Chart Formations

It is important to note that the Technical Analysis Overview provided does not attempt to be a comprehensive treatment of Charting or Technical Analysis methods. There are numerous, well-written books on Chart Interpretation and Technical Analysis. A brief and simplistic review of some basic charting concepts are provided for reference or to stimulate further study. Please contact your broker for a recommended reading list on Charting and Technical Analysis.

Technical Analysis makes the assumption that history repeats itself. Any trading method or system that works well on a broad sample of historical data, may have validity when applied to future trading environments. One should keep in mind that the markets are dynamic. The forces that motivate price movement are dynamic, and the participants are dynamic. Therefore any system which has performed well on past historic data may decline in value as the evolving dynamics of the markets change over time.

The assumption is made that trading results can be improved when trading skills are improved. This requires practice! Surely any time spent learning to trade on past historical data, will not be wasted when it comes to preparing to trade for the future.

Chart Formations

Trendlines

Inclining Trendline

A straight line usually drawn to define an uptrend against or through price bar lows.

Declining Trendline

A straight line usually drawn to define a downtrend against or through price bar highs.

Support

A horizontal floor where interest in buying a commodity is strong enough to overcome the pressure to sell. Therefore a decrease in price is reversed and prices rise once again. Typically, support can be identified on a chart by a previous set of lows.

Resistance

A horizontal ceiling where the pressure to sell is greater than the pressure to buy. Therefore, an increase in price is reversed and prices revert downward. Typically resistance can be located on a chart by a previous set of highs.

Channels

Inclining

The inclining channel is a formation with parallel price barriers along both the price ceiling and floor. Unlike the sideways channel the inclining channel has an increase in both the price ceiling and price floor.

Declining

The declining channel is a formation with parallel price barriers along both the price ceiling and floor. Unlike the sideways channel the declining channel has a decrease in both the price ceiling and price floor.

Horizontal or Sideways

A horizontal or sideways is a formation that features both resistance and support. Support forms the low price bar, while resistance provides the price ceiling.

Triangles

Symmetrical

A formation in which the slope of price highs and lows are converging to a point so as to outline the pattern in a symmetrical triangle. To trade this formation place a buy order on a break up an out of the triangle or a sell order on a break down and out of the triangle.

Non-Symmetrical

A formation in which the slope of price highs and lows are converging to a point so as to outline the pattern in a non-symmetrical triangle. To trade this formation, place a buy order on a break up an out of the triangle or a sell order on a break down and out of the triangle.

Ascending Triangle

A formation in which the slope of price highs and lows come together at a point outlining the pattern of a Right Triangle. The hypotenuse in an Ascending Triangle should be sloping from lower to higher and from left to right. To trade this formation, place a buy order on a break up and out of the triangle or a sell order on a break down and out of the triangle. Ascending triangles, with a prior downtrend, are anticipated to break down and out, rather than up and out.

Descending Triangle

A formation in which the slope of price highs and lows come together at a point outlining the pattern of a Right Triangle. The hypotenuse in an Descending Triangle should be sloping from higher to lower and left to right. To trade this formation, place a buy order on a break up and out of the triangle or a sell order on a break down and out of the triangle. Descending triangles, with a prior uptrend, are anticipated to break up and out, rather than down and out.

Pennants

Similar to a Symmetrical Triangle but generally stubbier or not as elongated. A formation in which the slope of price bar highs and lows are converging to a point so as to outline the pattern in a symmetrical triangle. To trade this formation, you can place orders at both the break up and out of the pennant and break down and out of the pennant.

Wedges

Rising or Inclining

This formation occurs when the slope of price bar highs and lows join at a point forming an inclining wedge. The slope of both lines is up with the lower line being steeper than the higher one. To trade this formation, place an order on a break up and out of the wedge or a sell order on a break down and out the wedge. Rising wedges, with a prior downtrend are anticipated to break down and out, rather than up and out.

Falling or Declining

This formation occurs when the slope of price bar highs and lows join at a point forming an declining wedge. The slope of both lines is down with the upper line being steeper than the lower one. To trade this formation, place an order on a break up and out of the wedge or a sell order on a break down and out the wedge. Falling wedges, with a prior uptrend, are anticipated to break up and out, rather than down and out.

