Price, Moving Average and Dr Alexander Elder's Teachings

[smartshahezad]

Hello guys

I am starting this thread to share some of the readings about Price and Moving Averages. I have been following SH's trading setup and there were plenty of places where i came across users asking questions like "Why this MA?", "Why this TimeFrame?" and some questions like "How do we decide what MA to use?" and "How do we choose a TimeFrame?"

I had those questions too and those were answered by Dr Alexander Elder(obviously through his books). I have decided to post things regarding what is Price(without knowing what is price, you cant know what is a MA and all), Moving Average, etc and how can one decide which MA to use and how can one decide what TimeFrame to trade.

In the upcoming posts, i will start explaining stuffs. Some things would be in my language some would be exactly the words of the books "Trading for A Living" and "Come into my Trading Room".

Note : Do use google to know who Dr Alexander Elder is as thats the only thing i won't do it here. Sorry.

 

[SaravananKS]

Hello guys

I am starting this thread to share some of the readings about Price and Moving Averages. I have been following SH's trading setup and there were plenty of places where i came across users asking questions like "Why this MA?", "Why this TimeFrame?" and some questions like "How do we decide what MA to use?" and "How do we choose a TimeFrame?"

I had those questions too and those were answered by Dr Alexander Elder(obviously through his books). I have decided to post things regarding what is Price(without knowing what is price, you cant know what is a MA and all), Moving Average, etc and how can one decide which MA to use and how can one decide what TimeFrame to trade.

In the upcoming posts, i will start explaining stuffs. Some things would be in my language some would be exactly the words of the books "Trading for A Living" and "Come into my Trading Room".

Note : Do use google to know who Dr Alexander Elder is as thats the only thing i won't do it here. Sorry.

Good Initiative I expect some explanation of elder rule in our market charts :thumb:

 

[smartshahezad]

Price

Price:

Price is the heart of technical analysis. Technical Traders believe that history repeats itself and the price, at any given moment, represents all the fundametals all the market sentiment. Price also represents the demand and supply. For instance, there are some fundamentals and there are some sentiments in the market; according to that, there is a demand and the demand is met with a supply; and at that very point where the demand and supply is met, we get a PRICE. In general, price is the intersection of supply and demand curves.

Every serious trader must know the meaning of price. We need to know what are we analysing before we go out there and buy/sell stocks, futures or options. We need to what does open, high, low, bid, ask and close represent. We need to understand the underlying psychology and meaning of those terms.

Before talking more about prices, lets try to understand the terms such as bulls, bears, hogs, sheep, bid and ask.

Bulls:

A Bull is an animal duh). A bull fights by striking up with his horns(i really hope everyone knows this). A bull is a buyer - a person who bets on a rally and profits from a rise in prices.

Bears:

A Bear is again an animal duh so are hogs and sheep for later). They usually fight by striking down with his(her too i guess) paws. A bear is a seller - a person who bets on a decline and profits from a fall in prices.

Hogs:

Hogs are greedy. They get slaughtered when they trade to satisfy their greed. Some hogs buy or sell positions that are too large for them and get destroyed by a small adverse move. Other hogs overstay their positions - they keep waiting for profits to get bigger even after the trend reverses. These are the losers who usually we profit from. They are very important for the market as without them we wont make any profits. Someone has to loose for someone to win. Trading is a ruthless battle.

Sheep:

Sheep are passive and fearful followers of trends, tips and gurus. They sometimes put on a bull's horns or a bearskin and try to swagger. You recognize them by their pitiful bleating when the market becomes volatile.


Bulls are buying, Bears are selling, hogs and sheep get trampled underfoot, and the undecided traders wait on the sidelines. Now we know that there are usually three groups of traders in the market : buyers, sellers and undecided traders


Ask:

It is what a seller asks for his merchandise. Sellers what to charge as much as possible. They have a choice : to wait until prices rise, or to accept a lower offer for his merchandise.

Bid:

It is what a buyer offers for that merchandise. Buyers want to pay as little as possible. A buyer also has a choice : to wait until the prices come down, or to offer to pay more to the sellers.

A trade occurs when there is a momentary meeting of two minds(buyer and seller). An eager bull agrees to a seller's terms and pays up, or an eager bear agrees to a buyer's terms and sells a little cheaper and the presence of undecided trader puts pressure on both bulls and bears. The buyer knows that if he thinks for too long, another trader can step in and snap away his deal and a seller knows that if he tries to hold out for a higher price, another trader may step up in and sell at a lower price.


