Currency trading is a relatively young type of exchange trading, at least when compared with some other “commodities”. Even younger is the Forex market, the emergence of which is inextricably linked with the emergence of the worldwide Internet. The main difficulty of all traders has always been to predict the movement of the asset price, in the case of currency trading - the exchange rate. In forecasting, there is ...
Currency trading is a relatively young type of exchange trading, at least when compared with some other "commodities". Even younger is the Forex market, the emergence of which is inextricably linked with the emergence of the worldwide Internet. The main difficulty of all traders has always been to predict the movement of the asset price, in the case of currency trading - the exchange rate.
There are two opposite approaches in forecasting - and. Each contains an infinite variety of ways to predict prices. We will talk about a method that is somewhere in between technical and fundamental analysis. This method is to forecast rates based on the analysis of futures.
What are futures?
Futures are trading instruments, the purchase of which gives the investor the right after a certain period of time to buy a volume of currency strictly defined by the contract at a strictly defined price. There are two types of futures - European and American. The former imply the delivery of currency strictly on the day of the expiration of the futures, the latter - on any day before that date. Obviously, American futures are the most common in the market.
It is not hard to imagine the importance of the functions of futures. They allow for a small commission to get the right to buy currency in the future at a fixed rate, which, in turn, allows you to insure the possible risks of those who work with futures. But all of the above applies to those economic entities that actually use the currency for their needs. However, futures are also a way to make money, just like trading on the spot currency market. The only difference is that in the futures market, players predict the price of a currency for a more distant future, and use futures contracts of currency pairs as instruments.
So, we came to the conclusion that there are two "parallel" realities: futures and spot markets. Their prices differ, the more - the more volatile a trading instrument is.
The price of a currency futures is the price at which the market expects to buy it at the moment of expiration (expiration) of the futures contract at the current time. As is clear from the definition, this is a kind of forecast given by the market itself. It is important to understand that this forecast is given in accordance with the current state of affairs, and at every moment in time it is being corrected. That is, if at the moment the price of a futures for a currency is higher than the spot price, this does not mean that it will be higher at the moment of expiration, however, this indicates that in the current state of affairs this is the most likely scenario.
Forecasting methods
The use of futures for forecasting the rate is precisely in the adjustment of trading signals to the market expectation. In other words, if the market confidently expects a price below the current level, it is more expedient to consider signals for a fall for trading, and vice versa, otherwise. This is the simplest way to use futures, and like any very simple way, it does not give unambiguous results.
A much more accurate and effective, albeit more complex, method is the method of analyzing the dynamics of changes in volumes. In addition to the current futures price in the futures market, in contrast to the spot Forex market, there is the concept of volumes, that is, the number of futures contracts concluded at the moment. So, depending on the price of the asset, more or less contracts are concluded. So, the price of an asset, including a futures price, is a kind of compromise, an optimum that suits the market at the moment. However, the optimum and price level may differ, but such deviations are quickly corrected by the market. In other words, the market gravitates towards the optimum. So, the closer the price approaches this optimal level, the more futures contracts are purchased, the volumes grow. If, when the price of an asset moves in a certain direction, the volumes of deals are also growing - this direction is probably the current trend, and one should trade in it.
Also, the outrunning change in futures prices of later periods testifies to the correspondence of the current direction of price movement to the trend. That is, if, when the price of a monthly futures falls, the three-month one falls more strongly - the direction is probably in line with the general expectations of the market.
Information on the current state of affairs can be obtained from a huge number of information sites on the Internet. There are also offices that offer information on futures prices in real time, that is, without a 10-15 minute lag.
In addition to direct analysis of futures prices on the market, there is also an analysis focused primarily on the volume of transactions. This analysis uses the reports of the American Commission for Commodity Futures Trading as a base, and contains the volumes of transactions by categories of subjects who concluded them. We will not go into a detailed description of such reports, this is a topic for a separate, long conversation, however, it is worth noting that the analysis of COT reports (as such reports are called) has a number of indisputable advantages and is one of the most promising market analysis tools.
The use of futures in trading requires a lot of experience and knowledge, moreover, not only in the field of trading in the foreign exchange market, but also in the field of economics and finance. Only an understanding of the entire mechanism of the futures market allows making a correct forecast based on this instrument, and also, most importantly, avoiding the misconceptions that beginners often face.
Volume analysis is not as effective in commodity futures markets as it is in the stock market. Firstly, this is due to the delay in data on futures transactions by one day. Secondly, in the commodity futures markets, there is a very, in my opinion, inconvenient practice of analyzing individual contracts on the basis of total volume indicators, instead of using real volume values separately for each contract. True, it should be recognized that the use of such a method has good reasons. But what to do when, on the same commodity market, on the same day, the closing price for some contracts has increased, while for others it has decreased? Days when the price change during the trading session reaches maximum allowable value, also create additional difficulties for interpretation. If trading is stopped due to exceeding the limit of deviation from the previous day's quotation price when prices rise, then the volume indicator on that day is usually very low. The point is that exceeding the limit is a sign of market strength; the number of buyers has exceeded the number of sellers so much that prices have reached the maximum allowable ceiling, and in such cases, trading is suspended. In accordance with classical principles of interpretation, small volume during market rallies indicates bearish trends. A low volume reading on days when the deviation limit is exceeded is contrary to this rule and may distort the OBV reading.
In addition, the futures markets lack the so-called growth-fall volume indicators used in the analysis of stock indices, as well as data on the number of shares, transactions in which were concluded with a minimum rise (uptick) and minimum decline (downtick) in prices. This very useful information is not available to a participant in the commodity futures market. However, even with some limitations, analyzing the volume in the futures market can be very fruitful. We urge the reader to keep a close eye on this important indicator of market development.
INTERPRETATION OF OPEN INTEREST
The methods for interpreting open interest and volume are almost the same. Nevertheless, it is necessary to dwell on some of the features of the interpretation of indicators of open interest.
1. If, in conditions of rising prices, the value of the total open interest exceeds the seasonal indicator (the average value, which is calculated for a period of five years), the market is witnessing an influx of new funds, reflecting strong buying activity (bullish sign).
2. However, if the market is experiencing an increase in prices and open interest falls below its seasonal average, the market recovery was mainly due to the coverage of short positions(holders of unprofitable short positions are forced to close them). Consequently, there is an outflow of money from the market. This is a bearish sign as the uptrend is likely to fizzle out after covering short positions.
3. If, with a decrease in prices, open interest increases to values that overlap the seasonal average, there is an influx of new money in the market - a process reflecting the growth of new short selling. This indicates a confident continuation of the downtrend and is considered a bearish sign.
4. Finally, the overall indicator of open interest may decrease compared to the seasonal average against the background of a general decline in prices. The fall in prices in this case was caused by the confusion in the ranks of traders forced to liquidate their long positions. This is believed to be a sign of market strength, indicating the imminent end of a downtrend. The fall in prices will end as soon as the majority of bull traders close their losing long positions, which will manifest itself in a noticeable decline in open interest.
Let's sum it up briefly:
1. An increase in open interest in an uptrend is a bullish sign.
2. A decline in open interest in an uptrend is a bearish sign.
3. Growth of open interest in a downtrend is a bearish sign.
4. A decline in open interest in a downtrend is a bullish sign.
The Role of Open Interest in Analyzing Other Market Situations
In addition to the above, the analysis of open interest can be very fruitful in the following market situations:
1. At the end of large-scale movements in the market, when open interest grew during the entire process of the trend development, alignment of indicators of open interest or their decrease warns of a possible break(see fig. 7.11).
2. A high indicator of open interest recorded at the top of the market can be considered a bearish sign if prices fall sharply. This means that all new long positions opened at the end of the uptrend became unprofitable. Their forced liquidation will put pressure on prices until open interest drops significantly. As an example, consider the following situation. Prices have been rising in the market for some time. Over the previous month, there was also a rather noticeable increase in open interest. It should be recalled that each new contract adds one long and one short position to the market. Suddenly, prices began to fall sharply and fell below the minimum recorded in the previous month. Every long position opened this month was unprofitable.
The forced liquidation of these long positions put pressure on prices until they were all liquidated. The matter is further aggravated by the fact that forced sales often take on a spontaneous nature and, as prices continue to fall, cause the remaining long positions to be sold, thereby dropping prices lower and lower. A striking example of this phenomenon is the situation that developed by the end of the eighties. At this time, the rise in prices in the commodity markets reached the limit and was replaced by a five-year period of recession. In some markets, by this time, the indicators of open interest reached unprecedented values in a long history, which undoubtedly contributed to the collapse of prices. Summarizing in our example, we can say that an unusually high open interest reading in a bull market serves as a danger signal(see fig. 7.12).
Fig. 7. Pa In this example, the growth of open interest confirms the revival of the market. Note the flattening of open interest at the end of February - a signal that the market may have reached a top. Indeed, from that moment on, prices began to fall sharply.
Fig. 7. 11b A sharp upward turn in sugar prices is also reflected in the values of volume and open interest. Note the sharp decline in these numbers just before the market's steep rise in July. The increase in volume and open interest in July signifies a significant shift in market sentiment - from bearish to bullish, confirming that the market is likely to have reached a tipping bottom and will now rally.
