Once you have decided which futures to trade and have created account with your chosen broker, you need to evaluate the market. To evaluate the majority financial markets traders use two main types of analysis:
- Fundamental analysis
- Technical analysis
Fundamental analysis
Fundamental analysis includes the study of underlying factors that determine the level of prices for financial assets or goods. The type of analysis will largely depend on which category of futures you choose to invest in. For example, if you decide to trade futures for treasury bonds, you need to analyze the main factors affecting the prices of these bonds. These factors include the level and direction economic activity, monetary policy, supply and demand, investor sentiment, and daily economic and press releases. On the other hand, grain futures traders will be much more interested in analyzing weather reports, planting areas and yields, supply of alternative grains, and shipping costs.
The two short examples above show that fundamental analysis one market has little to do with the fundamental analysis of another market. This is why many traders prefer to focus on only one or two futures markets. This allows them to focus their efforts on developing sharp analytical skills for, say, the oil market, or the metals market. Switch quickly from one futures market to another, seeking to trade depending on how volatile or popular the market is. this moment it is, is unlikely to be a successful approach.
Regardless of which market you choose, it is important to understand that you are likely to have some sort of lack of information regarding other market participants. There are two main types of market participants: speculators and hedgers. Speculators try to capitalize on price fluctuations, while hedgers try to remove the risk associated with future price movements from their business. In some markets (for example, the interest rate futures market), a very well-informed and dedicated person could theoretically have the same amount of information needed for analysis as a bank or an institutional investor. And in some other markets, it's just not practical.
For example, if you're a corn trader, no matter how many market reports you read, you're not likely to be better oriented than a farmer in Iowa or Nebraska, let alone a big farming company like Monsanto. The same is true for the oil market. Exxon is likely to have a better sense of supply and demand dynamics in the oil market over the next three months than even a very well-informed average trader.
Despite this lack of information, it is important to be as knowledgeable as possible about the chosen market. Remember, Monsanto or Exxon are interested in hedging their assets, not speculating on daily price movements. They are so large that their transactions can be quite cumbersome. As an individual, you have the ability to be more flexible and opportunistic than some of the larger companies.
Regardless of which market you choose, you need to do a lot of research before you start trading. basic principles and market conditions to maximize opportunities for success.
Technical analysis
The second main type of analysis used to evaluate futures markets is technical analysis. While fundamental analysis is concerned with determining the intrinsic value of an asset, technical analysis attempts to determine future price movement by evaluating prior price action. While many market participants believe that chart analysis does not provide insight into what will happen in the future, there are also many advocates of technical analysis, especially among short-term traders.
One of the advantages of technical analysis is that, unlike fundamental analysis, many of the charts and tools that technical analysts use can be applied to any type of market. This means that although a technical analyst may have the advantage of concentrating on certain markets, he nevertheless has much more flexibility than a fundamental analyst.
Whether you choose to focus on fundamental or technical analysis, remember not to rely on one to the exclusion of the other. Many fundamental analysts examine charts to determine trade entry and exit points in the direction they have discovered through their research. In the same way, even the most hardened Chartists pay attention to important fundamental events. (Regardless of what the chart says, if a hurricane wipes out all the major refineries, the price of oil will likely rise because supply will decrease).
Tools and methods
In addition to fundamental and technical analysis, there are many other tools and methods that can help you trade futures. The most important of these is risk management. As we discussed earlier, using leverage in futures trading increases both reward and risk. In order to avoid being thrown out by unexpected market movements, private traders must practice strict risk management. This should include setting a stop loss level. This should be the level where you exit the trade and cut your losses, whether or not you still believe in the original premise. Never forget the famous saying “the markets can stay irrational longer than you can stay solvent”. Even if the initial premise is ultimately correct, irrational market moves can stay in place much longer than they “should” and can suck up all capital, especially when you leverage.
Often, traders place physical stop loss orders (stop loss orders) at the moment they enter a trade. These orders should automatically work and stop losses if the market goes against the trader.
Note: Such orders are good to use, but keep in mind that in very volatile markets they simply cannot be executed and the losses will be much larger than planned.
The last important risk management tool is diversification. This means that you have to distribute your capital into a series of small bets in the futures market. Remember, investing is a marathon, not a sprint. Diversification also means that futures trading should not be your only investment program. In addition to your trading account, you must have other, more long term investment supported in different styles using different market mechanisms.
Theory of volumes. Basic Concepts
THE CONCEPT OF VOLUME and its role in futures trading
Why is futures trading so attractive to speculators, given that the spot price movement charts themselves are almost identical, and forex trading conditions are more accessible?
Look at two charts - euro futures on CME and eurodollar forex pair. The prices are almost identical and differ only by a small amount, called the basis (by the time the contract expires, the futures and spot prices will always be the same):
When trading futures, we have more guarantees in the quality of the information provided (current price, volume:) because futures are traded on specific exchanges and the rules of these exchanges clearly state the size of contracts for each futures, as well as its other attributes. This allows you to keep accurate records of completed transactions. Basically trading data currency futures taken from CME (Chicago Mercantile Exchange, Chicago, USA). This is due to the fact that the volume of trading in currency futures on this exchange is the largest in the world. CME reports also reflect open interest in traded futures and options, which provides additional information for market analysis. Thus, the openness of information plus the protection of the client gives an undeniable advantage when trading exactly exchange instruments.
Trading on the stock exchange until recently relied largely on technical or fundamental analysis. We will not discuss whether strategies based on these types of analysis are successful or not, we will only pay attention to the fact that volume data, and even more so the ability to analyze them, was provided until recently only to insiders, the so-called guys from the hole. With the growing share of electronic trading and the ability to receive information directly from the exchange, there is a chance to look behind the scenes of exchange trading, namely, to see the volume of turnover at certain prices.
