. The evidence that supply is clearly dominant increases either with a clear break of support or with a decline below the mid-point of the TR after a UT or UTAD. There are often multiple weak rallies within Phase D; these LPSYs represent excellent opportunities to initiate or add to profitable short positions. Anyone still in a long position during Phase D is asking for trouble. **Phase E.** Phase E depicts the unfolding of the downtrend; the stock leaves the TR and supply is in control. Once TR support is broken on a major SOW, this breakdown is often tested with a rally that fails at or near support. This also represents a high-probability opportunity to sell short. Subsequent rallies during the markdown are usually feeble. Traders who have taken short positions can trail their stops as price declines. After a significant down-move, climactic action may signal the beginning of a re-distribution TR or of accumulation. * * * [hashtag](https://chartschool.stockcharts.com/table-of-contents/market-analysis/wyckoff-analysis-articles/the-wyckoff-method-a-tutorial#supply_and_demand_analysis) Supply and Demand Analysis --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Analysis of supply and demand on bar charts, through examination of volume and price movements, represents one of the central pillars of the Wyckoff method. For example, a price bar that has wide spread, closing at a high well above those of the previous several bars and accompanied by higher-than-average volume, suggests the presence of demand. Similarly, a high-volume price bar with wide spread, closing at a low well below the lows of prior bars, suggests the presence of supply. These simple examples belie the extent of the subtleties and nuances of such analysis. For instance, labeling and understanding the implications of Wyckoff events and phases in trading ranges, as well as ascertaining when the price is ready to be marked up or down, is based largely on the correct assessment of supply and demand. Wyckoff's first and third laws described above (Supply and Demand and Effort versus Result) embody this core approach. Conventional wisdom of much technical analysis (and basic economic theory) accepts one of the obvious insights of the law of Supply and Demand: when demand to buy shares exceeds sell orders at any time, price will advance to a level where demand decreases and/or supply increases to create a new (transient) equilibrium. The converse is also true: when sell orders (supply) exceed buy orders (demand) at any time, equilibrium will be restored (temporarily) by a price decline to a level where supply and demand are in balance. Wyckoff's third law (Effort versus Result) involves identifying price-volume convergences and divergences to anticipate potential turning points in price trends. For example, when volume (Effort) and price (Result) both increase substantially, they are in harmony, suggesting that Demand will likely continue to propel price higher. In some instances, however, volume may increase, possibly even substantially, but the price does not follow, producing only a marginal change at the close. If we observe this price-volume behavior in a reaction to support in an accumulation trading range, this indicates absorption of supply by large interests, and is considered bullish. Similarly, huge volume on a rally with minimal price advance in a distribution trading range demonstrates a stock's inability to rally because of the presence of significant supply, also from big institutions. Several reactions in the AAPL chart below illustrate the Law of Effort versus Result. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FMEhJE0bfMYcJcyBOcigI%252Fwyckoffaapl.png%3Falt%3Dmedia%26token%3D276868d6-e66a-469b-99c9-acd7f06d8063&width=768&dpr=4&quality=100&sign=86077f5d&sv=2) In this chart of AAPL, we can observe the principle of Effort versus Result in three price reactions. In the first, we see prices falling on a number of wide-spread bars and volume increasing. This suggests a harmony between volume (Effort) and the decline in price (Result). In the second reaction, price decreases by a similar amount as in Reaction #1, but on smaller spreads and lower volume, indicative of reduced supply, which in turn suggests the potential for at least a short-term rally. In Reaction #3, the swing size decreases, yet volume increases. In other words, the Effort increases while the Result decreases, showing the presence of large buyers absorbing supply in anticipation of a continuation of the