3. If the indicator of open interest rises significantly during stagnant consolidation or when prices move within the "market corridor", then the subsequent price movement after the breakout will be quite significant. Everything is logical. The market seems to be in indecision; no one can say in which direction the prices that have escaped to freedom will go. However, an increase in the open interest indicator indicates that many traders are starting to open positions in anticipation of a market breakout. When this happens, many of them will unfortunately realize that they are on the wrong side of the market (refer back to the example in Figure 7.5, which illustrates a similar situation in the silver market).
Fig. 7.12 The example shows the classic situation of how a very high open interest value can become a bearish factor if prices start falling. Prices dropped by $ 2 in two weeks. All long positions opened since the end of August became unprofitable. Prices declined until these positions were liquidated. Note that this was followed by a sharp drop in open interest.
Suppose that within three months prices moved within the "market corridor", and the indicator of open interest jumped during this time by ten thousand contracts. This means that ten thousand new short positions and ten thousand long positions were opened. Then prices broke out of the corridor and the market reached new highs for three months. Consequently, each short position (and there are ten thousand of them in total), opened in the previous three months, turns out to be unprofitable. The hype begins; traders feverishly cover their short positions, thereby increasing pressure on prices from below, which, in turn, increases panic in the market. The price movement remains in effect until all or most of the short positions are offset by long positions taken during a period of particular market strength. If the breakout of prices was directed downwards, then the situation would have been diametrically opposite in the market, that is, panic would have swept the holders of long positions, and so on.
When a new trend arises immediately after a breakout, there is always panic in the market, created by traders trying to liquidate their positions that have become unprofitable. Their actions inadvertently reinforce the emerging trend. The more traders are caught off guard (and this is determined by a high indicator of open interest), the more excitement reigns in the market immediately after a sudden unwanted price turn. However, for other market participants (more experienced or lucky ones who made the right choice), the current situation, on the contrary, is very favorable. By their actions, they also whip up the emerging trend, using unrealized profits on existing positions to open new ones (this situation makes you think; each new contract that makes an amendment to the open interest indicator means that someone has made a mistake). It becomes clear why an increase in open interest during the period when prices follow within the "trade (or market) corridor", moreover - during the formation of any price model - leads to an increase in the potential of the subsequent price movements.
4. An increase in the indicator of open interest at the time of the completion of the price pattern can serve as another confirmation of the signal about the direction of the trend. For example, a breakout of the neckline of a head and shoulders pattern formed at the bottom of the market is more convincing if it occurs with an increase in open interest and volume. In this case, some caution must be exercised. Since traders who find themselves at a loss give an additional impetus to the development of the market after the initial trend signal arrives, open interest sometimes decreases slightly when a new trend appears. . This slight initial drop in open interest may be confusing to some analysts. There is only one conclusion here - one should not attach too much importance to short-term changes in open interest.
BRIEF CONCLUSIONS
Let's summarize by briefly reminding the reader of the main features of the analysis of price, volume and open interest.
1. For forecasting purposes, only total indicators of volume and open interest.
2. Open interest indicators should be seasonally adjusted.
3. The increase in volume and open interest indicates that the current trend is likely to continue.
4. The decrease in volume and open interest indicates that the trend may be coming to an end.
5. Volume precedes price - in the sense that changes in pressure on the market from buyers and sellers, as a rule, are first reflected in volume, and then on prices.
6. For a more accurate determination of the direction of the volume pressure, you can use the OVU indicator or its modifications.
7. In an uptrend, an unexpected alignment or decline in open interest warns of a possible trend reversal.
8. An excessively high indicator of open interest recorded at the top of the market is dangerous - it can increase the pressure on falling prices.
9. A significant increase in open interest during market consolidation amplifies the subsequent price movement after a breakout.
10. An increase in open interest and volume confirms the completion of price patterns, as well as other graphical signals indicating the beginning of a new trend.
DEPARTURES AND CULTIVATION OF SALES
We did not mention another important feature of the market, which often manifests itself when the latter reaches extreme values. These are the so-called outlets(blowoffs) and sales climax(selling climaxes) - occurring, respectively, in the areas of the top and bottom of the market. Under by the way understand the situation when the market, after a long period of steady growth, begins a sudden revival of prices, accompanied by a large
a jump in trading activity and a significant decline in open interest. When sales climax a long period of price decline is followed by a sharp market collapse against the background of an increase in the volume of transactions and a decrease in open interest (see Fig. 7.13).
In each of the two cases, one should pay attention to the behavior of two indicators - volume (sharp rise) and open interest (sharp decline). The combination of these two signs after a protracted price movement suggests that a large-scale liquidation of positions is taking place in the market. As a rule, this is a signal warning of an impending, often abrupt change in trend.
"TRADER COMMITMENT REPORT"
The consideration of open interest will not be complete if we do not touch on the so-called "Report on the obligations of traders"(Commitments of Traders Report) and the possibilities of its use in forecasting. The report is published by the Commodity Futures Trading Commission (CFTC) on the eleventh day of each month and reflects open interest statistics at the end of the previous month. This report breaks open interest metrics into three categories that represent the main market participants in terms of the extent and nature of their work: "large hedgers", "large speculators" "," small traders ". When a trader begins to conclude sufficiently large transactions, the sizes of which correspond to the level subject to accounting, data on his activities should be provided to the commission. Then this data is used to compile special statistical calculations on open interest - for the categories of large hedgers and traders. By subtracting the sums of indicators in two categories from the total value of open interest, you can calculate the indicator for small traders.
When analyzing this data, it is assumed that large traders represent the so-called "smart money". It is believed that small traders are less informed and less experienced in making deals than large ones. Further, it is assumed that with the acquisition of experience, small traders move into the ranks of large ones. It is also believed that a large trader who made mistakes immediately returns to the category of small ones.
Fig. /. (3 Example of exhaustion. Note the significant increase in volume in the final phase of the uptrend, and also (very significant!) That the sharp decline in open interest began a week before prices reached the top of the market. The decline in open interest after a sharp jump in prices is bearish sign.
This kind of analysis has long been conducted by technical analysts in the securities markets. It is generally believed that securities specialists know the market well and always make the right decisions. Therefore, their activities are closely watched. Conversely, casual players (that is, non-specialists, who are sometimes called "dummies") almost always misjudge the market situation.
Studies in the futures markets show that of the three categories of market participants, the most accurate decisions are made by large hedgers. Then there are large speculators and small traders complete the group (see Fig. 7.14).
The best way to use statistics is to simply imitate the actions of the smart money (that is, the lucky traders) and try to avoid what their less fortunate counterparts are doing. In fig. 7.14 presents an example of the table of the "Report on the obligations of traders", which is published by the agency CLE. Please note that the table is vertically divided into three general columns - correspondingly with three categories of market participants. Each of the general columns is divided, in turn, into four narrow ones: "% on long positions", "% on short positions", "% net position" and "% gain / loss" (change in percentage compared to the previous month indicated by a delta icon). The table, for example, reflects the situation in the livestock market on December 31, 1984, where large hedgers hold 14% long and 43% short positions. The indicator "- 29" in the third column means that the net share of short positions in this category of livestock market participants is 29% (43% - 14%). The indicator "- 2" in the fourth column means that the net share of short positions increased by 2% compared to the previous month.
Below the table is a brief explanation of how to use the table. Please note the warning that the sum of all positions is not always 100%. The fact is that the table does not take into account the statistics of intermarket spreads. So, summing up long positions in all categories - 14% in the category of large hedgers, 19% - large speculators and 62% - small traders, we get 95%. Thus, intermarket spreads account for the remaining 5%.
ACCOUNTING FOR SEASONAL VIBRATIONS IN THE ACTIVITY OF DIFFERENT CATEGORIES OF MARKET PARTICIPANTS
Before we begin to study the data in the table in more detail (see Fig. 7.14), it is necessary to consider a very important correction that needs to be made in the analysis of indicators of activity of various groups of market participants. We are talking about seasonal fluctuations - a result of the characteristics of market activity inherent in each of the categories. The deviation from the normal "style" of work in the market for a given time of year gives a real indication of their mood. A 1985 Commodity Year Book article by W. Giler explains how CRB uses these statistics in its analytical newsletters. He also cites some of the results of his research in this area.
"The difference between the current net open position held by members of a given market group and the seasonal norm allows us to determine to what extent their sentiment is bullish or bearish in a given market."
Further in the article some general principles of interpreting the behavior of market participants are given: "In the market with the most pronounced bullish traits, the following picture is observed: large hedgers predominantly take long positions, blocking their average seasonal indicator. Large speculators are dominated by long positions, and small traders are short, the current net share of which is higher than the seasonal average.In general, the manifestations of bullish sentiments among representatives of different categories of market participants take on a wide variety of configurations - up to pronounced bearish.
Fig. 7.14 A table of liabilities for three categories of market participants (large hedgers, large speculators and small traders) as of December 31, 1984. Open interest data is presented in rounded percentage terms.
the opposite pattern: large hedgers are predominantly short, and so on. You have to be especially careful when the discrepancy between the current and long-term seasonal averages reaches 40%, while the 5% difference should not be taken into account at all. "
Research conducted by CRB showed that although both categories of large traders performed the best, large hedgers still outperformed large speculators. The worst performance was for small traders.