Why is volume so important? Because volume shows market sentiment. He shapes it. Each price movement is accompanied by the fact that someone bought or sold at the same price. If you look at how the volume is formed, and then a trend grows from it, it will be very similar to looking into the womb and seeing how a child is formed and grows. In the same way, you can look into the "womb" of the market and see what is happening there.
Since the creation of exchanges (more than two centuries), the main types of analysis have been technical analysis and fundamental analysis. But due to the development of communications in the century technical progress, and with them the e-commerce markets, we have access to information that was previously available only to a select few (remember that at the beginning of the last century, even quotes were learned from newspapers). Now we can see both placed orders-bids (in the form of a glass), and executed transactions (in the form of prints), and as combining the first and second - the traded volume of contracts (shares).
Basic Concepts
Volume- this is the number of shares (or contracts) on which trading operations were performed for a certain period of time (hour, day, week, month, etc.). Trading volume analysis is an integral and very important element of technical analysis. According to the volume dynamics, one can judge the significance and strength of the price movement.
So, we got access to insider information and there is no generally accepted way to trade on this data yet. These technologies have been used in the West for several years now (but we haven’t seen any sensible techniques and it’s more like a microscope in the hands of a Neanderthal), but they came to us quite recently - about a year ago, the creators of the VolFix analytical platform lifted the veil into the “world of insider ", showing his concept of trading with volumes. Therefore, I want to give the basics of this concept, which can be taken as a base - consider the main known types of volume:
- Tick - displays the dynamics of price changes for a certain period.
- Quantitative - displays the number of completed transactions for a certain period of time (COUNT).
- Net exchange - displays the number of traded contracts (shares) for a certain period of time at a certain price.
The latter interests us the most, since it is this indicator that indicates the fixed interest of the market in relation to some prices or price ranges. It follows that price fluctuations, one way or another, are a derivative moment from the input or output of funds into or out of the market. Simply put, the VOLUME ---> PRICE scheme works
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Thanks to the analysis of volumes, we can determine the potential place for the beginning of the movement or its end, because the cyclical movement of the price goes from volume to volume and the movement algorithm is the same for all time periods.
Classic charts and volume charts, what's the difference?
Let's take as an example a Japanese candlestick chart from a broker's terminal and a cluster chart displayed in a specially designed analytical platform.
The time period for both is 15 minutes, the instrument is a futures on the S&P500 index traded on CME:
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In this figure, we see two charts taken for the same period (the difference in platform settings is one hour, but the time period is really the same).
Above - standard data in OHLC format (Open, Hi, Low, Close).
The chart below shows intra-bar accumulations (the number of traded contracts), that is, the places where the maximum number of positions was placed for the period (15 minutes). Areas with accumulations more than the value specified in the filter (3, 5, 10 thousand and maximum in the cluster) are highlighted with different colors. It is clearly seen here that the distribution of the traded volume within the cluster is completely uneven along the price scale, and with the standard display method (be it candles or bars), we simply cannot see this.
The total accumulation of volumes in clusters form the maximum volume of the day, which in turn acts as a kind of indicator of the direction to intraday trading. Literally: above the volume of the day - purchases are in priority, below the volume of the day - sales are in priority.
Now, I think, it becomes clear about the indicators:
1. Why are technical analysis indicators "late"?
Because the indicator is a derivative of the price, which in turn is a derivative of the volume.
SCHEME: INTEREST ---> VOLUME ---> PRICE ---> INDICATOR
2 Why don't they work sometimes?
Because they take into account completely all prices and all the time without determining rating priorities. And they are...
- Contract volume (the maximum possible volume of the instrument, covers the entire trading period from the moment the first lot appears on it)
- Volume of the month (includes 4 calendar weeks)
- Volume of the week (current and previous)
- Volume of the day (current or past)
- Hour volume (half hour, 15 minutes, 5 minutes, etc. in descending order)
All these parameters together determine the future and current behavior of the market in the price space. Remember: the price moves from volume to volume.
All intraday movements are based on intraday volumes of the day + past volumes. The volume of the day is formed from the volumes of hours, the volumes of hours from the volumes of smaller periods.
We will focus on understanding intraday volumes in this topic.
Consideration of the scheme for moving the volume of the contract and, as a result, the development of a trend on the example of the December futures contract for the euro 6EZ1:
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The transfer of the contract volume serves as a certain platform for the development of further movement, all long-term trends move in this way. From volume to volume...
What is the basis of volume work?
So why are large volume levels still being worked out? Since the volume level can be considered support/resistance, there is an accumulation of multidirectional orders in this place. It can be:
- take profit of sellers who opened sell positions above
- stops of buyers who opened positions in the hope of growth
- sell stops of traders who believe that the level will be broken
- buy-limits of traders who are waiting for a rebound (for the case when the price approaches the level from above).
The idea is that which total volume will be greater - buys or sells - we'll go there.
It is this accumulation of orders that ensures a return to the broken level, since especially large orders for buying or selling are not always satisfied the first time: first, the price leaves the level in the direction of a large deal, and then returns to further execute the same deal at the same price.
This is what allows you to conduct trades with a good mathematical expectation, since the stops are set at a minimum level, and the amount of potential profit is many times higher. At the same time, even with the statistics of profitable and losing trades 50/50, a good positive mathematical expectation is obtained, which will allow trading account grow.
Some people think that volume trading involves active intraday trading only. However, it is not. Here, as elsewhere, everything is determined by your temperament and trading style. Some prefer 3-4 large lot entries per day with very small stops and profits of 20-40 points. Others make one or two trades per week with the same small stops, but significantly larger profits. There is also a positional style of trading in which transactions are made with a fairly large lot, but are held for several months. Only for this you need nerves of steel, because when you see huge profits that are eaten up by kickbacks, you are tempted to close a position or part of it. In addition, it is not so easy to enter such a position and keep it at the very beginning of the trend.