rally. [hashtag](https://chartschool.stockcharts.com/table-of-contents/market-analysis/wyckoff-analysis-articles/the-wyckoff-method-a-tutorial#comparative_strength_analysis) Comparative Strength Analysis --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Wyckoff's stock selection process always included an analysis of comparative strength. To identify candidates for long positions, he looked for stocks or industries that were outperforming the market, both during trends and within trading ranges, whereas, with short positions, he looked for under-performers. All of his charting, including bar and Point and Figure charts, was done by hand. Therefore, he conducted his comparative strength analysis between a stock and the market, or between a stock and others in its industry, by placing one chart under another, as in the example below. Wyckoff compared successive waves or swings in each chart, examining the strength or weakness of each in relation to prior waves on the same chart and to the corresponding points on the comparison chart. A variation of this approach is to identify significant highs and lows and note them on both charts. One can then evaluate the strength of the stock by looking at its price relative to the previous high(s) or low(s), doing the same thing on the comparison chart. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FAYd55B2fVVQw6QMeZzlF%252Fwyckoffaaplcompq.png%3Falt%3Dmedia%26token%3D3e43dcf4-8a19-409b-af6a-94c838c6c2c4&width=768&dpr=4&quality=100&sign=5fb40def&sv=2) In these charts of AAPL and the NASDAQ composite index ($COMPX), AAPL is making a lower high at point #3 (relative to point #1), whereas the $COMPX is making a higher high at that point. This shows that AAPL is under-performing the market at point #3. The picture changes in February: AAPL is starting to outperform the market by making a higher high at point #5 and higher low at #6 relative to the market, which is making a lower high at point #5 and a lower low at point #6. In his stock selection, Wyckoff would enter long positions in stocks that showed similar strength relative to the market, assuming that these candidates met other criteria as well, as discussed in the Nine Buying/Selling Tests, below. Modern Wyckoff practitioners can utilize the Relative Strength Ratio between a stock and a market proxy to compare points of strength and weakness. In fact, use of the Relative Strength Ratio can more easily eliminate potential inaccuracies due to the existence of different price scales between a stock and its relevant market index. * * * [hashtag](https://chartschool.stockcharts.com/table-of-contents/market-analysis/wyckoff-analysis-articles/the-wyckoff-method-a-tutorial#nine_buying_selling_tests) Nine Buying/Selling Tests ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Whereas the three Wyckoff laws provide a big-picture foundation for the Wyckoff method, the nine buying and selling tests are a set of narrower, specific principles to help guide trade entry. These tests help delineate when a trading range is drawing to a close and a new uptrend (markup) or downtrend (markdown) is about to begin. In other words, the nine tests define the line of least resistance in the market. Below is a listing of the nine buying tests and nine selling tests, including the references to which kind of chart should be used. ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/market-analysis/wyckoff-analysis-articles/the-wyckoff-method-a-tutorial#wyckoff_buying_tests_for_accumulation) Wyckoff Buying Tests for Accumulation 1. Downside price objective accomplished – P&F chart 2. Preliminary support, selling climax, secondary test - Bar and P&F charts 3. Activity bullish (volume increases on rallies and diminishes during reactions) – Bar chart 4. Downward stride broken (that is, supply line or downtrend line penetrated) - Bar or P&F chart 5. Higher lows - Bar or P&F chart 6. Higher highs - Bar or P&F chart 7. Stock stronger than the market (that is, stock more responsive on rallies and more resistant to reactions than the market index) - Bar chart 8. Base forming (horizontal price line) – Bar or P&F chart 9. Estimated upside profit potential is at least three times the loss if the initial stop-loss were hit – P&F and bar charts ### [hashtag](https://chartschool.stockcharts.com/table-of-contents/market-analysis/wyckoff-analysis-articles/the-wyckoff-method-a-tutorial#wyckoff_selling_tests_for_distribution) Wyckoff Selling Tests for Distribution 1. Upside objective accomplished - P&F chart 2. Activity bearish (volume decreases on rallies and increases on reactions) - Bar and P&F charts 3. Preliminary supply, buying climax - Bar and P&F charts 4. Stock weaker than the market (that is, more responsive than the market on reactions and sluggish on rallies) - Bar chart 5. Upward stride broken (that is, support line or uptrend line penetrated) - Bar or P&F chart 6. Lower highs - Bar or P&F chart 7. Lower lows - Bar or P&F chart 8. Crown forming (lateral movement) - P&F chart 9. Estimated downside profit potential is at least three times the risk for if the initial stop-order were hit - P&F and bar charts (Adapted from Pruden H (2007) The Three Skills of Top Trading. Hoboken, NJ: John Wiley & Sons, Inc.; pp. 136-37) The AAPL chart below illustrates Buying Tests 2 through 8. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FN4RwE5vQdEiWGoGhCrA0%252Fwyckoffaaplbuyingtests.png%3Falt%3Dmedia%26token%3D63f3dd3a-d4c3-4949-a725-4ec2e595267b&width=768&dpr=4&quality=100&sign=fa2410c1&sv=2) The downtrend in this example of AAPL concludes with Preliminary Support (PS), a Selling Climax (SC), an Automatic Rally (AR) and a Secondary Test (ST), which combine to satisfy Test #2. Volume contracts throughout the trading range and prices start to make higher highs and higher lows – this shows a decrease and absorption of supply and ease of upward movement, despite decreasing demand. Once supply has been exhausted, price can rise on lower demand than one might otherwise expect. Such activity is bullish and satisfies Test #3. The downward stride and downtrend channel have been broken and price consolidates in the trading range – Test #4 is satisfied. In February-April 2009, AAPL makes higher highs and higher lows, all of which are stronger than the market. This satisfies Tests #5, 6 and 7. The stock has spent six months consolidating and has built a cause sufficient for a substantial future advance. The base is formed, satisfying Test #8. Note that tests #1 and #9 could only be met through the use of P&F charts. Guidelines for horizontal counting in a trading range are discussed in the following section of this article. * * * [hashtag](https://chartschool.stockcharts.com/table-of-contents/market-analysis/wyckoff-analysis-articles/the-wyckoff-method-a-tutorial#wyckoff_point_and_figure_p_f_count_guide) Wyckoff Point and Figure (P&F) Count Guide --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Wyckoff developed a uniquely effective method to identify price targets for both long and short trades using Point and Figure (P&F) charts. This method embodies Wyckoff's fundamental law of Cause and Effect, where the horizontal P&F count within a trading range represents the Cause and the subsequent price movement out of the trading range represents the Effect. The Wyckoff Count Guide shows the trader how to calculate the cause built during a trading range so as to be able to project future price targets. The process consists of the following: * Use a bar chart and a P&F chart encompassing the same trading range(s) and timeframe. * Choose an appropriate box size for the P&F chart: e.g., for low-priced stocks, the box size could be 0.5 to 1 point, whereas for high-priced (> $200) stocks, a box size of 5 points would be more appropriate. The box size for the Dow Jones Industrial Average could be 100 points. * After identifying a sign of strength (SOS) towards the right side of the TR on the bar chart, locate the last point at which support was met on a reaction—the last point of support (LPS). Locate this point on your P&F chart also and count from right to left at the price level of the LPS, taking your most conservative count first and moving further to the left as the move progresses. These increments in counts should be based on phases corresponding to specific Wyckoff events within the TR. * In moving to the left, turn to your bar chart and divide the area of accumulation into phases, adding one complete phase at a time. Note that P&F phases are NOT the same as Phases A – E used in the analysis of trading ranges described in previous sections on Accumulation and Distribution. Never add only part of a P&F phase to your count. Volume and price action will usually show where the phase began and ended. For instance, the first phase can consist of the P&F count from the LPS back to the spring, while the second phase covers the count from the spring to a clearly defined ST. * In the case of a longer-term count involving multiple P&F phases, the LPS often appears at the original level of preliminary support or the SC. When the LPS occurs at either of these levels, this tends to validate the count. * A spring may also serve as the LPS