Flags

Bull Flag

A formation consisting of a small number of price bars where the slope of price bar highs and lows are parallel and declining. Bull Flags are identified by their characteristic pattern and by the context of the prior trend. In the case of a Bull Flag the trend leading to the formation of the Bull Flag is up. To trade this formation, place orders on the break up and break down points, leaving your unfilled order as your stop loss.

Bear Flag

A formation consisting of a small number of price bars in which the slope of price bar highs and lows are parallel and inclining. Bear Flags are identified by their characteristic pattern and by the context of the prior trend. In the case of a Bear Flag the trend leading to the formation of the Bear Flag is down. To trade this formation, place buy and sell orders on the break up and down of the flag, leaving the unfilled order as your stop loss.

Top and Bottom Formations

1-2-3 (A-B-C) Top

Anticipates a change in trend from up to down on a break below the number 2 point.

1-2-3 (A-B-C) Bottom

Anticipates a change in trend from down to up on a break above the number 2 point.

Head and Shoulders Top

Anticipates a decline on a break below the Neckline.

Head and Shoulders Bottom

Anticipates a rise in prices on a break above the Neckline.

Double Top

Anticipates a change in trend from up to down.

Double Bottom

Anticipates a change in trend for down to up.

Triple Top

Anticipates a change in trend from up to down.

Triple Bottom

Anticipates a change in trend from down to up.

Rounded Top

Anticipates a change in trend from up to down.

Rounded Bottom

Anticipates a change in trend from down to up.

Congestions

Generally refers to any type of chart pattern in which prices are temporarily trapped in a trading range. The range can be converging, expanding or defined by parallel lines on the horizontal. Congestions of shorter duration are usually found to be a variation of a Flag, or some variation of a converging or expanding triangle. Periods of longer congestion are usually defined by a variation of a converging or expanding triangle, or may be an elongated parallel channel on the horizontal. Such patterns are frequently referred to being Continuation patterns if price break out in the direction of the trend leading to the formation of the congestion pattern.

Continuation Patterns

Periods of longer congestion are usually defined by a variation of a converging or expanding triangle, or may be an elongated parallel channel on the horizontal. Such patterns are frequently referred to being continuation patterns if price break out in the direction of the trend leading to the formation of the congestion pattern.

Gaps

Breakaway Gaps

Occur when prices gap higher or lower out of a congestion pattern in the direction of the prevailing trend.

Measuring or Running Gaps

Difficult to identify, but usually occur at the midpoint in a price rally or decline.

Exhaustion Gaps

Occur at the end of a market trend, usually after steep accelerated uptrend or downtrend. The gap can leave one price bar or a small number of congestive price bars behind.

OR

Retracements

Fibonacci Retracements

Fibonacci Retracement levels correspond percentage retracements that occur in the ebb and flow of a market trend. According to the Elliot Wave Theory, market trends tend to occur in five distinct waves: three waves that move in the direction of the trend with the middle or third wave being the strongest usually, alternating against two counter-trend waves. Elliot asserted that these counter-trend waves will usually retrace against the trending waves by 38.2, 50 and 61.8 percent (also, less frequently by 24 and 76 percent). These Retracement Percentages correspond to natural ratios discovered by the Greeks called the Golden Ratio and rediscovered by Fibonacci, a medieval, Italian Mathematician.

An Introduction to Japanese Candlestick Charting

A New Way to Look at Prices

Would you like to learn about a type of commodity futures price chart that is more effective than the type you are probably using now? If so, keep reading. If you are brand new to the art/science of chart reading, don't worry, this stuff is really quite simple to learn.

Technical Analysis - a Brief Background

Technical analysis is simply the study of prices as reflected on price charts. Technical analysis assumes that current prices should represent all known information about the markets. Prices not only reflect intrinsic facts, they also represent human emotion and the pervasive mass psychology and mood of the moment. Prices are, in the end, a function of supply and demand. However, on a moment to moment basis, human emotions.fear, greed, panic, hysteria, elation, etc. also dramatically effect prices. Markets may move based upon people's expectations, not necessarily facts. A market "technician" attempts to disregard the emotional component of trading by making his decisions based upon chart formations, assuming that prices reflect both facts and emotion.