In fig. 7.15 shows examples of charts used by the CRB agency in analyzing the seasonal preferences of three categories of market participants (we borrowed from the cited article). The research method was reduced to comparing the indicators shown in the table with the seasonal norm presented in the graphs. Let's go back to the last report and try to draw some conclusions.
Let's look at the statistics of the soy flour market. Here is a quote from the section "Overview of the technical state of the market" of the CRB Futures Chart Service bulletin dated January 18, 1985 (maintained by the author of this book): "Report on the obligations of traders"shows an all-time bullish sentiment in this market."
Let's figure it out. The report indicated that in the large hedger category, the net share of long positions was 21% (an increase of 15% compared to the previous month). Small traders have a predominance of short positions (16% - an increase of 17%). Thus, in the camp of large hedgers, bullish sentiments already prevail and continue to grow. Small traders are leaning towards bearish sentiment, which is also growing in strength.
Now let's look at a graph of seasonal soy flour market sentiment, structured by group. At the end of December, for the category of large hedgers, the seasonal norm is the prevalence of short positions (their net share is about 8%), while small traders at this time of the year should have an advantage of long positions (about 6%). The actual reading suggests even stronger bullish sentiment compared to the seasonal norm. Thus, the net position of large traders is currently 29% more bullish than usual (from -8% to + 21%), the bearish sentiment of small traders is also higher than normal - by 22% (from + 6% to -16%). At first glance, the fact that large hedgers are bullish and small traders bearish is indicative of a bullish market as a whole. After comparison with seasonal indicators, the overall picture of the market takes on even more pronounced bullish lines.
Take a look at the rest of the metrics and you'll see something else. Look carefully to see if there are any significant changes in the last columns of all three categories. Note the significant gains in the group of large hedgers in the oil (+ 21%), orange juice (+ 14%), British pound (+ 21%) and Swiss franc (+ 23%) markets. Bullish development should be expected in these markets. Small traders saw an increase in sentiment in favor of the pig (+ 10%) and pork bellies (+ 14%) markets, so it should be concluded that the pig markets are facing bearish times. At the same time, the same small traders showed a persistent negative attitude towards orange juice (-10%) and foreign currency, therefore, one can hope that these markets will go up.
Figure 7.15 Charts illustrating the seasonal sentiment of the three categories of traders. It is important to consider seasonal trends when determining the relationship of a particular group to the state of the market at a given moment.
There is another way to use this table, which is to search for all-time high scores.
for open positions (long or short) for the category of small traders (a value exceeding 70% is already considered large). Since traders in this category have a reputation for perpetually mistaken players, their clear preference for one side of the market should serve as a warning that it will begin to develop in the opposite direction (or so it is commonly believed).
In our example, fairly large (that is, potentially bearish) indicators for open long positions fall on the livestock (62%) and forest (63%) markets. High values are also observed for the indicators for the NYSE Composite (62%) and Value Line (77%) indices. The subsequent movement of stock index quotes, oddly enough, confirmed the correctness of the opinion of small traders. In this regard, it should be noted that most of the research in this area has been carried out in traditional agricultural markets. Therefore, it should be used with great care. "Report on the obligations of traders" at analysis of financial futures markets (emerging relatively recently) - at least until further research is carried out.
Monthly "Report on the obligations of traders" - one of the ways to interpret the indicators of open interest. It is based on tracing the behavior patterns of three main categories of market participants. The disadvantages of this method include the fact that the data arrives with a two-week delay, and therefore may partially lose its value.
This effective tool of technical analysis has not yet received proper recognition in the commodity futures markets, it is mainly used - and quite widely - in the securities markets. However, this method is very promising because it allows you to confidently measure market sentiment and deserves further in-depth study. (For more information on analyzing market sentiment, see Chapter 10). Anyway, "Report on the obligations of traders" - a technical analysis tool that the reader should be aware of and which should be used from time to time. Those who are interested in this topic, we refer to the book by D. Belveal "Charting Commodity Market Price Behavior" (L. Dee Belveal).
CONCLUSION
By talking about volume and open interest, we have completed a significant part of the topic of technical analysis of the commodity futures markets. We reviewed the theoretical foundations of technical analysis, described many of its main elements, talked about the principles and rules for constructing and interpreting charts and price patterns. We also examined in detail the three sources of technical data on which market research is based - indicators of price, volume and open interest.
So far, considering graphical technical analysis tools, we have limited ourselves to examples. daytime charts. In the next chapter, we will expand the time horizon of market analysis and move on to weekly and monthly charts used to analyze long-term trends. We will also show how generalized futures price indices and indices of different market groups are used.
The success of trading on the exchange is based on financially accurate calculation and competent analysis, not randomness. To conduct transactions in the RTS index futures market, such instruments as price charts and the volume of transactions carried out, as well as a table with quotation volumes are used.
The chart of the price and trading volume of the RTS futures, used since December 2013, as the main tool for determining the real situation on the market. The calculation is also based on the actual fluctuation in the price of oil.
Futures on the RTS index is directly related to the performance of the MICEX-RTS stock exchange, half of whose shares are distributed among Russian issuers. In this regard, in addition to the RTS table, the creation of a MICEX price chart is supposed to be the main instrument for trading management.
The graph reflecting the ratio of price and volume of sales for a dollar to ruble futures is designated as Si. An inversely proportional relationship between the value of a futures and the RTS index was noted. If the Si futures fall, the RTS futures will grow by the given number of units. Analysis of Si futures indicators is carried out on the basis of the data of the chart of the international section of the MICEX. This relationship is based on the dependence of the Russian raw material economy on the dollar exchange rate.
In addition to charts for conducting trades, a trader will need a glass of orders, which means a trade drive, and tables, with the help of which control over trading operations takes place. To build a chart, you will also need the characteristics of client accounts, the content of orders and a table showing the indicators of all conducted transactions.
Trading currency futures on the MICEX is identical to the exchange of banknotes in bank branches. If you expect a fall in the exchange rate, you should sell the currency; if its value increases smoothly or sharply, you should have time to buy.
But the sale of foreign exchange reserves on the stock exchange has a number of advantages:
The main characteristic of stock trading is the ability to reserve currency before the start of operations for a future period. If a trader is interested in the growth of the US dollar, then he should buy futures for this currency. With an increase in its value, the trader will receive compensation - a reward, since trades are carried out on the basis of speculation and exchange. The ruble index is in direct proportion to the level of Russian oil sales. If the prices for a natural resource are "brought down", the Russian currency exchange rate will likely fall by the corresponding value.
Principles of plotting the dollar-ruble pair
One of the most popular futures in exchange trading is the RTS index. The indicator is distinguished by low fees and commissions transferred to brokers who represent the interests of traders on FORTS.
Of greatest interest is trading in the dollar-ruble pair, as an indicator of the development of the Russian economy along with the cost of oil reserves, since in the international arena the Russian currency is not of interest to a wide range of traders.
If we compare the work of currency futures and stock indices in world trading, then we can determine that trading in currency equivalents takes place with the most flexible financial indicators. They are convenient for intraday trading.
When plotting a futures chart, it is important to determine the difference between the maximum and minimum values on the trading chart during the day session.
Historical indicators are taken into account to determine the limits. The greater the distance between them, the better the opportunities for movement within the 5-minute chart. At the same time, the risks remain at an acceptable level, and the level of profit can reach high rates. It is much easier to predict changes in the price of a currency than in stock indicators. The trajectory of their change is much clearer, especially for novice traders. Time characteristics are much more effective when trading in currencies, since the RTS index can remain unchanged for a long time, which will lead to no movement of funds. In the case of currency futures on the dollar-ruble, several falls and sharp increases in the sales rate may occur during this time, which guarantees a high reward.
The currency movement chart is provided online on the Moscow Exchange website. Indicators are updated with a delay of 10 minutes on all types of browsers. In order to track the progress of trading in real time, it is necessary to install a special CFD program that reflects the dynamics of the movement of futures. When working with this collateral, futures for dollar-ruble trading are broadcast without restrictions. The system also installed a demonstration of the difference between the underlying and derivative futures, shown while maintaining the positions of the asset dynamics. Thus, the first instrument for organizing sales on currency options is characterized.
Influence of the dollar-ruble chart on the oil sales rate
With a fall in oil prices, the value of the ruble goes down sharply.
When constructing a chart, the Russian oil sales rate, which determines the value of the local currency in world markets, has a significant influence. The price of oil is determined by the news. For example, on the eve of the collapse in the value of black gold occurred due to the news about the dispatch of a resource from Iran to the United States.
Fluctuating currencies when selling gold
Foreign exchange trading directly depends, in addition to fluctuations in oil prices, on the gold selling rate. A simple example - the subject of a contract is measured in grams and ounces of gold. Its value is determined in US dollars for each ounce contained in the bar.
The minimum price change is taken at $ 0.1, with a 5% guarantee 
the value of the contract for the sale of gold.
At the time of the trades, the accepted dollar / ruble rate is 1 / 35.50. The deal is carried out at 835 points trades. Thus, the open position will be 29,642 rubles, based on the calculation of 835 * 35.5. GO - 5% from 29642 in the amount of 1482 rubles.
If the price of gold, like oil, changes by several positions, presumably, the step becomes equal to 880. Thus, the level will rise by 45 points and will amount to 1,598 rubles, based on the calculation of 45 * 35.5 rubles. The specified value is acquired when the price of gold fluctuates.