Volumes vertical
We all know the histogram of volumes, built vertically and usually located at the bottom of the working chart. But what is it and what information does it carry?
Let's consider two options for representing this volume (not to be confused with the volume in MT-4 - it is something else there):
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The upper figure shows that graphically the volume is represented by red and green lines that match the color of the bars (as you know, a red bearish bar - "down tick" is obtained if the closing price is lower than its opening price, and a green bullish one - "up tick", respectively, vice versa ).
What information does the presented volume graph carry in this case?
Knowing that the volume is the number of contracts traded over a certain period of time (in the figure it is 5 minutes), we see that about 5 thousand contracts were traded per bar from 16-10 to 16-15, and judging by the color , (green) bar was bullish, meaning there were more buyers here.
If we take the bar at 17-10, then sellers prevailed here.
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But how complete is this information? Focusing on the upper picture, we can only say that this is bullish and this is bearish, but we do not see the real strength of buyers or sellers.
If you look at the bottom figure, the situation is different here (the volume bars consist of two parts and reflect the number of purchases and the number of sales): at 16-15, there were many times more purchases than sales, and at 17-10, sellers only slightly prevailed. This difference between buying and selling is characterized as DELTA, and we will look at it a little later.
You can estimate the number of buys and sells in more detail using the additional cluster chart of the bar itself:
And an ordinary bar volume shows only the opening-closing of the bar. And even then, if you use the MT-4 terminal, then we will see the following picture:
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Knowing that in MT-4 the market volume is not transmitted, it turns out to be complete nonsense. Here is a visual difference between the two completely different ways presentation of market information.
Horizontal volumes
Unlike vertical volumes, we learned about horizontal volumes quite recently. The concept itself was introduced a little over a year ago by the creators of the volume visualization platform. Some things worked, some didn't - but in general the idea was quickly developed in dozens of different systems using volume levels. How profitable they work is another question, our task is to determine how they are formed and worked out.
Graphically, horizontal volumes can be represented as a histogram:
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And how it is formed can be seen in the following figure (remember the ratings: the volume of a tick forms the volume of a minute,: half an hour, an hour - the volume of the day - the volume of the week - the volume of the month - the volume of the contract).
The figure shows that from the first maximum volume of the day, which coincided with the current volume of the hour and the maximum volume in the cluster (at the price of 1084), the first session move described above occurred.
The next session reversal came from the new day level 1080.75 (78951 contracts), which coincided with the hourly level (even two in a row). One of the ways to execute trades by volume is presented below:
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This is only one of the options for the formation and development of volumes, but there is another value that almost no one seriously considered at one time - this is DELTA, as an indicator of market movement. About a year of joint work was devoted to the study of its behavior (along with approbation at the auction in real life), and we will definitely consider some points.
Starts at 7:20 and ends at 14:10.
Before you start trading, you must learn to identify the trend. To do this, we need to be interested in three parameters:
To correctly identify a trend, you need to understand the interaction of time periods relative to each other and the volumes for these periods. You should always remember that the market "walks" from volume to volume:
Rice. 1. Schematic price movement in the market.
All we need is analyze the current market situation regarding the previous day, past and current week, contract.
For a more productive trend assessment, it is most convenient to use combo charts. The meaning of combining (overlaying) one chart on another is that this approach allows you to see the "mood" of the market, namely, in which zone the market is located: in buying or selling. For example, if you take the previous day and the current one, and overlay both charts on top of each other, the market picture will be clear (see Fig. 2).
Rice. 2. Combined euro chart.
Here you can clearly see that the previous day (red) formed the volume, and the next (green) traded above this volume, therefore, the market is in the buying zone relative to the previous day.
You also need to define market position relative to contract price. For this, it is used weekly combo chart, for global trend detection.
Rice. 3. Combined weekly chart Euro.
Figure 3 shows that the contract price was formed last (green) week, and the current (white) one went above this accumulation, therefore, the market was in the buy zone relative to the last week and the contract price.
And the last thing you need to know in order to correctly determine the trend is the principle of forming a "corridor" of volumes. Consider an example. Weeks 10.11-14.11 (red) and 17.11-21.11 (green) formed a price range of prices, which will serve us to determine the further movement of the market.
Rice. 4. The principle of forming a "corridor" of volumes.
Above the upper limit of the corridor, the market is conditionally in the buy zone, below the lower limit - in the sell zone. If the current market price is in the corridor, do something Not recommended as there is no clear direction in the market. This principle should be applied to daily ranges as well as intraday trading.
Euro intraday trading
As mentioned earlier, all intraday movements are based on intraday volumes of the day and past volumes. The volume of the day is formed from the volumes of hours, the volumes of hours from the volumes of smaller periods. The main emphasis in this topic will be on understanding intraday volumes.
Let's consider an example of the intraday market movement on Monday 11/24/2008 on EURO(EUA). We will consider every hour for 30 minutes, and track all price movements relative to the formed volumes.
00:00-01:00. First hour:
Rice. 5. Market behavior in the first hour of trading.
We see that the first hour created the maximum volume at the price of 1.2665, and on the right figure we can see how it was formed during this hour. The first 30 minutes - the maximum volume is 1.2651, and the second 30 minutes - 1.266. At the opening of the hourly chart, it was necessary to buy, since the volume of the week is 1.2515, the market is over the volume - purchases prevail. So, the first hour was traded for buying and formed the volume at 1.2665. On the hourly combo chart you can see how it happened.
Rice. 6. Combo-chart of the first hour.
