Traders Toolbox Lesson 3: Change is inevitable
The most powerful ally you can have in trading and analysis is the trend. A market may stay in a given trend for a long period of time, but change is inevitable.
Since change is inevitable, it is important to be able to identify when or where a market may turn. I use an analytical tool called terminal areas to identify a time or a place in the market where a trend potentially may change. Terminal areas are the single most powerful tool I possess.
The word “terminal” is defined as, at or reaching an end. It can also mean a stopping point. The importance of terminal areas is that these are the only places where a market can make a major turn. Very simply, a market cannot make a major change in trend unless it is in a position to do so. When a terminal area is reached, and if the end of the trend is at hand, the old trend will die and a new trend will be born. However, reaching a terminal area does not mean a trend change is automatic. Since terminal areas also serve as a stopping point, a market may experience an interruption of trend instead of a change in trend. An interruption of trend will develop as a congestion area or a sideways pattern, preceding continuation of the trend.
There are six primary areas which can be termed terminal. These are: 1) Major retracement levels, primarily 25%, 38%, 50%, 62%, and 75%; 2) congestion or sideways areas of the past, preferably from weekly, or even longer-term, charts; 3) old highs and lows, again from longer-term charts; 4) trendlines natural trendlines, Andrews lines, Gann angles or whatever your preferred method of drawing trendlines; 5) gaps caused by market action, not those created by the changing of contract months on a continuation chart; and 6) critical points in time, such as cycle turns, anniversary dates, Fibonacci counts, etc.
The combination of several terminal areas greatly enhances the probability of a major turn. Combine two terminal areas and you have a point which has as much as three times the influence of a single terminal area. Three converging terminal areas have the potential to be as much as nine times more powerful than a single area. Occasionally, a convergence of four legitimate terminal areas will occur. This development can evolve into the “home run” type of move.
Terminal areas which have the greatest impact for a major trend change are found on long-term charts. Also, I have found the combinations which have the highest reliability in forecasting a turn usually include a major time point.
Thanks - much appreciated all your assistance. Would really love your Market Club to include the JSE (South Africa),but I really do enjoy your communication.
I would not like Market Club to include the JSE. We’ve already got the nearly irrelevant TSE (toronto stock exchange) there which often leads to a whole lot of “whoops, I dont want that one” when I’m looking for new trades with smartscan.
If I ruled Market Club all exchanges would be separated. The client would be able to select the exchanges they prefer. The client would be able to opt out of the exchanges they did not prefer. The client would not have to sort through long lists that did not apply.
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Mike,
If I am understanding your suggestion, then you would be able to specify in an area in a customizable area that you didn’t want to even see anything about let’s say the MGEX. So when you did scans you never saw a MGEX symbol come up. It’s a very interesting idea. Feel free to email me any further suggestions at lindsay@ino.com.
Best,
Lindsay Thompson
Director of New Business Development
INO.com & MaketClub.com
I would like to see these terminal areas drawn out and diagrammed on charts showing each scenario.
I think what MarketClub really needs to do is to add a filter to it’s “recent trade triangles” so that users can filter for only US and only Canadian exchanges or filter by each individual exchange.
That will solve the problem of “whoops, I don’t want that one”.
They already have a filter for their Smart Scan so implementing this for recent trade triangles should be trivial.
Also, they should add a system for instant e-mail notifications for triangle signals and allow us to keep track of our real investment portfolios.
Regards
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Philip,
Thanks for the suggestions. I think you are going to be very happy in the near future as we have new features and tools being tested right now. Our technical team is always looking for new ways to improve our service and the information that we supply to our members. If you have any other suggestions feel free to email them to me, lindsay@ino.com. Keep your eyes peeled for the new additions to MarketClub.
Best wishes,
Lindsay Thompson
Director of New Business Development
INO.com & MarketClub.com
Confused.
Crude Oil closed at $140.00 today, DOWN from Friday’s $140.21 (despite an intra-day high), and again selling off at the end of the day and failing to close significantly above the 131-140 trading range. Why does the chart web page incorrectly state otherwise?
*June 30, 2008: The U.S. Energy Information Administration revised down U.S. April oil demand by 863,000 barrels per day (bpd) to 19.77 million bpd — 3.9 percent below year-ago levels — as surging fuel costs erode demand in the world’s top consumer.
The revision showed April demand was the lowest for the month since April 2002, and came even before prices scaled to new highs in June.
“This revision of the U.S. oil demand for April has certainly put pressure on crude futures. This is demand destruction before our very eyes,” said Phil Flynn of Alaron Trading. “This is a huge revision and it happened when (fuel) prices were still lower, so you can expect that there could be more future downgrades in demand data.”
I’m going to be very critical.
Those primary areas which you term as terminal look very much as pure rationalization, convenient explanation of what the market does. Wherever the Market turns, you are ready with levels, congestions, gaps, and etc. Practically speaking, such “tools” worth nothing, bla-bla.
In option trades, what % stop would you recommend?
I’m having difficulty in my paper trades finding an acceptable % stop to use to protect my paper capital.
Please advise me on AKORN shares/ (AKRX)
any margin hit due to insider trading
Regards,
RAJESH