Dependence of the currency movement schedule on the example of trading in Sberbank shares
For the stock exchange, the risk of a margin call is of great importance, that is, the achievement of a minimum value. This situation can be explained using a simple example.
When buying 100 shares of Sberbank, their value was set at 90 rubles. per share, that is, a total of 9,000 rubles. During trading, the price of Sberbank shares fell by 5.5%, reaching 85 rubles. Total losses were equal to 500 rubles.
What matters is the collateral (GO), set, for example, at 15% for transactions with Sberbank securities. When trading using this technology, its size will be 1350 rubles, obtained according to the formula 9000 * 0.15. Thus, the costs will be equal to 37% with a loss of 500 rubles.
When the value of the futures falls by more than 7%, a margin call is announced, since there is half the money left for subsequent trades. Selling a futures in such trading in Sberbank shares is forced by a broker.
To use a futures or CFD chart based on the indicators of concluded contracts in dollars and rubles, it is necessary to enter the name of the corresponding futures in the characteristics of trading on the market. The name of the tickers may differ from the usual one, however, the list of futures and CFDs with accepted trading indicators is always placed under the chart in a special table.
Modern futures is a part of the capital market, an effective tool to compensate for price fluctuations and "instantaneous" averaging of money demand without a sharp change in supply. The technical analysis of such assets has features that can be used to avoid mistakes and increase the reliability of your Forex transactions.
The main difference between assets lies in the structure of the Forex market and the market for futures contracts, that is, in the principles of market price formation.
The Forex market is an over-the-counter interbank market used by banks and other financial institutions for speculation and regulation of financial flows. Real volumes are not visible precisely because there is no single trading platform. The volume of speculative transactions is over 70%. Despite active attempts at regulation, the degree of control over such a market is low. Technical analysis is complicated by the fact that each broker has its own price stream.
The futures market is a centralized (transparent) exchange market, which, during the process of clearing transactions, connects the seller and the buyer on the exchange. There is no spread, floating bid / ask is minimal and is regulated by the volume of client orders. That is, if a real client buys a real futures contract, but the price of the asset falls, then it is this client who incurs losses, and the one who sold this contract to him makes a profit. The loss of the client in no way becomes the profit of the exchange or broker. The exchange lives at the expense of the commission from the turnover, which is assigned to the client individually: if there are few transactions, the commission is equal to the spread (similar to Forex), with a large number of transactions, it is much lower.
Please note: most forex brokers calmly declare that they guarantee futures trading, but in the list of trading instruments, as a rule, only CFD assets are present. It is highly recommended to study and feel the difference before opening real trades. You can read in detail here about futures on Forex .
A little about the subject
All futures that may be of interest for Forex trading are calculated, that is, they are not expected to be actually delivered. Today, a wide range of trading assets is offered in the form of forward contracts: currency rates, commodities, stock and settlement indices, securities, metals, and energy. Technical analysis of futures should take into account the fundamental factors to a greater extent. The exchanges constantly trade contracts with different expiration dates, therefore there is a special exchange calendar for several years with a clear indication of the delivery date for all assets.
Now it is completely unnecessary for a futures to be based on a real asset (stock, bond or commodity) - it can be any information, such as the likelihood of an increase in interest rates or the result of national elections. The market forms the demand and conditions for such assets.
Index futures can be considered a separate group of assets: general, industrial, regional. An additional factor influencing the dynamics of composite or industrial indices is the reporting of the enterprises included in its calculation - pay attention to the corresponding calendar. New index assets are constantly emerging, for example, recently CME Group launched a futures on - a new index for assessing the real value of the dollar (similar to the DXY), it is calculated based on a basket of ten currencies (EUR, JPY, CAD, MXN, GBP, AUD, CHF, KRW, CNH, BRL).
Features of technical analysis of futures
Major futures can be traded through a standard forex terminal, using practically the same principles of fundamental and technical analysis, using standard order types. Moreover, initially all technical tools were developed specifically for trading commodity contracts.
Forex quotes come from a variety of sources, and the prices of CFD assets that are offered to you in a regular forex terminal may at a particular moment differ significantly on different sites. This is not possible with real futures, trading is carried out only on exchanges, and only a specific trading pair, buyer-seller, form quotes. All exchange platforms openly publish their prices for the previous trading day with an accuracy of 1 tick, so all clients have the same data when working with futures in trading terminals.
Futures contracts are term assets, that is, they have an end date of closing (expiration), before this date the contract must be fulfilled, that is, the client can voluntarily get rid of the assumed obligations. To keep a deal longer than the expiration period, you need to regularly switch to a later contract. If you do not close a futures deal on time, the broker will forcefully close it and the price will not be the best. It goes without saying that most speculators own the asset for a fairly short time.
Futures is, first of all, volatility, because the share of short-term speculators on the real exchange is also very impressive. But with a reasonable approach, such activity may well bring a stable income on Forex intraday transactions. Nervous reactions to fundamental news or force majeure can be compensated for by analyzing related markets.
The heterogeneity of futures volatility is constantly affected. Even if, on average, the life of a contract is from 3 to 6 months, the main trading volume for it occurs in the last 3 weeks (for short-term contracts) or in the last 2 months (for long-term contracts), that is, when this futures becomes the closest expiration date.
This complicates long-term analysis. Immediately after the opening of the contract, it lacks liquidity - sharp price jumps occur, closer to the closing date, a stable, but still too strong volatility appears. As a result, when a Forex asset approaches a strong support / resistance level, a futures asset may not react to this because of its "youth", or give false signals because large volumes of transactions are recorded before the current contract is closed. Therefore, to analyze CFDs in the Forex trading terminal, you need to use the data of a futures that is in the "middle" of its term, when it is most consistent with technical analysis and is not subject to calendar speculations.
Since a futures is a transaction in which there are two parties (seller / buyer), the concept of the number of open positions shows the degree of interest of trading participants in a particular price movement, and the more open interest in a particular futures, the more price movement should be expected. ... We take data on open interest from CME reports or on other exchange resources.
The closer to the expiration date of the futures, the more transactions on it are recorded. The asset market becomes thin, with gaps, large players with large volumes are activated on it, speculating and shifting the price in the direction they need. At such times, the futures price can no longer be used as a “guide” or a source of trading signals for CFD assets or currency pairs.
There is no locking and no swap in futures trading, but there is rollover and there is clearing. There is always a difference between the spot prices and the futures analogue - it is maximum when a new contract is opened, and decreases as we approach the contract closing date. In addition, price calculations are complicated by the difference in one asset, but with different terms.
Getting ready to trade futures
Before you start trading any futures, in addition to the minimum technical analysis, you need to do some preparatory work. First, we clarify the ticker of the asset (either on CME www.cmegroup.com, or on ICE www.theice.com), for example, gold falls into the “Metals” section, in the “Precious” column with the ticker “GC Gold”. Next, we study the specification of the contract - "Contract Specifications" with the main parameters of the asset. Dozens of contracts can be traded in parallel (visible in the "Listed Contracts" section), we need the most liquid one. We are looking for data in the appropriate section, for example, on the BarChart website, in the “Volume” column - the largest volume is needed. If the data of neighboring contracts are approximately equal, then we choose a longer period.
Be sure to clarify for ourselves the last day of trading and the expiration date for the selected contract, so as not to remain with an open deal in the last hours of its existence. Otherwise, in the best case, you will have to close in a thin market with non-standard spreads, and in the worst case, the broker will fix your deal at a very unfavorable price.
It is recommended to transfer a deal to the next contract (close the current one and open a new one on a more “distant” futures), at least a few working days in advance for monthly futures, and 1.5-2 weeks in advance for quarterly ones.
Please note: in futures, instead of leverage, the concept of "collateral margin" is used, which may differ for different contracts, just like the cost of 1 tick.
Strategies for trading futures
Almost all trading strategies that have worked well on futures assets can be successfully applied in Forex, but subject to certain rules.
Despite the high average volatility - scalpers on futures do not survive, the overwhelming majority of real exchange traders are trending medium-term traders, and large volumes of futures are in long positions for almost the entire period. As a result, a swing movement appears before the close of contracts in order to bring the market price as close as possible to the level of the contract. After opening a new futures, the price can return to the previous level just as quickly.
As a rule, large exchange traders use a minimum of technical analysis, preferring the technologies of volume analysis and VSA to traditional calculated indicators. Almost all of the advertised indicator strategies of the luminaries of trading were created specifically for Forex. The use of oscillators such as RSI or Stochastic in futures trading usually only adds false signals, but trend indicators, in particular, combinations of moving averages, as well as indicators based on momentum, are required.
The movement in news futures is usually very strong (especially on indices), but it looks illogical. Statistics show that in 90% of cases, futures traders use fundamental information that has not been worked out by the market or has completely lost its relevance. The influence of fundamental factors, especially on commodity futures, is always multifactorial, and for a normal, well-founded reaction, the market takes some time to analyze.
The insider factor most of all affects the main futures (oil, gold, S & P500, dollar index): having important information before the main market, large players before the news artificially move the price against a logical movement in order to force the bulk of traders to jump into the market, and in fact after news release quickly perform the unloading of the recruited position. That is why, contrary to technical analysis, even on negative data, underlying futures always give short-term impulses in the opposite direction and also quickly roll back, which is very dangerous for small deposits with an insufficient StopLoss level.