00:01-02:00. Second hour:
Rice. 7. Market behavior in the second hour of trading.
The second hour of work was traded for sale from the volume of the first hour. If we pay attention to Figure 7, we will see how the sale started right from the volume of the first column, from the maximum volume of the first hour, and the volume was formed at the price of 1.262, where, at current time, the maximum volume for the day was formed.
The figure on the right shows that the first 30-minute period of the second hour formed the maximum volume at the price of 1.2634 and the next 30 minutes approached this level and worked it out - the market sold out again.
On the combo chart this development is visible (see Fig. 8). All levels of 30 minutes and hours are exposed.
Rice. 8. Combo-chart of the second hour.
00:00-03:00. Third hour:
Since after the strong market movement, which we observed in the second hour of work, the market stops to accumulate new volume, we spent the third hour in the same mood. The price range is narrow, which formed the maximum volume of the hour for the current time, there was a transfer of the volume of the day to the price of 1.2588. This important point must be taken into account.
Rice. 9. Market behavior in the third hour of trading.
If we consider this hour with an interval of 5 minutes, it is clear that the lion's share of the volume was formed in the second 5-minute and in the sixth. This is clearly seen in Figure 10.
Rice. 10. Formation of the main volume of the third hour of work.
And of course, let's see how the third hour looked on combo chart(see fig. 11).
Rice. 11. Combo chart of the third hour.
00:00-04:00. fourth hour
After passing the fourth hour, which we mostly spent in one place, consolidating, the fourth one opened lower. As a result, it turns out that it is impossible to immediately enter the sale, since there was no level development, and the first 15 minutes formed at a price of 1.2578.
Rice. 12. Work in the first 15 minutes of the fourth hour.
The next 15 minutes (3:15-3:30) opened higher than the previous ones, at a price of 1.259 and above the previous hour's volume. This hour was traded for buying, from the volume formed in the range of 02:00-3:00. It is noticeable how the market moves from volume to volume.
Rice. 13. Formation of the volume of the fourth hour of work.
After the buy traded, the maximum volume of the current hour was formed at the price of 1.2607, which can be seen in Figure 13. On the combo chart, it is noticeable that the market sold out, and the third and fourth hours (green and red) formed a larger volume with the transfer of the maximum volume of the day to the price of 1.259, which turned the market in the other direction, to buy:
Rice. 14. Fourth hour combo chart.
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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 price of an asset, in the case of currency trading - 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 price of an asset, in the case of currency trading - the exchange rate.
In forecasting, there are two opposite approaches - and. Each contains an infinite number of ways to predict prices. We will talk about the method, which is something in between, between technical and fundamental analysis. This method is the forecasting of rates based on the analysis of futures.
What are futures?
Futures are trading instruments, the purchase of which entitles the investor through certain period 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 assume the delivery of the currency strictly on the day of the expiration of the futures, the latter - on any day before this period. Obviously, American futures are the most common on the market.
It is not hard to imagine the importance of futures functions. They allow for a small commission to get the right to buy a 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 have come to the conclusion that there are two "parallel" realities: the futures and the spot markets. The prices for them differ, the more - the more volatile the trading instrument.
The price of a currency futures is the price at which the market currently expects to buy it at the time of expiration (expiration) of the futures contract. 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 each moment in time it is corrected. That is, if at the moment the price of a currency futures is higher than the spot price, this does not mean that it will be higher at the time of expiration, however, this suggests that in the current state of affairs this is the most likely scenario.
Forecasting methods
The use of futures for price forecasting is just a correction trading signals in anticipation of the market. In other words, if the market confidently expects a price below the current level, it is more appropriate to consider downside signals for trading, and vice versa otherwise. This is the simplest way to use futures, and like any very simple method, it does not give unambiguous results.
A much more accurate and efficient, although more complex method is the method of analyzing the dynamics of changes in volumes. In addition to the current price of the futures in the futures market, unlike 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. Thus, the price of an asset, including futures, is a kind of compromise, an optimum that suits the market at the moment. However, the optimum and the price level may differ, but such deviations are quickly corrected by the market. In other words, the market tends to the optimum. So here's what closer price fits this optimal level- the more futures contracts are purchased, the volumes grow. If, as the price of an asset moves in a certain direction, the volume of transactions also increases, this direction is probably the current trend, and you should trade in it.
Also, the correspondence of the current direction of price movement to the trend is indicated by the advanced change in futures prices of later periods. That is, if the three-month futures price falls more when the monthly futures price falls, the direction is probably in line with the general expectations of the market.
Information on the current state of affairs can be obtained on a huge number of information sites on the Internet. There are also offices that offer real-time information on futures prices, that is, without a 10-15 minute lag.
In addition to direct analysis of futures prices in the market, there is also an analysis focused mainly on the volume of transactions. Such an analysis uses the reports of the US Commodity Futures Trading Commission as a base, and contains the volume of transactions by category of entities that have 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 undeniable advantages and is one of the most promising tools for market analysis.
The use of futures in trading requires a lot of experience and knowledge, and not only in the field of trading on foreign exchange market but also in economics and finance. Only an understanding of the entire mechanism of the futures market allows you to make a correct forecast based on this instrument, and, most importantly, avoid the misconceptions that beginners often encounter.
Translation from English: Novitskaya O., Sidorov V.
Scientific editor candidate 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 theoretical basis technical analysis and methods of its practical application. The author, a world-famous leading specialist in technical analysis, convincingly proves the need to use technical methods to predict price movements and successful financial transactions.
The book is a basic guide to 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 beginners and experienced specialists in the exchange and over-the-counter markets.
"Technical Analysis of Futures Markets" has been translated into eleven languages, has been published in many countries and is being published in Russian for the first time.