from the perspective of the P&F count. Usually a spring is followed by an SOS, and the low of the reaction following that SOS is also a valid LPS. * As the trend progresses, you will often see price consolidation, or a new trading range, forming at a higher (or, in a downtrend, lower) level. Very often, this will produce a “stepping stone confirming count” of the original P&F count. Thus, as the new TR forms, you can often get a timing indication by watching the action of the stock as the potential count begins to confirm the original count. In other words, as the price target projected from the stepping-stone TR approaches that of the original TR, the upward or downward trend may be ready to resume. * Because the price swings within these stepping-stone consolidations are typically narrower than those in primary accumulation or distribution TRs, it is preferable to use a smaller box size to measure P&F counts within the former. For example, long-term counts on three-point and five-point charts are frequently confirmed by subsequent minor counts using a one-point chart in re-accumulation TRs. * For longer-term price targets, you should add the P&F count to the exact low of the trading range in which the count is being measured, as well as to the halfway point between the low and the price level of the count line. You will thus be using the most conservative count(s) as a guide so as to estimate more realistic minimum price targets. * Price targets derived from Wyckoff P&F counts represent points where you should “stop, look and listen.” These targets should never be looked upon as exact points of where a trend will change; instead, use them as projected points where a turn could occur. Additionally, you can use the bar chart to observe the price action and volume as these points are approached. * In case of three-point or five-point charts, the same count line should be used as for one-point charts. Below is an example of horizontal stepping stone P&F counts for the Dow Jones Industrial Average (DJIA). The box size is 100 points with 3-box reversals. Therefore, to calculate price targets, tally the number of columns at the level of the count line, multiply that sum by 100 (the box size) and 3 (the reversal metric), then add this product to the count line (producing the maximum price objective), the low of the trading range (minimum price objective) and the half-way point. The maximum P&F objectives for the DJIA project a potential stopping and consolidating action around the target areas. ![](https://chartschool.stockcharts.com/~gitbook/image?url=https%3A%2F%2F436553459-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FERtrZrZOhufFzk6ZQO4B%252Fuploads%252FIYJNGm9ZHpD0ykJUckUM%252Fwyckoffpnf.png%3Falt%3Dmedia%26token%3Dd6713ee8-cc64-4f4c-b184-5af0caa1b487&width=768&dpr=4&quality=100&sign=69de7276&sv=2) [hashtag](https://chartschool.stockcharts.com/table-of-contents/market-analysis/wyckoff-analysis-articles/the-wyckoff-method-a-tutorial#conclusion) Conclusion ------------------------------------------------------------------------------------------------------------------------------------------------------------------- The pioneering work of Richard D. Wyckoff in the early twentieth century was centered around the realization that stock price trends were driven primarily by institutional and other large operators who manipulate stock prices in their favor. Many professional traders today use Wyckoff's method, but his overall approach is still not widely-followed among retail traders, even though his educational efforts were intended to teach the public the “real rules of the game.” Nonetheless, his stock selection and investment methodology has stood the test of time, largely due to its thorough, systematized and logical structure for identifying high-probability and highly profitable trades. The discipline involved in this approach allows the investor to make informed trading decisions unclouded by emotion. Using Wyckoff's method, one can invest in stocks by capitalizing on the intentions of the large “smart money” interests, rather than being caught on the wrong side of the market. Attaining proficiency in Wyckoff analysis requires considerable practice, but is well worth the effort. [hashtag](https://chartschool.stockcharts.com/table-of-contents/market-analysis/wyckoff-analysis-articles/the-wyckoff-method-a-tutorial#about_the_author) About the Author ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- _This article was written by Roman Bogomazov and Michael Lipsett, and the schematics were created by Roman