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  1. 1. Eliminating Five Basic Mistakes from your Analysis Simple rules to avoid loss making trades Ian Copsey – FX-Strategy
  2. 2. Trend lines
  3. 3. Trend lines Even professional traders have the habit of drawing as many lines as they can on their charts So how many do they have to draw and how do they decide which ones will work?
  4. 4. Trend lines
  5. 5. Trend lines The main error is that they do not identify trends and work on a hit and miss basis Look at what happened next:
  6. 6. Trend lines
  7. 7. Trend lines Q. What is the definition of a trend? A. Uptrend: A sequence of higher highs and higher lows Downtrend A sequence of lower lows and lower highs
  8. 8. Trend lines
  9. 9. Trend lines Three Touch Guideline Anyone (and generally everyone including my dog) can draw a line between two highs or two lows This is my dog ☺ By waiting for three touches the trend line becomes stronger and more reliable
  10. 10. Trend lines
  11. 11. Trend lines
  12. 12. Trend lines
  13. 13. Trend lines
  14. 14. Trend lines
  15. 15. Trend lines IF YOU CAN’T DRAW A TREND LINE THEN DON’T FORCE YOURSELF Actually they happen infrequently!
  16. 16. Double Tops and Bottoms Double Top Double Bottom
  17. 17. Double Tops and Bottoms Are associated with bullish or bearish sentiment that fails to be fulfilled The period of sideways consolidation between extremes and peak/trough will generally cause confusion
  18. 18. Double Tops and Bottoms Target Measurement Minimum Target Establishing a minimum target for the pattern
  19. 19. Double Tops and Bottoms
  20. 20. Double Tops and Bottoms
  21. 21. Double Tops and Bottoms
  22. 22. Double Tops and Bottoms
  23. 23. Double Tops and Bottoms Q. Why didn’t these Double Tops work??? A. Because they weren’t Double Tops Double Tops and Bottoms require confirmation…
  24. 24. Double Tops and Bottoms Break confirmation Confirmation comes on break of the trough/peak
  25. 25. Double Tops and Bottoms
  26. 26. Double Tops and Bottoms
  27. 27. Double Tops and Bottoms
  28. 28. Double Tops and Bottoms
  29. 29. Double Tops and Bottoms
  30. 30. Heads and Shoulders Head Shoulder Shoulder Retest of neckline Neckline Neckline Retest of neckline Shoulder Shoulder Head
  31. 31. Heads and Shoulders Head & Shoulders represent a slowing of momentum after a trending move They should develop with a broad trending sentiment (uptrend or downtrend) which should be sustained during development of the pattern
  32. 32. Heads and Shoulders Extend from point of break Measure peak to neckline Minimum target Establishing a minimum target for the pattern
  33. 33. Heads and Shoulders
  34. 34. Heads and Shoulders
  35. 35. Heads and Shoulders
  36. 36. Heads and Shoulders Failures do occur and positions need to be managed closely Generally the neckline should act as support/resistance after penetration though occasionally there can be slight penetration
  37. 37. Heads and Shoulders
  38. 38. Heads and Shoulders
  39. 39. Heads and Shoulders
  40. 40. Momentum A favorite indicator type is momentum in one form or another. These are often utilized as overbought/oversold signals but quite often are misunderstood. If they are misused losses can result.
  41. 41. Momentum
  42. 42. Momentum
  43. 43. Momentum Why did RSI & Stochastics fail in USDJPY for so long? Basically there was a strong uptrend and momentum studies are not intended to be used in trending markets
  44. 44. Momentum How can we protect ourselves against entering against the trend? Use another indicator that identifies trends
  45. 45. Momentum
  46. 46. Momentum As ADX/ADXR are rising, generally above 30 a trend is indicated at which point momentum indicators should not be used
  47. 47. Momentum Sometimes popular indicators such as RSI do not move to extremes There are two methods that can be used to determine better trading opportunities:
  48. 48. Momentum More sensitive version of RSI
  49. 49. Momentum Breaks of momentum trend lines
  50. 50. Momentum After a trend – when should momentum indicators be used? When there is a divergence
  51. 51. Momentum Bullish Divergence – Price is making new lows – Momentum is making higher lows Bearish Divergence – Price is making new highs – Momentum is making lower highs The underlying momentum of price is slowing beware of a reversal!
  52. 52. Momentum
  53. 53. Momentum Wealth Warning!! A divergence is not a reversal signal and trades should not be based only on the fact that a divergence has occurred Look for other signals: – A break of a trend line – Break of a pattern – Break of the sequence of highs/lows
  54. 54. Momentum
  55. 55. Momentum
  56. 56. Confirm your analysis! Technical analysis is a broad subject with many different techniques. However, it is often risky to rely on one indicator/technique alone. Stronger profitability will come from utilizing complimentary analytical techniques
  57. 57. Confirm your analysis! What kind of complimentary techniques are there? Momentum – used in consolidation and divergence after trends Trend lines breaks Fibonacci projections from Elliott Wave Pattern breaks Time cycles
  58. 58. Confirm your analysis!
  59. 59. Confirm your analysis!
  60. 60. Confirm your analysis!
  61. 61. Confirm your analysis!