Copyright 1986 by Prentice Hall AU Rights Reserved
Foreword
Why do we need another book on the technical analysis of commodity futures markets? To answer this question, I will have to go back a few years to the time when the New York Institute of Finance introduced a course on this subject.
In the spring of 1981, the leadership of the institute asked me to organize a course on technical futures market analysis for the students of this institution. By that time, I had more than a decade of practical experience as a technical analyst under my belt, and I had been invited to lecture on the subject to various audiences on numerous occasions. However, the task of constructing a fifteen-week course turned out to be, contrary to my expectations, rather difficult. At first I was sure that it would be difficult for me to stretch the content of the course for such a long period of time. However, when I began to select material that, in my opinion, deserved to be included in the program, I came to the conclusion that fifteen weeks would hardly be enough to even in general terms to cover 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, combined, form a single technical theory. The study of technical analysis must necessarily begin with an acquaintance with more than ten different approaches, while it is necessary to clearly understand their relationship within the framework of one coherent theory.
Having determined the range of questions that should be included in the course program, I began to search 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, among the books published at that time on this subject, there were many good and worthy of attention, but none of them suited my purposes. Those books that covered the basics of technical analysis quite fully were intended for the stock market, and I did not want to take a book on the analysis of securities as the basis for the "futures" course.
As for books on the technical analysis of futures markets, they could be divided into several categories. Almost all of them were designed for an audience already familiar with the basics of chart 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 starting to get acquainted with the subject. The books of the other group were devoted to one section of technical theory, for example, the analysis of bar or point and figure charts, the theory of Elliott waves, or the analysis of cycles and did not suit me because of 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 were suitable as a textbook for a technical analysis course, as they were either very difficult for a beginner or too narrowly specialized.
Finally, 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 major areas of technical analysis in relation to the futures markets and which, at the same time, was would be accessible to the unprepared reader, 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 gaps must be filled, I concluded that if I needed a book like this, I would have to write it myself.
The book "Technical Analysis of the Futures Markets" was not planned as an exhaustive, comprehensive work on technical analysis. There is no such book and there never will be. Technical analysis is very broad and multifaceted, it has so many subtleties and different currents that any attempt to write an "exhaustive" book would not only be arrogant, but would already be doomed to failure from the very beginning. There are separate works on almost every topic covered in this book.
At the same time, this book is not a simple textbook for beginners. Its first chapters are devoted to a detailed study of the foundations of technical theory. This is partly due to the fact that, in my deep conviction, the effectiveness of technical analysis is determined primarily by the ability to correctly use these fundamentals. 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 graph analysis, the reader will be able to move on to the more complex methods and tools outlined in subsequent chapters. The book is structured in such a way as not to cause difficulties in the perception of 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 repeat the provisions and principles of technical theory 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 past forty years. However, I am still learning and I hope to make more significant discoveries in the future. " ("Profitable operations in commodity markets", 1976, p. 2).
The importance of constantly expanding knowledge and repeating previously studied material cannot be overestimated. Being engaged in teaching of the technical analysis, I because of necessity constantly returned to the literature already read by me some years ago. As a practicing analyst, I only benefited from this: each new reading opened up for me some new subtleties and details that had previously gone unnoticed. It amuses me very much 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'm still trying to master these very basics.
IN chapter 1 reveals the philosophical basis of the technical analysis of futures markets, as well as its main postulates. In my opinion, many misconceptions regarding technical analysis are caused primarily by the lack of a clear understanding of what technical theory is, and ignorance of the philosophical roots that underlie it. Next, 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 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 futures technical analysts are unaware of how much of what they use today in their work is based on the principles outlined in Charles Dow at the end of the last century.
IN chapter 3 describes how to construct a daily bar chart, the most common type of chart, and introduces the concepts of trading volume and open interest. Also, the features of building weekly and monthly charts, which are a necessary addition to the daily one, are considered.
IN chapter 4, devoted 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 correction, gaps and days of a key turning point.
IN chapters 5 and 6c With the help of concepts already known to the reader in the previous chapter, price models are studied. The main 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 the ways in which price patterns are measured in order to determine price targets, as well as the role of trade volume in the formation and completion of patterns. Chapter/ the concepts of volume and open interest are covered in more detail.
It is shown how changes in these indicators can confirm the price movement 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. The importance of using the open interest indicators contained in the Traders Commitments Report is also emphasized.Chapter 8 is devoted to an important area of graphical analysis - the use of weekly and monthly charts of long-term development, which is often given insufficient attention. Long-term charts give a clearer picture of the general trend of the market than daily charts. In addition, the necessity of tracking indicators of generalized indices is substantiated. commodity markets, such as the Futures Price Index of the Bureau of Commodity Market Research (CLE) and indices of various market groups.
IN chapter 9 the moving average is considered, one of the most famous and widely used technical tools, the basis of most computerized technical trend-following systems.
This chapter also introduces another trend-following technique, the weekly price channel, or "four-week rule".
IN chapter 10 explains the different types of oscillators and how they are used to detect overbought and oversold markets and divergences. Attention is also paid to another way of determining the critical conditions of the market - the method "from the opposite".
Chapter 11 introduces the reader to the world of point and figure charts. Although less well known, this type of chart allows for more accurate analysis of price movements and is a valuable addition to bar charts.
IN chapter 12 shows how to retain some of the advantages of the point-and-figure method of reporting data in the absence of intraday price information. The method of three-cell reversal and methods for optimizing point-and-digit graphs are considered. It seems that with the widespread use of computers and the advent of ever more sophisticated systems for distributing price information, pip-digit charts are gradually regaining their former popularity among futures market analysts.