It is assumed that in a stable market, exchange players will always follow the trend identified on the intraday chart. Let's recall one simple but stable strategy for trading futures
Trading by pivot points
This technique is most consistent with the logic of real exchange players, who consider the data of the previous day as the basis for determining the dominant trend. Trading assets: stock indices; oil; gold; major currency pairs.
Technical analysis defines pivot points as price support / resistance levels calculated based on the Low, High and Close prices of the previous closed period (H1 / D1 / W1 / MN1). If necessary, calculations are performed for all timeframes sequentially, but, naturally, the smaller the data range for calculation, the lower the accuracy of the constructed levels. Daily pivot points of the day allow you to build a scheme of work for each subsequent currency session.
The classic scheme for calculating daily pivot points begins with determining the central pivot point of the day: PP0 = (Low + High + Close) / 3.
We calculate the first resistance from it: R1 = (PP0 * 2) - Low; and the first support: S1 = (PP0 * 2) - High.
The second pair of support & resistance is defined as: R2 = PP0 + (R1– S1); S2 = PP0 - (R1 - S1).
The trading technology is elementary: we open a trade every time a breakout of the nearest pivot point (by a closed candle).
From the point of view of the foundation, it is believed that the values described above show the levels where the interests of large players have been in equilibrium for a long time. Experienced traders use pivot points in combination with other instruments to determine the entry point as accurately as possible using additional indicators or a chart pattern.
Do not forget: the whole world has been trading on pivot points for several decades and there is no secret in this. Subject to strict money management, the pivot points trading strategy will be profitable only if three conditions are met:
- you need to correctly determine the shock day;
- open strictly according to the trend during the trading session.
- hold a profitable position until the next pivot level is reached.
The idea of pivot points is quite effectively used by the shock day theory, which can be seen in Rezvyakov's strategy. A shock trend day is determined at the beginning of the session: if the price starts moving in the area of the pivot point, then with a 90% probability the day will be trending. If the price at the beginning of the trading session does not fall within the range of the pivot point, for example, above R2 or below S2, then we are waiting for a flat and it is worth reducing the volume of an open deal or not entering the market at all.
Strong price levels formed by limit orders, repeatedly tested by the market for breakout / pullback, have been used by large players for many years to determine the trend. according to the bump day system, it is not recommended to open new trades on Friday (due to the high risk of a gap on Monday) and at the end of the futures.
As a rule, the strategy uses a stable oscillator in addition to the pivot points, for example, the classic MACD - its signals reduce the number of entry points by about 3 times, but significantly increase reliability, especially with further transaction support.
Using futures as an indicator
For evaluating futures, tick volumes do not matter at all, so any technical analysis of Forex, both on a real futures and on a CFD asset, will only evaluate mathematical dependence. Futures counterparts can be used as “guides” using proprietary indicators that are used in exchange trading terminals. Then you can get trading signals that take into account the dynamics of real volumes. A successful example is the trading system of Sergei Rublev and his System Ryblev ArrowSTUDY futures indicator, created for the Thinkorswim trading platform.
Using its signals as a guideline, you can trade short-term on a regular currency pair or CFD versions of futures in regular MetaTrader. So, on the futures stock chart we have:
- a pink arrow or "starting candle" as a result of the conditions for the entry point for the strategy;
- horizontal level - for a pending order 2-3 points higher or lower;
- white arrow - breakout of the pending order level.
As a result, we take signals from TOS, and open deals on MT4. The trading system works strictly according to the trend, it has shown itself to be excellent on major currencies and commodity futures, the working timeframe is from M15. The stop to profit ratio is at least 1: 4.
And as a conclusion ...
For most small traders, full-fledged contracts are not available due to financial conditions, but for almost every popular index and commodity futures there is a mini-contract option, for example, E-mini S & P500, E-mini DowJones, E-Mini NASDAQ or E-mini Euro, with more loyal conditions and, of course, only for speculation. Due to traders with small deposits under such contracts, liquidity is always higher than for the main asset.
According to professional traders, futures are eternal, because it is an ordinary trading agreement of exchange participants, it has more logic, and technical analysis on it is much more reliable. In addition, this is a natural stage in the development of a small speculator into a serious player.
Translation from English: Novitskaya O., Sidorov V.
Scientific editor candidate of economic sciences Samotaev I.
John J. Murphy
Technical analysis of futures markets: theory and practice... - M .: Sokol, 1996.
This book discusses in detail and in an accessible form the theoretical foundations of technical analysis and methods of its practical application. The author, a leading expert in technical analysis with a worldwide reputation, convincingly proves the need to use technical methods to predict price movements and successful financial transactions.
The book is a basic manual for the technical analysis of not only futures, but also stocks and other financial instruments. It is rightfully considered the "bible of technical analysis" ".
The book is designed for both novice players and experienced specialists in the exchange and over-the-counter markets.
"Technical Analysis of Futures Markets" "has been translated into eleven languages, published in many countries and for the first time in Russian.
Copyright 1986 by Prentice Hall AU Rights Reserved
Foreword
Why Another Book on Technical Analysis of Commodity Futures Markets? To answer this question, I will have to go back a few years, to the time when a course in this subject was introduced at the New York Institute of Finance.
In the spring of 1981, the leadership of the institute approached me with a request to organize a course on technical analysis of futures markets for students of this educational institution. By that time, I had over a decade of practical experience as a technical analyst behind me, and I was repeatedly invited to lecture on this subject in various classrooms. Nevertheless, the task of constructing a fifteen-week course turned out to be quite difficult, contrary to my expectations. At first I was sure that I would hardly be able to stretch the content of the course for such a long time. However, starting to select the material that, in my opinion, deserves inclusion in the program, I came to the conclusion that fifteen weeks is hardly enough to cover even in general terms such a complex and voluminous topic.
Technical analysis is more than a simple set of highly specialized knowledge and techniques. It is a combination of several different approaches and areas of specialization, which, when combined, form a single technical theory. The study of technical analysis must necessarily begin with familiarity with more than ten different approaches, while it is necessary to clearly understand their relationship within the framework of one coherent theory.
Having identified the range of issues that should be included in the course program, I started looking for a book that could be used as a textbook. However, having studied all the available literature, I came to the conclusion that such a book does not exist. Of course, there were many good and noteworthy books published at that time on this topic, but none of them was suitable for my purposes. Those books that covered the basics of technical analysis in sufficient detail were intended for the stock market, and I did not want to take a book on securities analysis as the basis of a "futures" course.
As for the books on the technical analysis of the futures markets, they could be divided into several categories. Almost all of them were designed for an audience already familiar with the basics of graph analysis. Their authors presented their new developments and the results of original research to the reader. Such literature could hardly be useful to those who are just beginning to get acquainted with the subject. The books of another group were devoted to one section of technical theory, for example, the analysis of bar or dot-and-digital charts, the theory of Elliott waves or the analysis of cycles and did not suit me due to their narrow specialization. The books of the third group dealt with the problems of using computer technologies and developing new systems and indicators. Despite the obvious merits of all these books, none of them was suitable for the role of textbooks for a course in technical analysis, as it was either very difficult for a beginner, or too narrowly specialized.
In the end, I suddenly realized that the book I was looking for for my course, a solid textbook that would cover in a logical, consistent manner all the most important areas of technical analysis in relation to the futures markets and which, at the same time, was would be accessible to an unprepared reader, it simply does not exist. It became clear to me that there was a gap in the literature on this topic. Since, like any technical analyst, I know that the gaps have to be filled, I concluded that if I needed such a book, I would have to write it myself.
The book Technical Analysis of Futures Markets was not intended to be an exhaustive, comprehensive book on technical analysis. There is no such book and never will be. Technical analysis is very wide and multifaceted, there are so many subtleties and different currents in it that any attempt to write an "exhaustive" book would not only be presumptuous, but would initially be doomed to failure. There are separate works on practically every topic covered in this book.
At the same time, this book is not a simple textbook for beginners either. Its first chapters are devoted to a detailed study of the foundations of technical theory. This is due, in part, to the fact that, in my deep conviction, the effectiveness of technical analysis is determined primarily by the ability to use these fundamentals correctly. Most of the complex systems and indicators used today are nothing more than a continuation and development of the simplest concepts and principles. Having mastered the basics of chart analysis, the reader will be able to move on to considering more complex methods and tools outlined in the following chapters. The book is structured in such a way as not to cause difficulties in perception for a relatively unprepared reader. At the same time, most of the material will be useful to those who already have some experience in this area and have worked in the futures market for more than one year. Professional technical analysts will be able to use this book to review the concepts and principles of technical theory that they already know.
The last statement is especially important, because, as you know, repetition is the mother of learning. One of the greatest traders of his time and the founder of one of the branches of technical analysis, W. D. Gann, once said: “I have studied and improved my methods every year for the last forty years. Nevertheless, I am still learning and hope to make more significant opening in the future. " ("Profitable operations in the commodity markets", 1976, p. 2).