Standard bar charts are commonly used to convey price activity into an easily readable chart. Usually four elements make up a bar chart, the Open, High, Low, and Close for the trading session/time period. A price bar can represent any time frame the user wishes, from 1 minute to 1 month. The total vertical length/height of the bar represents the entire trading range for the period. The top of the bar represents the highest price of the period, and the bottom of the bar represents the lowest price of the period. The Open is represented by a small dash to the left of the bar, and the Close for the session is a small dash to the right of the bar. Below is a standard bar chart example.

Candlestick Charts Explained

You may be asking yourself, "If I can already use bar charts to view prices, then why do I need another type of chart?"

The answer to this question may not seem obvious, but after going through the following candlestick chart explanations and examples, you will surely see value in the different perspective candlesticks bring to the table. In my opinion, they are much more visually appealing, and convey the price information in a quicker, easier manner.

What is the History of Candlestick Charts?

Candlestick charts are on record as being the oldest type of charts used for price prediction. They date back to the 1700's, when they were used for predicting rice prices. In fact, during this era in Japan, Munehisa Homma become a legendary rice trader and gained a huge fortune using candlestick analysis. He is said to have executed over 100 consecutive winning trades!

The candlesticks themselves and the formations they shape were give colorful names by the Japanese traders. Due in part to the military environment of the Japanese feudal system during this era, candlestick formations developed names such as "counter attack lines" and the "advancing three soldiers". Just as skill, strategy, and psychology are important in battle, so too are they important elements when in the midst of trading battle.

What do Candlesticks Look Like?

Candlestick charts are much more visually appealing than a standard two-dimensional bar chart. As in a standard bar chart, there are four elements necessary to construct a candlestick chart, the OPEN, HIGH, LOW and CLOSING price for a given time period. Below are examples of candlesticks and a definition for each candlestick component:

• The body of the candlestick is called the real body, and represents the range between the open and closing prices.
• A black or filled-in body represents that the close during that time period was lower than the open, (normally considered bearish) and when the body is open or white, that means the close was higher than the open (normally bullish).
• The thin vertical line above and/or below the real body is called the upper/lower shadow, representing the high/low price extremes for the period.

Bar Compared to Candlestick Charts

Below is an example of the same price data conveyed in a standard bar chart and a candlestick chart. Notice how the candlestick chart appears 3-dimensional, as price data almost jumps out at you.

( 3a )

( 3b )

The long, dark, filled-in real bodies represent a weak (bearish) close ( 3a ), while a long open, light-colored real body represents a strong (bullish) close ( 3b ). It is important to note that Japanese candlestick analysts traditionally view the open and closing prices as the most critical of the day. At a glance, notice how much easier it is with candlesticks to determine if the closing price was higher or lower than the opening price.

Common Candlestick Terminology

The following is a list of some individual candlestick terms. It is important to realize that many formations occur within the context of prior candlesticks. What follows is merely a definition of terms, not formations.

• The Black Candlestick -- when the close is lower than the open.

• The White Candlestick -- when the close is higher than the open.

• The Shaven Head -- a candlestick with no upper shadow.

• The Shaven Bottom -- a candlestick with no lower shadow.

• Spinning Tops -- candlesticks with small real bodies, and when appearing within a sideways choppy market, they represent equilibrium between the bulls and the bears. They can be either white or black.

• Doji Lines -- have no real body, but instead have a horizontal line. This represents when the Open and Close are the same or very close. The length of the shadow can vary.

Candlestick Reversal Patterns

Just as many traders look to bar charts for double tops and bottoms, head-and-shoulders, and technical indicators for reversal signals, so too can candlestick formations be looked upon for the same purpose. A reversal does not always mean that the current uptrend/downtrend will reverse direction, but merely that the current direction may end. The market may then decide to drift sideways. Candlestick reversal patterns must be viewed within the context of prior activity to be effective. In fact, identical candlesticks may have different meanings depending on where they occur within the context of prior trends and formations.

• Hammer -- a candlestick with a long lower shadow and small real body. The shadow should be at least twice the length of the real body, and there should be no or very little upper shadow. The body may be either black or white, but the key is that this candlestick must occur within the context of a downtrend to be considered a hammer. The market may be "hammering" out a bottom.