IN chapter 13 the theory of Elliot waves and the Fibonacci number sequence are covered. This theory, originally applied to the analysis of stock indices, in last years began to attract increased attention of specialists working in the futures markets. Elliott Principles are a unique approach to studying market dynamics and, when applied correctly, allow the analyst to predict future changes in trends from more confidence and reliability.
Chapter 14 introduces the reader to the theory of cycles, thereby adding a new - time - aspect to the process of market forecasting. It also considers the annual seasonal patterns of price movement. Apart from overview the main principles of cyclical analysis, the problem of increasing the efficiency of other technical tools, such as averages, is discussed.
moving and oscillators, by synchronizing them with the dominant market cycles.
Chapter 15 pays tribute to the increased role of computers in recent years in technical market analysis and stock trading. This chapter lists some of the advantages and disadvantages of using mechanical computer trading systems and discusses some features of the computer program for technical analysis, created by the company "Computrack". Nevertheless, it is constantly emphasized that the computer is just a tool that is not able to replace the proper analysis, competent and balanced. If the user does not know the methods described in chapters 1 to 14, you should not rely on the help of a computer. A computer can make a good technical analyst even better, and it can even hurt a bad one.
IN chapter 16 one more aspect of successful futures trading, which, unfortunately, is often neglected, is covered 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 it is the ability to properly manage their funds that is the most important aspect futures trading. This chapter shows the relationship between the three elements of a trading program: forecasting, tactics, and money management. Forecasting helps the trader decide which side he should enter the market from - long or short. Trading tactics is to choose a specific moment to enter the market and exit it. The principles of money management allow you to determine how much to invest in a trade. In addition, discussed Various types exchange orders and the question of whether protective stop orders should be used as part of a trading strategy.
In chapter "Systematization of analytical methods" all the variety of technical methods and tools discussed in previous chapters is presented as a single coherent theory. The need for knowledge of all the various areas of technical analysis and the ability to combine them in one's work is emphasized. Many technical analysts specialize in one area of analysis, believing it to be the key to success. I am firmly convinced that no single area of technical analysis can provide 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 more likely that he can 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 or plan to trade directly in futures contracts, the principles of technical analysis outlined in it can be applied with the same success in trading spreads and options. Some features of the use of the technical approach in these two most important areas of exchange 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, according to some experts, effective tools in Appendix 3.
It is to be hoped that this book will indeed 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 is not 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 seemingly overly complex and confusing subject with those who really want to expand their knowledge of it.
Technical analysis is not "guessing on the coffee grounds" at all, such comparisons can only be heard from ignorant people. 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 the movement of the market, based on the study of the past, human psychology and probability theory. Of course, he is not perfect. Nevertheless, in most cases, forecasts based on it differ 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 who are seriously involved in the study of market behavior.
The main theme of this book is simplicity. I have always been opposed to over-complicating the methods of technical analysis. 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: keep it simple.
John J. Murphy
Chapter 1.
Philosophy of technical analysis
INTRODUCTION
Before proceeding to 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 a technical analysis. In addition, one should dwell on its philosophical basis, draw a clear distinction between technical and fundamental analysis, and, finally, mention the critical remarks that technical analysis is often subjected to.
So let's get to the definition. Technical analysis is the study of market dynamics, most often through charts, in order to predict the future direction of price movements. The term "market dynamics" includes the three main sources of information available to a technical analyst, namely price, volume, and open interest. In our opinion, the term "price action", which is often used, is too narrow, since most commodity futures technical analysts use volume and open interest for their forecasts, and 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 as synonyms.
PHILOSOPHICAL BASIS OF TECHNICAL ANALYSIS
So, let's formulate three postulates on which technical analysis stands, like on three pillars:
1. The market takes everything into account.
2. Price movement is subject to trends.
3. History repeats itself.
The market takes everything into account
This statement, in fact, is the cornerstone of all technical analysis. As long as the reader does not comprehend the whole essence and the whole meaning of this postulate, it makes no sense for us to move on. The 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 nature: economic, political, psychological - any) will certainly find their reflected in the price of this item.
It follows from this that all that is required of you is a careful study of price movements. It may seem that this 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 price movements. If demand exceeds supply, prices rise. If supply exceeds demand, prices go down. This, in fact, underlies any economic forecasting. But the technical analyst approaches the problem from the other side and argues as follows: if, for whatever reason, prices in the market went up, then demand exceeds supply. Therefore, according to macroeconomic indicators, the market is beneficial for the bulls. If prices fall, the market is profitable 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 here. After all, albeit indirectly, but the technical analyst somehow merges with fundamental analysis. Many specialists 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, the charts do not have the slightest impact on the market. They only reflect the psychological, if you like, upward or downward trend that is currently taking over the market.
As a rule, chart analysts prefer not to go into the root causes that caused prices to rise or fall. Very often in the early stages, when the trend towards price changes has just begun, or, conversely, at some critical moments, the reasons for such changes may not be known to anyone. It may seem that the technical approach unnecessarily simplifies and roughens the task, but the logic behind the first initial postulate - "the market takes into account everything" - becomes the more obvious, the more experience of real work in the market a technical analyst acquires.
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 carefully monitor and study the dynamics of prices. Analyzing price charts and many additional indicators, the technical analyst achieves that the market itself indicates to him the most probable direction of its development. We don't need to try to beat or outwit the market. All the methods and techniques that will be discussed in this book serve only to help the specialist in the process of studying the dynamics of the market. The technical analyst knows that for some reason the market goes up or down. But it is unlikely that knowledge of what these reasons are is necessary for his forecasts.
Price movement is subject to trends
The concept of a trend or a trend (trend) is one of the fundamentals in technical analysis. It is necessary to learn that, in fact, everything that happens in the market is subject to one trend or another. The main purpose of charting the price dynamics 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 the trend and follow it throughout its entire period of existence (see Fig. 1.1) .