The importance of constantly expanding knowledge and repeating previously studied material can hardly be overestimated. Being engaged in teaching technical analysis, by force of necessity, I constantly returned to the literature I had already read several years ago. As a practicing analyst, I only benefited from this: each new reading revealed for me some new subtleties and details that had previously remained unnoticed. I am very amused when some novice technical analyst, after half a year or a year of practical activity, tells me that he has already mastered the basics and would like to do something "more serious." Maybe I'm just jealous of people like that. Despite over fifteen years of experience, I am still trying to master these very basics.
IN Chapter 1 the philosophical basis of technical analysis of futures markets is revealed, as well as its basic postulates. In my opinion, many misconceptions regarding technical analysis are caused primarily by the lack of a clear understanding of what a technical theory is, and ignorance of the philosophical roots that underlie it. Further, the technical and fundamental methods of forecasting market dynamics are compared and some advantages of the technical approach are indicated. Attention is also paid to some of the similarities and differences in the application of technical analysis in the stock and futures markets, since questions on this topic arise quite often. The views of two groups of opponents of technical analysis are briefly considered: adherents of the theory of "random events" and "self-fulfilling prophecy".
Chapter 2 is devoted to the famous Dow theory, which laid the foundation for the development of most areas of technical theory. Many technical analysts in the futures markets are unaware of how much of what they use in their work today is based on the principles set forth by Charles Doe at the end of the last century.
IN Chapter 3 describes how the daily bar chart, the most common type of charts, is built, and introduces the concepts of trade volume and open interest. The features of constructing weekly and monthly graphs, which are a necessary addition to the daily one, are also considered.
IN chapter 4, dedicated to the trend and its main characteristics, reveals the basic concepts, or "building blocks", of graphical analysis, such as support and resistance, trend lines and price channels, percentages of the length of the correction, gaps and days of a key change.
IN chapters 5 and 6c using the concepts already known to the reader from the previous chapter, price models are studied. Major trend reversal patterns such as head and shoulders, double top and bottom are discussed in Chapter Five. Continuation patterns, including flags, pennants, and triangles, are in the sixth. The text is accompanied by a large number of illustrations. Much attention is paid to ways of measuring price patterns in order to determine price targets, as well as the role of trading volume in the formation and completion of patterns. In chapter/ the concepts of volume and open interest are covered in more detail.
It shows how changes in these indicators can confirm price movements or serve as a warning about a possible trend reversal. Some indicators based on trading volume are considered, such as on-balance volume (OBV), volume accumulation (VA), etc. It also emphasizes the importance of using the indicators of open interest contained in the "Report on obligations of traders".Chapter 8 is devoted to an important area of graphical analysis - the use of weekly and monthly charts of long-term development, which are often given insufficient attention. Long-term charts give a clearer idea of the general trend of the market development than daily charts. In addition, the need to track indicators of generalized indices of commodity markets, such as the index of futures prices of the Bureau of Commodity Markets Research (FCC) and indices of various groups of markets, is substantiated.
IN Chapter 9 the moving average is considered, one of the most famous and widespread technical tools, the basis of most computerized technical systems that follow the trend.
This chapter also introduces another trend-following technique - the weekly price channel, or the "four-week rule".
IN Chapter 10 Learn about the different types of oscillators and how they identify overbought and oversold market conditions and divergences. Attention is also paid to another way of determining critical market conditions - the “reverse” method.
Chapter 11 introduces the reader to the world of point-to-digital charts. Despite its lesser popularity, this type of charts allows for more accurate analysis of price movements and is a valuable addition to bar charts.
IN Chapter 12 shows how to preserve some of the advantages of the point-to-digital method of presenting data in the absence of information about intraday prices. The method of three-cell reversal and ways of optimizing point-to-digital graphs are considered. It seems that due to the widespread use of computers and the emergence of more and more sophisticated systems for disseminating price information, digital charts are gradually regaining their former popularity among analysts of the futures markets.
IN Chapter 13 covers the theory of Elliott waves and the Fibonacci number sequence. This theory, originally applied to the analysis of stock indices, in recent years has attracted increased attention from specialists working in the futures markets. The Elliott Principles provide a unique approach to studying market dynamics and, when applied correctly, enable the analyst to predict future trend changes with greater confidence and reliability.
Chapter 14 introduces the reader to the theory of cycles, thereby adding a new - temporal - aspect to the process of market forecasting. It also discusses the annual seasonal models of price movements. In addition to a general overview of the basic principles of cyclical analysis, the problem of improving the efficiency of other technical instruments, such as average
moving and oscillators, by synchronizing them with the dominant market cycles.
Chapter 15 pays tribute to the increased role of computers in the technical analysis of the market and the stock exchange game in recent years. This chapter outlines some of the advantages and disadvantages of using mechanical computerized trading systems and discusses some of the features of the computer program for technical analysis, created by Komputrek. Nevertheless, it is constantly emphasized that the computer is just a tool that cannot replace the analysis itself, competent and balanced. If the user does not know the methods described in chapters 1 to 14, do not rely on the help of a computer. A computer can make a good technical analyst even better, and even harm a bad one.
IN Chapter 16 another aspect of successful futures trading, which, unfortunately, is very often neglected, is discussed in detail - money management. It reveals the basic principles of effective money management and explains why they are so necessary for survival in the futures markets. Many traders believe that the ability to properly manage their funds is the most important aspect of futures trading. This chapter shows the relationship between the three elements of a trading program: forecasting, tactics, and money management. Forecasting helps a trader to decide which side he should enter the market - long or short. Trading tactics consists in choosing a specific moment to enter and exit the market. Fund management principles allow you to determine how much should be invested in a trade. In addition, various types of exchange orders are discussed and the question of whether to use protective stop orders as part of a trading strategy.
In chapter "Systematization of analytical methods" all the variety of technical methods and tools discussed in the previous chapters is presented in the form of a single coherent theory. The need for knowledge of all different areas of technical analysis and the ability to combine them in your work is emphasized. Many technical analysts specialize in one particular area of analysis, believing that this is the key to success. I am firmly convinced that no single area of technical analysis can give answers to all questions, each of them contains only a part of the answer to the question of interest to the analyst. The more methods and tools a trader uses, the more likely he will be able to make the right decision. The list of technical procedures in the questions presented in the section will help him in this.
Despite the fact that this book is intended primarily for those who are engaged or are planning to trade directly in futures contracts, the principles of technical analysis outlined in it can be applied with the same success in spreads and options trading. Some of the features of the use of the technical approach in these two most important areas of stock trading are briefly discussed in Appendices 1 and 2. Finally, no book on technical analysis can be considered complete without mentioning the legendary W. D. Gann. Without being able to dwell on the provisions of his teachings within the framework of this book, we will describe several of his most simple and, in the opinion of some experts, effective tools in Appendix 3.
Hopefully, this book will really fill the gap discovered by the author and help the reader to better understand what technical analysis is and appreciate its value. Of course, technical analysis isn't for everyone. Moreover, its effectiveness would most likely be significantly reduced if everyone suddenly began to use it. It is not the intention of the author to impose a technical approach on anyone. This book is an attempt by a technical analyst to share his views on a sometimes seemingly complicated and confusing subject with those who really seek to expand their knowledge about it.
Technical analysis is not at all a "guessing on the coffee grounds", such comparisons can only be heard from people who are ignorant. But at the same time, it should not be considered a magic wand that guarantees instant enrichment. Technical analysis is simply one of the approaches to predicting market movement, based on the study of the past, human psychology and the theory of probability. Of course, he is not perfect. Nevertheless, in most cases, forecasts based on it are distinguished by a fairly high degree of accuracy. Technical analysis has stood the test of time in the real world of stock trading, and deserves the attention of those seriously studying market behavior.
The main theme of this book is simplicity. I have always been against the over-complication of technical analysis methods. Having tried most of the existing technical tools, from the simplest to the most sophisticated, over the years, I have come to the conclusion that the simpler techniques are often the most effective. So my advice to you is: strive for simplicity.
John J. Murphy
Chapter 1.
Philosophy of technical analysis
INTRODUCTION
Before embarking on the study of the methods and tools used for the technical analysis of commodity futures markets, it is necessary first of all to determine what, in fact, is technical analysis. In addition, one should dwell on its philosophical basis, draw clear distinctions between technical and fundamental analysis, and, finally, mention the criticisms that technical analysis is often subjected to.
So, let's get down to the definition. Technical analysis is the study of market dynamics, most often through charts, in order to predict the future direction of price movement. The term "market dynamics" includes three main sources of information at the disposal of a technical analyst, namely: price, volume and open interest. In our opinion, the term "price dynamics", which is often used, is too narrow, since most technical analysts in the commodity futures markets use volume and open interest for their forecasts, not just prices. But, despite these differences, it should be borne in mind that in the context of this book, the terms "market dynamics" and "price dynamics" will be used interchangeably.
PHILOSOPHICAL BASIS OF TECHNICAL ANALYSIS
So, we will formulate three postulates on which, like on three pillars, technical analysis stands:
1. The market takes into account everything.
2. Price movement is subject to trends.
3. History repeats itself.
The market takes into account everything
This statement, in fact, is the cornerstone of all technical analysis. Until the reader comprehends the whole essence and all the meaning of this postulate, it makes no sense for us to move on. A technical analyst believes that the reasons that can somehow affect the market value of a futures commodity contract (and these reasons can be of the most diverse properties: economic, political, psychological - any), will inevitably find their own reflection in the price of this item.