• Hanging Man -- identical in appearance to the hammer, but appears within the context of an uptrend.

• Engulfing Patterns -- Bullish -- when a white, real body totally covers, "engulfs" the prior day's real body. The market should be in a definable trend, not chopping around sideways. The shadows of the prior candlestick do not need to be engulfed.

• Bearish -- when a black, real body totally covers, "engulfs" the prior day's real body. The market should be in a definable trend, not chopping around sideways. The shadows of the prior candlestick do not need to be engulfed.

• Dark-Cloud Cover(bearish) -- a top reversal formation where the first day of the pattern consists of a strong white, real body. The second day's price opens above the top of the upper shadow of the prior candlestick, but the close is at or near the low of the day, and well into the prior white, real body.

• Piercing Pattern (bullish) -- opposite of the dark-cloud cover. Occurs within a downtrend. The first candlestick having a black, real body, and the second has a long, white, real body. The white day opens sharply lower, under the low of the prior black day. Then, prices close above the 50% point of the prior day's black real body.

Stars

These candlestick formations consist of a small real body that gaps away from the real body preceding it. The real body of the star should not overlap the prior real body. The color of the star is not too important, and they can occur at either tops or bottoms. Stars are the equivalent of gaps on standard bar charts.

Stars make up part of four separate reversal patterns:

• Morning Star
• Evening Star
• Doji Star
• Shooting Star (Inverted Hammer)

Morning Star -- this is a bullish bottom reversal pattern. The formation is comprised of 3 candlesticks. The first candlestick is a tall black real body followed by the second, a small real body, which gaps (opens), lower (a star pattern). The third candlestick is a white real body that moves well into the first period's black real body. This is similar to an island pattern on standard bar charts.

Evening Star -- a bearish top reversal pattern and counterpart to the Morning Star. Three candlesticks compose the evening star, the first being long and white. The second forms a star, followed by the third, which has a black real body that moves sharply into the first white candlestick.

Doji Stars -- When a doji gaps above a real body in an uptrend, or gaps under a real body in a falling market, that particular doji is called a doji star. Two popular doji stars are the evening star and the morning star.

Evening Doji Star -- a doji star in an uptrend followed by a long, black real body that closed well into the prior white real body. If the candlestick after the doji star is white and gapped higher, the bearishness of the doji is invalidated.

Morning Doji Star -- a doji star in a downtrend followed by a long, white real body that closes well into the prior black real body. If the candlestick after the doji star is black and gapped lower, the bullishness of the doji is invalidated.

Shooting Star -- a small real body near the lower end of the trading range, with a long upper shadow. The color of the body is not critical. Not usually considered a major reversal sign, only a warning.

Inverted Hammer-- not really a star, but does look like a shooting star. When occurring within a downtrend, may be a turning signal. Body color is not critical.

Final Thoughts and Credits

It is important to realize that this introduction is just that, an introduction to candlestick analysis. After having read this, you will have merely scratched the surface of the many patterns and variables that can go into candlestick analysis. No attempt was made to provide a thorough analysis of each and every pattern. In fact, many formations were left out as they cross the border into more complicated analysis. For a more complete overview of candlestick analysis, it is highly recommended that you read the book that is referred to below.

A large portion of the material in this introduction is taken from an excellent book called Japanese Candlestick Charting Techniques: A Contemporary Guide to the Ancient Investment Techniques of the Far East. In some cases, sentences were taken almost verbatim, as there was no better way to say what Mr. Steve Nison, the author, already said. In his book, Mr. Nison, completely explains candlesticks and their formations, but more importantly explains how to combine candlestick analysis with traditional technical analysis. It is highly recommended that you consider purchasing this book from the ALTAVEST Online Bookstore.

As traders, we need as many trading tools in our arsenal, and a basic knowledge of candlesticks provides a trader much needed ammunition. Also remember that no matter what the trading tool, no matter how advanced or ancient, it is only effective when put into practice properly. This is, of course, your job as the trader.