Bogomazov and edited by the late Dr. Henry O. (“Hank”) Pruden. Roman is a trader and educator specializing in the Wyckoff Method of trading and investing, which he has taught for over a dozen years both as an Adjunct Professor at Golden Gate University and as the principal online instructor at_ [_wyckoffanalytics.com_arrow-up-right](https://wyckoffanalytics.com/) _. To learn more about the Wyckoff Method and Roman’s courses and regular market updates, please follow him on_ [_X_arrow-up-right](https://x.com/WyckoffAnalysis) _or visit_ [_wyckoffanalytics.com_arrow-up-right](https://wyckoffanalytics.com/) _._ [PreviousWyckoff Stock Analysischevron-left](https://chartschool.stockcharts.com/table-of-contents/market-analysis/wyckoff-analysis-articles/wyckoff-stock-analysis) [NextElliott Wave Analysis Articleschevron-right](https://chartschool.stockcharts.com/table-of-contents/market-analysis/elliott-wave-analysis-articles) Last updated 1 year ago Was this helpful? * [Wyckoff Method: The Origins](https://chartschool.stockcharts.com/table-of-contents/market-analysis/wyckoff-analysis-articles/the-wyckoff-method-a-tutorial#wyckoff_methodthe_origins) * [A Five-Step Approach to the Market](https://chartschool.stockcharts.com/table-of-contents/market-analysis/wyckoff-analysis-articles/the-wyckoff-method-a-tutorial#a_five-step_approach_to_the_market) * [Wyckoff's "Composite Man"](https://chartschool.stockcharts.com/table-of-contents/market-analysis/wyckoff-analysis-articles/the-wyckoff-method-a-tutorial#wyckoff_s_composite_man) * [Wyckoff Price Cycle](https://chartschool.stockcharts.com/table-of-contents/market-analysis/wyckoff-analysis-articles/the-wyckoff-method-a-tutorial#wyckoff_price_cycle) * [The Basic Principles: Three Wyckoff Laws](https://chartschool.stockcharts.com/table-of-contents/market-analysis/wyckoff-analysis-articles/the-wyckoff-method-a-tutorial#the_basic_principlesthree_wyckoff_laws) * [Analyses of Trading Ranges](https://chartschool.stockcharts.com/table-of-contents/market-analysis/wyckoff-analysis-articles/the-wyckoff-method-a-tutorial#analyses_of_trading_ranges) * [Wyckoff Schematics](https://chartschool.stockcharts.com/table-of-contents/market-analysis/wyckoff-analysis-articles/the-wyckoff-method-a-tutorial#wyckoff_schematics) * [Accumulation: Wyckoff Events](https://chartschool.stockcharts.com/table-of-contents/market-analysis/wyckoff-analysis-articles/the-wyckoff-method-a-tutorial#accumulationwyckoff_events) * [Accumulation: Wyckoff Phases](https://chartschool.stockcharts.com/table-of-contents/market-analysis/wyckoff-analysis-articles/the-wyckoff-method-a-tutorial#accumulationwyckoff_phases) * [Distribution: Wyckoff Events](https://chartschool.stockcharts.com/table-of-contents/market-analysis/wyckoff-analysis-articles/the-wyckoff-method-a-tutorial#distributionwyckoff_events) * [Distribution: Wyckoff Phases](https://chartschool.stockcharts.com/table-of-contents/market-analysis/wyckoff-analysis-articles/the-wyckoff-method-a-tutorial#distributionwyckoff_phases) * [Supply and Demand Analysis](https://chartschool.stockcharts.com/table-of-contents/market-analysis/wyckoff-analysis-articles/the-wyckoff-method-a-tutorial#supply_and_demand_analysis) * [Comparative Strength Analysis](https://chartschool.stockcharts.com/table-of-contents/market-analysis/wyckoff-analysis-articles/the-wyckoff-method-a-tutorial#comparative_strength_analysis) * [Nine Buying/Selling Tests](https://chartschool.stockcharts.com/table-of-contents/market-analysis/wyckoff-analysis-articles/the-wyckoff-method-a-tutorial#nine_buying_selling_tests) * [Wyckoff Buying Tests for Accumulation](https://chartschool.stockcharts.com/table-of-contents/market-analysis/wyckoff-analysis-articles/the-wyckoff-method-a-tutorial#wyckoff_buying_tests_for_accumulation) * [Wyckoff Selling Tests for Distribution](https://chartschool.stockcharts.com/table-of-contents/market-analysis/wyckoff-analysis-articles/the-wyckoff-method-a-tutorial#wyckoff_selling_tests_for_distribution) * [Wyckoff Point and Figure (P&F) Count Guide](https://chartschool.stockcharts.com/table-of-contents/market-analysis/wyckoff-analysis-articles/the-wyckoff-method-a-tutorial#wyckoff_point_and_figure_p_f_count_guide) * [Conclusion](https://chartschool.stockcharts.com/table-of-contents/market-analysis/wyckoff-analysis-articles/the-wyckoff-method-a-tutorial#conclusion) * [About the Author](https://chartschool.stockcharts.com/table-of-contents/market-analysis/wyckoff-analysis-articles/the-wyckoff-method-a-tutorial#about_the_author) Was this helpful? sun-brightdesktopmoon sun-brightdesktopmoon ---