From the position that the movement of prices is subject to trends, two consequences follow: The first consequence: the current trend is likely to develop further, and not turn into its own opposite. This consequence is nothing but a paraphrase of Newton's first law of motion. Consequence two: the current trend will develop until the movement in the opposite direction begins. This, in fact, is another formulation of the first corollary. No matter how verbal parabola this statement may seem to us, it should be firmly remembered 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.
Rice. 1.1 An example of an uptrend. Technical analysis is based on the premise 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, chart price patterns that have been identified and classified over the past hundred years reflect important features psychological state of the market. First of all, they indicate which moods - bullish or bearish - dominate the market at the moment. And if these models worked in the past, there is every reason to believe 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 somewhat 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 is the economic forces of supply and demand that cause prices to fluctuate, that is, make them go up, down or remain at the existing level. With a fundamental approach, all factors that somehow affect the price of a product are analyzed. This is done in order to determine the internal or actual value of the goods. According to the results of fundamental analysis, it is this actual value that reflects how much this or that product actually costs. If the actual value is lower than the market price of the commodity, then the commodity 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 goods, 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 forecasting 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 figure out the reason for the market movement, the technical analyst is only interested in the fact of this movement. All he needs to know is that such a movement or market 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 here is very blurred. Many fundamental analysts have at least basic chart analysis skills. At the same time, there is no such technical analyst who, at least in general terms, did not imagine the main provisions of fundamental analysis. (Although among the latter there are so-called "purists" who will strive at all costs to prevent the "fundamental infection" in 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 developments, market behavior does not fit into the framework of fundamental analysis and cannot be explained on the basis of economic factors alone.
It is at these moments, moments for the general trend of the most critical, two types of analysis - technical and fundamental - and diverge the most. Later, at some stage, they will coincide in phase, but, as a rule, too late for adequate actions of the trader.One explanation for this seeming contradiction is that the market price outperforms all known fundamentals. 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, yet unknown factors. The most significant periods of rising and falling prices in history began in an environment where nothing or almost nothing, in terms of fundamental indicators, did not portend any changes. When these changes became clear to fundamental analysts, the new trend was already developing in full force.
Over time, the technical analyst gains confidence in his ability to read and analyze charts. He is gradually getting used to a situation where the dynamics of the market does not coincide with the notorious "common sense". He begins to enjoy being in the minority. The technical analyst knows for sure that sooner or later the reasons for the market dynamics will become known to everyone. But it will be later. And now you can not 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 its advantage over the fundamental one is. 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 that fundamental analysis operates on, because if they are reflected in market price, so there is no need to analyze them separately. So chart analysis is essentially becoming a simplified form of fundamental analysis. Incidentally, the same cannot be said of the latter. Fundamental analysis does not study price dynamics. You can successfully work in the commodity futures market using only technical analysis. But it is very unlikely that you will succeed in any way if you rely only on fundamental analysis data.
TYPE OF ANALYSIS AND TIMING
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. To be successful on the stock exchange, the ability to choose the right time to enter and exit the market is of great importance, especially in futures transactions, where the “leverage effect” is so high. After all, you can correctly guess the trend, but still lose money. Relatively small amount collateral(usually less than 10%) leads to the fact that even slight price fluctuations in the direction you do not want can force you out of the market, and as a result
lead to partial or complete loss of collateral. For comparison, when playing 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. A 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 principle of "buy and hold" is absolutely not acceptable. Therefore, if we return to our two components, in the analysis phase, you can use both the technical and fundamental approaches to get the right forecast. As for the choice of time, determining the points of entry into the market and exit from it, a purely technical approach is required here. Thus, having considered the steps that a trader must take before assuming market obligations, we can once again be convinced that at a certain stage it is the technical approach that is absolutely indispensable, even if fundamental analysis was used in the early stages. .
FLEXIBILITY AND ADAPTABILITY OF TECHNICAL ANALYSIS
One of the strengths of technical analysis is undoubtedly 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 exchanges, where the methods of technical analysis would not be applied.
When it comes to commodity markets, the 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 market or group of markets: for example, grains, metals, etc. The advantages of broad specialization are obvious.
First of all, in any market there are periods of burst of activity and periods of lethargy, periods of pronounced price trend and periods of uncertainty. A technical analyst is free to concentrate all his attention and strength on those markets where price trends are clearly visible, and neglect all others for the time being. In other words, he maximizes the benefits of the rotational nature of the market, and in practice this translates into a rotation of attention and, of course, funds. At different periods of time, certain markets suddenly begin to "boil", prices for them form clear trends, and then the activity fades, the market becomes sluggish, price dynamics are uncertain. But in some other market, at this moment, a burst of activity suddenly begins. And a technical analyst in such a situation has freedom of choice, which cannot be said about fundamentalists, whose narrow specialization in a particular market or group of markets simply deprives them of this opportunity to 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 happening in the commodity markets. This allows them to avoid a kind of "blindness", which may be the result of specialization in any one group of markets. In addition, most futures markets are closely related to each other, they are affected by the same economic factors. Therefore, price behavior in one market or group of markets can be a clue to where some very different market or group of markets will go in the future.
TECHNICAL ANALYSIS AS APPLIED TO DIFFERENT MEANS OF TRADE
The principles of graphical analysis are applicable to fund-vom, and on commodity markets. As a matter of fact, initially, technical analysis was used precisely on the stock exchange, and came to the commodity exchange a little later. But since they appeared futures transactions on stock indices(stock index futures), the boundary between the stock and commodity markets is becoming more and more elusive. Technical principles also apply to the analysis international stock markets(International Stock Markets) (see Figure 1.2).
Over the past ten years have become extremely popular financial futures, including on interest rates And world currencies. They proved to be excellent objects for graphical analysis.