Stop Using Stops: Trading with Elliott Wave Analysis

Bob Prechter has done a lot of thinking about how to trade successfully. One startling conclusion he's come to: traders should often avoid using stops. Here's why: If you analyze the market you're trading, you shouldn't need a stop to tell you when to get out of the trade. In fact, the point of using Elliott wave analysis is to determine where the market is in a wave count, so that you are able to see where the trend is most likely to turn. (This excerpt is taken from the March 2003 Elliott Wave Theorist, the publication Bob has been writing for more than 25 years.)

Let’s talk about stops.

Bob Prechter: I think people lose more money on stops than anything else. When a trader suffers five stop-outs at 10 S&Ps contracts apiece, that trader now has 50 points to make up. Every book says to use stops, but it is often a bad idea. Before you recoil in horror, consider that I know a futures trader who steadily makes $200,000-$400,000 every year, and he never uses stops.

A stop takes only one aspect of analysis into account: price. There is much more to analysis than price. A stop also makes you lazy. If the market and your analysis turn against you, you are prone to think, “Well, if the market takes my stop, then I’m out.” But if you have already decided that your position is wrong, you should already be out! On the flip side, when you already have a stop in and decide it’s in the wrong place, there is a psychological impediment to widening it. If you don’t act, the stop is typically taken out, and then the market turns your way without you. So it can hurt you two ways.

So what should a trader use in place of stops?

Bob Prechter: A trader should use real-time analysis. The question isn’t so much whether a level is broken but what the analysis indicates as it breaks. Suppose you are short, and the market gaps up one morning. This could be a breakaway or an exhaustion gap, so at the time of the opening, you might have little knowledge of which it might be. Then suppose the market runs ticks hard but to a lower peak than earlier in the rally, which is typical of exhaustion gaps. Shortly after the high, you see a dramatic reversal in the 60-minute bar and non-confirmations against highs of the previous week in related market averages. At that point, the bear evidence becomes bigger than the bullish evidence, and your analysis tells you to stay short.

When entering a position, you have to give the market time to bounce around against you as it creates the bottom or top. That process almost always involves stopping most traders out with fancy footwork before really heading in the direction they expected in the first place. Most stops are harmful because where you decide is a cautious “too far” is where everyone else thinks is too far, so that’s where everybody’s stops are. The only way to make money is to let the market work itself out.

So what is the alternative?

Bob Prechter: Once you have a strong indication from your analysis and decide to take a position, place a stop at a “horror” level in case of disaster with the idea that you would never hold your position all the way to that point under normal circumstances. Then, watch the market. Every day, sometimes every hour, you get more information. You might have a bearish opinion but find that suddenly the put/call ratios (or some reliable sentiment indicator) shows traders shorting the market heavily for three days in a row. Now the analysis is telling you to be cautious or get out of your position or perhaps go long. It is a more sensible reason to act than a price stop.

What do you say to those who insist that without stops, they would get killed?

Bob Prechter: I say, you are trading with too much leverage. Leverage forces you out so often that all you will have after years of trading is a long string of losses from stop-outs. Trade well within your capital so that you can allow the market time to respond to the forces that you detect developing in your analysis. If you cannot watch the market closely or do not have time to do analysis (or don’t have someone doing it for you), you shouldn’t be trading in the first place. Aside from all that, there may in fact be occasional times for close stops. But treat them as exceptions that analysis demands.

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Applying Elliott Wave Analysis to Everyday Trading

Elliott wave analysis appeals to the instincts and to the intellect, but sometimes it's difficult to see how to trade using Elliott waves. The beauty is that the practical application is within anyone's reach. In today's Market Perspective, we'll see how Bob Prechter explains the Wave Principle and its application. (This excerpt is taken from the latest edition of Prechter's Perspective, published 2004.)

---

You've said that the Wave Principle is relatively easy to understand. How about application?

Bob Prechter: The basic idea is easy to understand. The intricacies can take a fair amount of time to learn. Once you've learned them, it becomes an easy step to recognize forms in the market. When you can recognize five wave moves, A-B-C corrections and Elliott triangles, a glance through your commodity charts will show definite buys and sells with no additional work whatsoever. It offers the best reward-for-the-effort-expended ratio I know.

On the other hand, you've also said that it is mastered by a relative few. Out of all investors, how many do you think the Elliott wave method is geared for?

