July 24, 2011- Sharpening the Mind- Educational Chronicles #2

Reference: Pring, Martin J.  Technical Analysis Explained. 4th Edition. Part 1: 1

Part 1: Trend-Determining Techniques

1.) The Market Cycle Model

Three Important Trends

a.) Primary- Generally lasts 9months and 2 years.

The business cycle extends statistically from trough to trough for approximately 3.6 yrs, so it follows that bull and bear markets last for 1-2 years.  Since building up takes longer than tearing down, bull markets generally last longer than bear markets.

It is very important to position both trades and investments in the direction of the main trend, a significant part of this book is concerned with identifying reversals in the primary trend.

b.) Intermediate – 6 weeks to 9 months.  Sometimes longer, rarely shorter.

It’s important to have an idea of the direction and maturity of the primary trend, but an analysis of intermediate trends help improve success rates in trading.

c.) Short Term – 2-4 weeks, sometimes shorter, sometimes longer.  Usually influenced by random news events and are far more difficult to identify than their intermediate or primary counterparts.

Major Technical Principle: As a general rule, the longer the time span of the trend, the easier it is to identify reversal.  

Intraday trends

1.) Reversals in intraday charts have only a very short term implication and aren’t significant for longer term price reversals.

2.) Extremely short-term price movements are much more influenced by psychology and instant reactions to news events than are longer-term ones.

3.) Intraday price action is more susceptible to manipulation.  As a consequence, very short-term charts are much more erratic and generally less reliable than those that appear in the longer-term charts.

Peak and Trough Progression

Major Technical Principle: The significance of a peak and trough reversal is determined by the duration and magnitude of the rallies and reactions in question.

As a general rule, in order to qualify as a new legitimate peak or trough, the price should retrace between 1/3 and 2/3s of the previous move.  Lines or consolidations also qualify as peaks and troughs where they form between 1/3 and 2/3s of the time taken to produce the previous advance or decline.  

 

– The Faceless Trader

 

 

 

 

 

 

 

 

 

 

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