It follows from this that all that is required of you is a thorough study of the price movement. It may seem like it sounds unnecessarily biased, but if you think about the true meaning of these words, you will understand that it is impossible to refute them.So, in other words, any changes in the dynamics of supply and demand are reflected in the movement of prices. If demand exceeds supply, prices rise. If supply exceeds demand, prices go down. This, in fact, underlies any economic forecasting. A technical analyst approaches the problem from the other end and argues as follows: if, for whatever reason, prices in the market go up, it means that demand exceeds supply. Consequently, in terms of macroeconomic indicators, the market is beneficial for the bulls. If prices fall, the market is beneficial for the bears. If suddenly you are confused by the word "macroeconomics", which suddenly appeared in our conversation about technical analysis, then this is completely in vain. There is absolutely nothing to be surprised at. After all, even indirectly, but a technical analyst somehow merges with fundamental analysis. Many experts in technical analysis will agree that it is the deep mechanisms of supply and demand, the economic nature of a particular commodity market, that determine the dynamics of rising or falling prices. By themselves, charts do not have the slightest effect on the market. They only reflect a psychological, if you like, an upward or downward trend that is currently taking over the market.
As a rule, charting analysts prefer not to delve into the underlying reasons that drove the rise or fall of prices. Very often in the early stages, when a tendency to change prices has just begun, or, on the contrary, at some turning points, the reasons for such changes may not be known to anyone. It may seem that the technical approach unnecessarily simplifies and coarsens the task, but the logic behind the first initial postulate - "the market takes everything into account" - becomes more obvious the more experience a technical analyst acquires in real work in the market.
It follows from this that everything that in any way affects the market price will certainly be reflected in this very price. Therefore, it is only necessary to closely monitor and study price dynamics. By analyzing price charts and many additional indicators, a technical analyst makes sure that the market itself indicates to him the most likely direction of its development. We don't need to try to outwit or outsmart the market. All the methods and techniques that will be discussed in this book only serve to help a specialist in the process of studying market dynamics. A technical analyst knows that for some reason the market is going up or down. But it is unlikely that the knowledge of what these reasons are necessary for his predictions.
Price movement is subject to trends
The concept of a trend or trend is one of the fundamental concepts in technical analysis. It is necessary to learn that, in fact, everything that happens on the market is subject to one or another trend. The main purpose of charting the dynamics of prices in the futures markets is to identify these trends in the early stages of their development and trade in accordance with their direction. Most technical analysis methods are trend-following in nature, that is, their function is to help the analyst recognize a trend and follow it throughout its entire period of existence (see Fig. 1.1) ...
From the position that price movement is subordinate to trends, two consequences follow: First consequence: the current tendency, in all likelihood, will develop further, and not turn into its own opposite. This consequence is nothing more than a paraphrase of Newton's first law of motion. Consequence two: the current trend will develop until it starts moving in the opposite direction. This, in essence, is another formulation of the corollary of the first. Whatever verbal parabola this position may seem to us, we should firmly remember that all methods of following trends are based on the fact that trading in the direction of an existing trend should be carried out until the trend shows signs of a reversal.
Fig. 1.1 An example of an uptrend. Technical analysis is based on the assumption that price movements are subject to trends and that these trends are sustainable.
History repeats itself
Technical analysis and research into market dynamics are closely related to the study of human psychology. For example, the charting price patterns that have been identified and classified over the past hundred years reflect important features of the psychological state of the market. First of all, they indicate what kind of structures - bullish or bearish - dominate the market at the moment. And if in the past these models worked, there is every reason to assume that they will work in the future, because they are based on human psychology, which does not change over the years. We can formulate our last postulate - "history repeats itself" - in slightly different words: the key to understanding the future lies in the study of the past. Or it can be quite different: the future is just a repetition of the past.
COMPARISON OF TECHNICAL AND FUNDAMENTAL FORECASTING
If technical analysis is mainly concerned with the study of market dynamics, then the subject of fundamental analysis research is the economic forces of supply and demand that cause price fluctuations, that is, make them go up, down or remain at the existing level. The fundamental approach analyzes all the factors that in one way or another affect the price of a product. This is done in order to determine the intrinsic or actual value of the goods. According to the results of fundamental analysis, it is this actual value that reflects how much a particular product actually costs. If the actual value is lower than the market price of the goods, then the goods must be sold, since they give more for it than it actually costs. If the actual value is higher than the market price of the product, then you need to buy, because it is cheaper than it actually costs. In this case, they proceed exclusively from the laws of supply and demand.
Both of these approaches to predicting market dynamics try to solve the same problem, namely:
determine in which direction prices will move. But they approach this problem from different angles. If the fundamental analyst is trying to understand the reason for the market movement, the technical analyst is only interested in the fact of this movement. All he needs to know is what the market movement or dynamics is taking place, and what exactly caused it is not so important. The fundamental analyst will try to figure out why this happened.
Many specialists working with futures traditionally refer to themselves as either technical or fundamental analysts. In fact, the border is very blurred here. Many fundamental analysts have at least some basic chart analysis skills. At the same time, there is no technical analyst who, at least in general terms, did not understand the main provisions of fundamental analysis. (Although among the latter there are so-called "purists" who will strive at all costs to prevent a "fundamental infection" from entering their techno-analytical holy of holies). The fact is that very often these two methods of analysis really come into conflict with each other. Usually, at the very beginning of some important shifts, market behavior does not fit into the framework of fundamental analysis and cannot be explained on the basis of only economic factors.
It is at these moments, moments for the general trend that are most critical, that the two types of analysis - technical and fundamental - diverge most of all. Later, at some stage, they will coincide in phase, but, as a rule, it is too late for adequate trader's actions.One of the explanations for this apparent contradiction is the following: the market price is ahead of all known fundamental data. In other words, the market price serves as a leading indicator of fundamental data or common sense considerations. While the market has already taken into account all known economic factors, prices are beginning to react to some completely new, not yet known factors. The most significant periods of rising and falling prices in history began in an environment when nothing or almost nothing, in terms of fundamental indicators, did not foreshadow any changes. When these changes became clear to fundamental analysts, the new trend was already developing in full force.
Over time, a technical analyst gains confidence in his ability to read and analyze charts. He gradually gets used to the situation when the market dynamics do not coincide with the notorious "common sense". He begins to enjoy being in the minority. A technical analyst knows for sure that sooner or later the reasons for the market dynamics will be known to everyone. But it will be later. And now you can't waste time waiting for this additional confirmation of your own innocence.
Even with this cursory acquaintance with the basics of technical analysis, one can understand what is its advantage over fundamental. If you need to choose one of the two approaches, then, logically, this, of course, should be technical analysis. First, by definition, it includes the data used by fundamental analysis, because if they are reflected in the market price, then they no longer need to be analyzed separately. So graph analysis is essentially becoming a simplified form of fundamental analysis. Incidentally, the same cannot be said about the latter. Fundamental analysis is not concerned with the study of price dynamics. You can successfully work in the commodity futures market using only technical analysis. But it’s very unlikely that you’ll succeed in any way if you rely only on data from fundamental analysis.
ANALYSIS TYPE AND TIME SELECTION
At first glance, this comparison is not entirely clear, but everything will become clear if we decompose the decision-making process into two components: the actual analysis of the situation and the choice of time. For successful trading on the stock exchange, the ability to choose the right time to enter and exit the market is of enormous importance, especially in futures transactions, where the leverage is so high. After all, you can correctly guess the trend, but still lose money. A relatively small amount of collateral (usually less than 10%) leads to the fact that even minor price fluctuations in an undesirable direction for you can oust you from the market, and as a result
lead to partial or complete loss of collateral. For comparison, when playing on the stock exchange, a trader who feels that the market is going against him can take a wait-and-see attitude in the hope that sooner or later there will be a holiday on his street. The trader holds his shares, that is, he turns from a trader into an investor.
In the commodity market, alas, this is impossible. For futures transactions, the buy and hold principle is absolutely unacceptable. Therefore, if we return to our two components, in the analysis phase, you can use both a technical and a fundamental approach to get the correct forecast. As for the timing, determining the points of entry into and exit from the market, a purely technical approach is required here. Thus, having considered the steps that a trader should take before taking on market obligations, we can once again make sure that at a certain stage it is the technical approach that is absolutely irreplaceable, even if fundamental analysis was applied in the early stages. ...
FLEXIBILITY AND ADAPTABILITY OF TECHNICAL ANALYSIS
One of the strengths of technical analysis is undoubtedly the fact that it can be used for almost any trading medium and in any time frame. There is no such area in operations on the stock and commodity exchange, where the methods of technical analysis are not applied.
If we are talking about commodity markets, then a technical analyst, thanks to his charts, can monitor the situation in any number of markets, which cannot be said about fundamentalists. The latter, as a rule, use so many different data for their forecasts that they simply have to specialize in one particular market or group of markets: for example, grain, metals, etc. The advantages of a broad specialization are obvious.