Bob Prechter: Only people who want to put in the extra effort. That's frankly a very small group. I think everybody will find the idea of the Wave Principle fascinating. People who aren't even in the market find it an interesting concept. But the people who should actually apply it are only the people who want to make the market a very large part of their lives. You can't make money at something without working at it. The Wave Principle demands that much, because the market demands that much. They are one and the same.

It's deceptive ?a construct that is simple and easy to understand, but because of the inherent uncertainty, it demands rigorous and disciplined application.

Bob Prechter: Well, the rules of chess are simple, but winning the game is not so easy.

So the essence of the task is to order the probabilities correctly. How is this accomplished on an ongoing basis?

Bob Prechter: The first thing you have to do is eliminate the impossible by applying the rules of wave analysis. At any market juncture, there are certain events that are impossible. Remaining may be a formidable list of possible interpretations. However, each possible interpretation must then be judged according to its adherence to the guidelines of the Wave Principle, including alternation, channeling, Fibonacci relationships, relative sizes of waves, typical targeting methods based on wave form, and volume and breadth, if appropriate.

The interpretation that (1) satisfies the most guidelines and (2) does so the most satisfactorily is the one that must be considered to be indicating the most likely path of the market. The next most satisfactory interpretation indicates the next most probable path, and so on. These are sometimes referred to as preferred and alternate interpretations.

The analyst must then monitor the market closely to determine if and when any one of the less probable interpretations becomes the most probable due to the elimination or decline in probability of other interpretations.

This sounds complicated.

Bob Prechter: Not really. Often, the best interpretation is so clearly superior that an investment decision is easy. Similarly, sometimes, the top two or three interpretations have the same implications regarding market behavior, also making an investment decision easy. At other times, interpretations with different implications carry nearly equal weight, dictating a "stand aside" posture. In the latter case, sooner or later the scales always tip in favor of one particular conclusion.

Forecasts of the Markets You Follow. No More, No Less.

In a perfect world, you would custom-build your own financial service. From the dozens of markets out there, you would select which ones to follow. You would get professional-grade forecasts. And you wouldn't pay for coverage you don't need.

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Stocks	Currencies
Commoditites	Metals
Interest Rates	Energy

Intraday Forecasts ? You get short, clear forecasts of the market's direction as often as market action warrants. For some markets (currencies and S&P futures, for example), you get updates 24 hours a day, often with short-term charts. Precise support and resistance points help you stay in control of your position risk.

Daily, Weekly & Monthly Forecasts ?Every evening after the market closes, our labeled daily price charts give you concise directional forecasts for tomorrow. And you'll always have our current long-term outlook, complete with weekly and monthly price charts updated as the market requires.

Whether you take a few major positions a year or trade intraday ... whether you're trading currencies, stocks, bonds or others ... EWI's Specialty Services give you the forecasts you need.

The Percent "R" Indicator: How to Make it Work for You

The Percent Range (%R) technical indicator was developed by renowned futures author and trader Larry Williams. This system attempts to measure overbought and oversold market conditions. The %R always falls between a value of 100 and 0. There are two horizontal lines in the study that represent the 20% and 80% overbought and oversold levels.

In his original work, Williams' method focused on 10 trading days to determine a market's trading range. Once the 10-day trading range was determined, he calculated where the current day’s closing price fell within that range. The %R study is similar to the Stochastic indicator, except that the Stochastic has internal smoothing and that the %R is plotted on an upside-down scale, with 0 at the top and 100 at the bottom. The %R oscillates between 0 and 100%. A value of 0% shows that the closing price is the same as the period high. Conversely, a value of 100% shows that the closing price is identical to the period low.

The Williams %R indicator is designed to show the difference between the period high and today's closing price with the trading range of the specified period. The indicator therefore shows the relative situation of the closing price within the observation period.

Williams %R values are reversed from other studies, especially if you use the Relative Strength Index (RSI) as a trading tool. The %R works best in trending markets. Likewise, it is not uncommon for divergence to occur between the %R and the market. It is just another hint of the market’s condition.