So, talking about prices again, we now know that every tick on our computer screen represents a deal between a buyer and a seller.They trade while surrounded by crowds of undecided traders. They(undecided traders) may become buyers or sellers as prices change or as time passes.

Buying by bulls pushes the markets up, selling by bears pushes it down and undecided traders creates that urgency and makes everything happen so fast.

Each price is a momentary consensus of value of all market participants(the crowds), expressed in action. Price is a psychological event - a momentary balance of opinion between bulls and bears. Prices are created by masses of traders - buyers, sellers, and undecided people. The patterns of prices reflect the mass psychology of the markets and that is what we as technical traders analyse.

Studying prices is nothing but studying crowd behaviour(psychology) or market sentiment.( Volume and Open Interest too reflect nothing but crowd behaviour. )


Note : There are many things to learn as to what what is volume, open interest and what is market types of traders, etc but we will not go there and directly jump to MAs(Moving Averages). Which i will be sharing as soon as possible. MA would be divided into more than one post as you can't explain everything in just one post. It would be justice only when i explain it in parts. Till then enjoy and keep learning.

 

[smartshahezad]

Moving Average

Moving Average:

The Moving Average Technical Indicator shows the mean instrument price value for a certain period of time. Moving averages define the trend and allow traders to recognize changes in the trend. They do not predict price direction, but rather define the current direction with a lag.

Let us look at an excellent comparison given by Dr. Alexander Elder in his book Trading for a Living, which will help us understand why we use Moving Averages and why is it a very important tool for Technical Analysis and will try to understand the Market Psychology behind the Moving Averages.

As we know now each price is a snapshot of the current mass consensus of value. A single price does not tell you whether the crowd is bullish or bearish - just as a single photo does not tell you whether a person is an optimist or a pessimist. If, on the other hand, someone brings ten photos of a person to a lab and gets a composite picture, it will reveal that person's typical features. If you update a composite picture each day, you can monitor trends in that person's mood.

So, a Moving Average is a composite photograph of the market - it combines prices for several days. The market consists of huge crowds, and a moving average identifies the direction of mass movement.

The most important message of a MA is the direction of its slope. Rising slope shows that the crowd is becoming more optimistic or bullish. When it falls, it shows that the crowd is becoming more pessimist - bearish.

Prices rising above the MA shows that the crowd is more bullish than before and when prices falls below the MA indicates that the crowd is more bearish than before.

There are three main types of MAs : Simple, Exponential and Weighted. Most traders use simple MAs because they are easy to calculate.

Will post about the different kinds of MAs in the upcoming days. Cheers and keep learning.

Thanks

 

[smartshahezad]

Sorry guys i had to give my machine away for servicing and now i have got it back but its gonna take a while to set everything up.. Hope to finish it off by tomorrow.. Cheers..

 

[smartshahezad]

SMA (Simple Moving Average)

SMA (Simple Moving Average) :

A simple MA adds up prices in its time window and divides the sum by the width of that window. It is the simplest in terms of calculation, of all the other MAs. For example, for a 10-day simple MA of closing prices, add up closing prices for the past 10 days and divide the sum by 10. Also it should not be 10-day in particular. The wider the width the more laggard it becomes and the shorter the width, the more signals you get. For simplicity well call it 10 bar MA instead of 10-day as the meaning changes as you change the TimeFrame. In a daily chart one bar is one day while in a 5minute chart, one bar is just a 5minute bar. The main benefit of it is that its so simple but there is a really big disadvantage to use this SMA.

The trouble with a simple MA is that each price affects it twicewhen it comes in and when it drops out. A high new value pushes up the moving average, giving a buy signal. This is good; we want our MAs to respond to new prices. The trouble is that 10 days later, when that high number drops from the window, the MA also drops, giving a sell signal. This is ridiculous because if we shorten a simple MA by one day, well get that sell signal a day sooner, and if we lengthen it by a day, well get it a day later. We can engineer our own signals by fiddling with the length of a simple MA!

Lets take an example. Imagine that a stock hovers between 80 and 90 and its 10-day SMA stands at 85 but includes one day when the stock reached 105. When that high number is dropped at the end of the 10-day window, the MA dives, as if in a downtrend. That meaningless dive has nothing to do with the reality of the market.

When an old piece of data gets dropped off, a SMA jumps. A SMA is like a guard dog that barks twice once when someone approaches the house, and once again when someone walks away from it. You do not know when to believe that dog. Traders use SMA out of inertia.

 

[hayerpa]

oh great just keep them coming..