First of all, any market has periods of bursting activity and periods of lethargy, periods of pronounced price trends and periods of uncertainty. A technical analyst can freely concentrate all his attention and strength on those markets where price trends are clearly traced, and all the rest can be neglected for now. In other words, he makes the most of the advantages of the rotational nature of the market, and in practice this is expressed in the rotation of attention and, of course, funds. At different periods of time, certain markets suddenly begin to "seethe", prices for them form clear trends, and then activity fades, the market becomes sluggish, price dynamics - uncertain. But in some other market at this moment, a burst of activity suddenly begins. And a technical analyst in such a situation has the freedom of choice, which cannot be said about fundamentalists, whose narrow specialization in a certain market or group of markets simply deprives them of this opportunity for maneuver. Even if the fundamental analyst decides to switch to something else, this maneuver will require much more time and effort from him.
Another advantage of technical analysts is the "broad view". Indeed, by following all the markets at once, they have a clear picture of what is generally going on in the commodity markets. This allows them to avoid the kind of "blinkeredness" that may result from specialization in any one group of markets. In addition, most of the futures markets are closely related to each other, they are affected by the same economic factors. Consequently, price dynamics in one market or group of markets may be the key to unraveling where some completely different market or group of markets will go in the future.
TECHNICAL ANALYSIS FOR VARIOUS MEDIA OF TRADE
The principles of graphical analysis are applicable to fund, and on commodity markets. As a matter of fact, initially technical analysis was used precisely on the stock exchange, and came to the commodity one somewhat later. But since they appeared futures deals on stock indices(stock index futures), the border between the stock and commodity markets is becoming more and more elusive. Technical principles also apply to analysis. international stock markets(International Stock Markets) (see Fig. 1.2).
Over the past ten years have become extremely popular financial futures, including on interest rates and world currencies. They have proven to be excellent objects for graphical analysis.
The principles of technical analysis can be successfully applied in operations with options and spreads. Since price forecasting is one of the factors that must be taken into account by the hedger, the use of technical principles when hedging has immeasurable advantages.
TECHNICAL ANALYSIS FOR VARIOUS TIMES
Another strong point of technical analysis is the possibility of its application at any time interval. And it does not matter at all whether you are playing on fluctuations within one trading day, when every tick is important, or analyzing a medium-term trend, in any case you use the same principles. It is sometimes argued that technical analysis is only effective for short-term forecasting. In fact, this is not the case. Some people mistakenly believe that fundamental analysis is more suitable for long-term forecasts, while the lot of technical factors is only short-term analysis in order to determine the moments of entry and exit from the market. But, as practice shows, the use of weekly and monthly charts, covering the dynamics of the market over several years, for long-term forecasting is extremely fruitful.
Fig. 1.2 International stock markets
It is important to fully understand the basic principles of technical analysis in order to feel the flexibility and freedom of maneuver that they provide to the analyst, allowing him to apply them with equal success to the analysis of any trading medium and at any period of time.
ECONOMIC FORECAST
At times, many of us tend to view technical analysis from a very specific angle: as something used to predict prices and trade in the stock and futures markets. But after all, with the same success the principles of technical analysis can find themselves and wider application, for example, in the field of economic forecasts. Until now, this area of technical analysis was not very popular.
Technical analysis has proven its effectiveness in forecasting the development of financial markets. But do these forecasts have any value in a macroeconomic context? A few years ago, The Wall Street Journal published an article titled "Bond Price Spikes — The Best Leading Indicator of Economic Bust and Bust." The main idea of the article was that bond prices record the coming changes in the economy with amazing clarity. The article contains the following statement:
"The bond market as a leading indicator outperforms not only the stock market, but any widely known leading indicator used by the US government."
What's important here? First of all, let's note the mention of the stock market. The Standarand & Poor's 500 Index is one of the twelve most common leading economic indicators used by the US Department of Commerce, citing data from the National Bureau of Economic Research in Cambridge, Massachusetts that the stock market is the best twelve leading indicators.The fact is that there are futures contracts for both bonds and the Standard & Poor's
500. Since both those and other contracts lend themselves well to technical analysis, it means, in the end, we are doing nothing more than economic forecasting, knowing it or not. The most striking example of this is the powerful upward trend in the bond and equity markets, which in the summer of 1982 heralded the end of the deepest and longest economic downturn since World War II. This signal remained at that time almost unnoticed by most economists.
The New York Coffee, Sugar and Cocoa Exchange (CSCE) has proposed the introduction of futures contracts for four economic indices, including the Housing Starts and the Consumer Price Index for Wage Earners. A new futures contract for the Commodity Research Bureau Futures Price Index is expected to be introduced. This index has long been used as a barometer to record the "pressure" of inflation. But, in fact, it can be used much more widely. An article in the Commodity Year Book (1984; Commodity Research Bureau, Inc) explores the relationship between the CRB index and all other economic indicators by analyzing four business cycles dating back to 1970 (see Fig. 1.3).
For example, it indicates that the values of the CRB index are closely related to the dynamics of the index of industrial production, in the sense that the index of futures prices, as a rule, anticipates the change in the values of the second index. The article says: "The apparent relationship between the CRB and industrial output indicates the effectiveness of the CRB as a broad economic indicator." (Stephen Cox, "The CRB Futures Price Index is a basket of 27 commodities that may soon become the subject of futures contracts", p. 4). From myself, I can only add that we have been drawing graphs and analyzing the dynamics of the CRB index for many years now, and always with constant success.
Thus, it becomes abundantly clear that the value of technical analysis as a predictive tool goes far beyond determining which direction the prices of gold or, say, soybeans are moving. However, it should also be noted that the merits of the technical approach to the analysis of macroeconomic trends have not yet been fully studied. The Consumer Price Index (CPI-W) futures contract, introduced on the Coffee, Sugar and Cocoa Exchange (CSCE), became the first swallow of such contracts for economic indices.
Fig. 1.3 The chart shows a clear relationship between the SRV futures index (solid line) and the industrial production index (dashed line).
TECHNICAL ANALYST OR GRAPHIST?
As soon as they do not name those who are engaged in the practical application of technical analysis: technical analysts, graphists, market analysts. However, until recently, they all meant approximately the same thing. Now we can talk about some narrowing of specialization in this area, so the need for terminological distinctions is urgently ripe. So who is who? Since technical analysis ten years ago was based primarily on chart analysis, the words “chartist” and “technical analyst” were essentially synonymous. Now this is not the case.
All technical analysis is gradually divided into different "spheres of influence" of two types of technical analysts. One type is the traditional "graphists". The other is "technical analysts", that is, those who use computer technology and statistical methods in their analysis. Of course, it is very difficult to draw a clear line here, and many technical analysts use both graphics and computer systems. But most of them still tend to gravitate towards one thing more often.
It does not matter whether this or that "graphist" uses computer technologies or not, the graph remains his main working tool. Everything else is secondary. The analysis of the graph, in any case, is a rather subjective matter. Its success largely depends on the skill of this particular analyst. It is not science, but rather art. It is no coincidence that in English this method is often called "art-charting".
In the case of using computer systems and statistical data, on the contrary, all particulars undergo quantitative analysis, checked and optimized in order to create mechanical trading systems. These systems, or trading models, as they are also called, are in turn programmed so that the computer automatically gives signals to buy and sell. Regardless of the complexity of such systems, the main purpose of their creation is to minimize or completely exclude the subjective or human factor from the decision-making process, to provide a certain scientific basis for it. Analysts of this type may not use charts at all. But nevertheless, they are considered technical analysts, since their entire activity is reduced to the study of market dynamics.
The line of "narrow specialization" can be continued even further and subdivide "computer" technical analysts into those who prefer mechanical systems of the "black box" type; and those who use computer technology to create ever more advanced technical indicators. Representatives of the second group interpret these indicators independently and retain control over the decision-making process for themselves.
So, the differences between "graphists" and "technical analysts" can be formulated as follows:
every graphist is a technical analyst, but not every technical analyst is a graphist. Throughout this book, we will use both of these terms interchangeably. However, it should be remembered that there is a difference between the two. The construction and analysis of charts is only a particular aspect of technical analysis. A professional working in this field will prefer to be called a "technical analyst" rather than a "graphist", because the difference between these concepts is the same as between an athlete-runner and someone who joggers from a heart attack. It's all about professionalism, experience and dedication.
BRIEF COMPARISON OF TECHNICAL ANALYSIS ON STOCK AND FUTURE MARKETS
It is often asked whether the same technical methods that are used to analyze the stock market can be applied to the analysis of commodity futures. It is difficult to answer unequivocally here. Basically, the principles are the same, but there are a number of significant differences. The principles of technical analysis initially began to be applied precisely in the stock market and only later came the commodity market. Many basic tools - for example, bar charts, point-to-digital charts, price patterns, trading volume, trend lines, moving averages, oscillators - are used in both. Therefore, it is not so important where you first encountered these concepts: in the stock market or in the commodity. It will not be difficult to rebuild. However, there are a number of common differences, which are related more to the very nature of the stock and commodity futures markets than to the tool that the analyst uses.
Pricing structure
The price structure in the commodity futures market is much more complicated than in the stock market. Each product is quoted in strictly defined units of account. For example, in grain markets it is cents per bushel, in livestock markets it is cents per pound, gold and silver are in dollars per ounce, and interest rates are in basis points. A trader must study the details of contracts in each market: on which exchange the operations are carried out, how a particular product is quoted, what are the maximum and minimum price changes and what are they equal in monetary terms.