On specifying the length of the interval for the Williams %R study, some technicians prefer to use a value that corresponds to one-half of the normal cycle length. If you specify a small value for the length of the trading range, the study is quite volatile. Conversely, a large value smoothes the %R, and it generates fewer trading signals. Some computer trading programs use a default period of 14 bars. Importantly, if an overbought/oversold indicator, such as Stochastics or Williams %R, shows an overbought level, the best action is to wait for the futures contract’s price to turn down before selling.

Selling just because the contract seems to be overbought (or buying just because it is oversold) may take a trader out of the particular market long before the price falls (or rises), because overbought/oversold indicators can remain in an overbought/oversold condition for a long time--even though the contract’s prices continue to rise or fall. Therefore, one may want to use another technical indicator in conjunction with the %R, such as the Moving Average Convergence Divergence (MACD).

The trading rules are simple. You sell when %R reaches 20% or lower (the market is overbought) and buy when it reaches 80% or higher (the market is oversold). However, as with all overbought/oversold indicators, it is wise to wait for the indicator price to change direction before initiating any trade.

Larry Williams defines the following trading rules for his %R: Buy when %R reaches 100%, and five trading days have passed since 100% was last reached, and after which the %R again falls below 85/95%. Sell when %R reaches 0%, and five trading days have passed since 0% was last reached, and after which the Williams %R again rises to about 15/5%.

Like most other "secondary" tools in my Trading Toolbox, I use the Williams %R indicator in conjunction with other technical indicators -- and not as a "primary" trading tool or as a stand-alone trading system.

More information on the Williams %R indicator can be obtained from Williams' book: "How I Made $1,000,000 Last Year by Trading Commodities." It's published by Windsor Books, New York.

Why Successful Traders Use Fibonacci and the Golden Ratio

Support and resistance levels on bar charts are a major component in the study of technical analysis. Many traders, including myself, use support and resistance levels to identify entry and exit points when trading markets. When determining support and resistance levels on charts, one should not overlook the key Fibonacci percentage "retracement" levels. I will detail specific Fibonacci percentages in this feature, but first I think it's important to examine how those numbers were derived, and by whom.

Leonardo Fibonacci da Pisa was a famous 13th century mathematician. He helped introduce European countries to the decimal system, including the positioning of zero as the first digit in the number scale. Fibonacci also discovered a number sequence called "the Fibonacci sequence." That sequence is as follows: 1,1,2,3,5,8,13,21,34 and so on to infinity. Adding the two previous numbers in the sequence comes up with the next number.

Importantly, after the first several numbers in the Fibonacci sequence, the ratio of any number to the next higher number is approximately .618, and the next lower number is 1.618. These two figures (.618 and 1.618) are known as the Golden Ratio or Golden Mean. Its proportions are pleasing to the human eyes and ears. It appears throughout biology, art, music and architecture. Here are just a few examples of shapes that are based on the Golden Ratio: playing cards, sunflowers, snail shells, the galaxies of outer space, hurricanes and even DNA molecules. William Hoffer, in the Smithsonian Magazine, wrote in 1975: "The continual occurrence of Fibonacci numbers and the Golden Spiral in nature explain precisely why the proportion of .618034 to 1 is so pleasing in art. Man can see the image of life in art that is based on the Golden Mean."

I could provide more details about the Fibonacci sequence and the Golden Ratio and Golden Spiral, but space and time here will not permit. However, I do suggest you read the book "Elliott Wave Principle" by Frost and Prechter, published by John Wiley & Sons. Indeed, much of the basis of the Elliott Wave Principle is based upon Fibonacci numbers and the Golden Ratio.

Two Fibonacci technical percentage retracement levels that are most important in market analysis are 38.2% and 62.8%. Most market technicians will track a "retracement" of a price uptrend from its beginning to its most recent peak. Other important retracement prcentages include 75%, 50% and 33%. For example, if a price trend starts at zero, peaks at 100, and then declines to 50, it would be a 50% retracement. The same levels can be applied to a market that is in a downtrend and then experiences an upside "correction."

The element I find most fascinating about Fibonacci numbers, the Golden Ratio and the Elliott Wave principle, as they are applied to technical analysis of markets--and the reason I am sharing this information with you--is that these principles are a reflection of human nature and human behavior.

The longer I am in this business and the more I study the behavior of markets, the more I realize human behavior patterns and market price movement patterns are deeply intertwined.