The principles of technical analysis can be successfully applied to transactions with options And spreads. Since price forecasting is one of the factors that a hedger must take into account, the use of technical principles in hedging has undeniable advantages.
TECHNICAL ANALYSIS FOR DIFFERENT TIMES
Another strength of technical analysis is the possibility of its application at any time interval. And it doesn't matter at all whether you play swings within one trading day, when every tick is important, or analyze the medium-term trend, in any case, you use the same principles. Sometimes the opinion is expressed that technical analysis is effective only for short-term forecasting. In fact, this is not so. Some people mistakenly believe that fundamental analysis is more suitable for long-term forecasts, and 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 for several years, for long-term forecasting is extremely fruitful.
Rice. 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 time interval.
ECONOMIC FORECASTING
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 with the same success, the principles of technical analysis can find a wider application, for example, in the field of economic forecasts. Until now, this area of technical analysis has not been very popular.
Technical analysis has proven its effectiveness in predicting the development of financial markets. But do these forecasts have any value in a macroeconomic context? A few years ago, the Wall Street Journal ran an article titled "Bond Boosts Are the Best Leading Indicator of Boom and Downs in the Economy." The main idea of the article was that bond prices capture 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 well-known leading indicators used by the US government."
What is important here? First of all, we note the mention of stock market. The Standard & Poor's 500 Index is one of the twelve most common leading economic indicators that the US Department of Commerce focuses on. The author of the article refers to data from the National Bureau of Economic Research in Cambridge, Massachusetts, according to which the stock market is the best of twelve leading indicators.The fact is that there are futures contracts for both bonds and the Standard & Poor's index
500. Since both contracts lend themselves perfectly to technical analysis, it means that in the end, we are engaged in nothing more than economic forecasting, whether we are aware of it or not. The clearest example of this is the powerful upward trend in the bond and stock markets that in the summer of 1982 heralded the end of the deepest and longest recession since World War II. This signal remained at that time practically unnoticed by most economists.
The New York Coffee, Sugar, and Cocoa Exchange (CSCE) has proposed futures contracts for four economic indices, including the Housing Starts Index and the Consumer Price Index for Wage Earners. The introduction of a new futures contract for the Commodity Research Bureau Futures Price Index is expected. This index has long been used as a barometer, registering the "pressure" of inflation. But, in fact, it can be used much more widely. An article in the 1984 Commodity Year Book ("Commodity Year Book"; Commodity Research Bureau, Inc) explores the relationship between the CRB index and all other economic indicators by analyzing four business cycles since 1970 (see Fig. 1.3).
For example, it indicates that the values of the CRB index are closely related to the dynamics of the volume index 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 values of the CRB index and the industrial output index indicates the effectiveness of the CRB index as a broad economic indicator." (Stephen Cox, "The CRB Futures Price Index - consumer basket of 27 commodities that may soon become the subject of futures contracts", p. 4). On my own, I can only add that we have been drawing charts and analyzing the dynamics of the CRB index for many years, and always with the same success.
Thus, it becomes quite clear that the value of technical analysis as a predictive tool goes far beyond determining in which direction the price of gold or, say, soybeans are moving. However, it should also be noted that the merits of the technical approach in the field of analysis of macroeconomic trends have not yet been fully explored. The futures contract for the consumer price index (CPI-W), introduced on the coffee, sugar and cocoa exchange (CSCE), became the first sign among similar contracts for economic indices.
Rice. 1.3 The chart shows a clear relationship between the NRW 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 there is an urgent need for terminological distinctions. So who is who? Since ten years ago technical analysis was based mainly on the analysis of charts, the words "graphist" (chartist) and "technical analyst" (technician) were, in fact, synonymous. Now it's not.
All technical analysis is gradually divided into peculiar "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 techologies and statistical methods. Of course, it is very difficult to draw a clear line here, and many technical analysts use both charts and computer systems. But most of them still more often gravitate towards one thing or another.
It doesn't matter whether this or that "graphist" uses computer technologies or not, the graph remains his main working tool. Everything else is secondary. Analysis of the graph, in any case, is a rather subjective matter. Its success largely depends on the skill of this particular analyst. It's not a science, but rather an art. It is no coincidence that in English this method is often called "art-charting".
In the case of the use of computer systems and statistical data, on the contrary, all details are quantitatively analyzed, checked and optimized in order to create mechanical trading systems. These systems or trading patterns, as they are also called, are in turn programmed so that the computer automatically gives buy and sell signals. Regardless of the complexity of such systems, the main goal of their creation is to minimize or completely eliminate the subjective or human factor from the decision-making process, to bring under it some scientific basis. Analysts of this type may not use charts at all. 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 extended even further and subdivided "computer" technical analysts into those who prefer mechanical systems of the "black box" type (black box); 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. In this book, we will use both terms interchangeably. However, it should be remembered that there is a difference between them. 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 is jogging from a heart attack. It's all about professionalism, experience and commitment.
A BRIEF COMPARISON OF TECHNICAL ANALYSIS IN STOCK AND FUTURES MARKETS
It is often asked whether the same technical methods can be applied to the analysis of commodity futures that are used to analyze the stock market. Definitely hard to answer 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 to the commodity market. Many basic tools - such as bar charts, point and figure 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 market. It will be easy to readjust. However, there are a number of general differences that are related, rather, with the very nature of the stock and commodity futures markets, rather than with the tool that the analyst uses.
Price 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 cattle markets it is cents per pound, gold and silver are in dollars per ounce, and interest rates are in basis points. The trader must study the details of the contracts in each market: on which exchange transactions are carried out, how this or that commodity is quoted, what are the maximum and minimum price changes and what they are equal in monetary terms.