Online Trading Blog

Gann Fans, developed by Gann, are one of the most widely used tools by Gann himself to exploit the relationship between price and time. Gann fans derive their existence from Gann angles, there are 9 major Gann angles and 1 x 1 or 45 degree angle is the single most important one. Know more about Gann Angles. Gann fans are used by traders to find support and resistance levels, trend changes and major price-time junctions.


Gann fans are plotted over charts; from recent peaks or bottoms. The chart should have same unit in X and Y axis; in other words consistency of unit is important. Lines of various lines (at 82.5, 75, 71.25, 63.75, 45, 26.25, 18.75, 15 and 7.5 degrees) are plotted. When ever the price moves above a line, the instrument is in upward trend and whenever the price moves below a line, the instrument is in downward trend. The lines serve as immediate support and resistance levels. Trend changes are indicated when a line is crossed and new trends are identified when price cross another line. When one line is broken prices then fall/rise to next nearest line.

In most cases Gann fans serve the function of trend lines and Fibonacci fans. Traders can enter and exit trades when the lines are broken or prices are at a strong trend (like 1 x 1 line). Price movements in higher degrees indicate swift price movements. Gann fans offer better results when used in conjunction with other trend and volume indicators.

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Wedge formations are one of the difficult formations to identify. They look like symmetrical triangle formation but unlike symmetrical triangle they have strong bullish or bearish bias and have slop. Wedge formations can be trend-reversal or trend-continuation patterns which favor long-term traders, as they usually take 2 to 4 months to form. Note that wedge formations have a high failure rate than others.


Rising wedge formation has a strong bearish bias. They are considered trend-continuation pattern, when formed after a strong downtrend, and trend-reversal pattern, when formed after an uptrend. Both lines of a rising wedge have upward slops, and the lower line is steeper than the upper one. The highs and lows tend to converge to a point and the break out occurs; in most cases downwards. Volume of trades tends to get lower as the pattern forms and the breakout is noticeable with a significant increase in volume.

Rising wedge formations occur when there is high-uncertainty in market and the bulls continuously fail to break the resistance level. The pattern in considered true one if there are two or more reaction highs and lows touching upper resistance and lower support lines. Rising wedge formations are more reliable as trend-continuation formation and traders enter sell orders when the pattern breaks down. Remember, rising wedge formation is considered less reliable when there is no sufficient increase in volume at breakout. The trader should use other indicators to confirm trend changes.

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Ease of Movement or EMV is a momentum indicator which shows the relationship between price change and trading volume. Many traders trading stocks, futures and currencies use this indicator to generate buy and sell signals. Ease of Movement indicator was developed by Richard W Arms Jr. and is closely related to Equivolume charts. The formula for calculating EMV is


Where
Mid-point move = Today’s mid point (high + low/2) – Yesterday’s midpoint
Box Ratio = Volume / (high - low)
The daily values of Ease of Movement are then smoothed by using a moving average (often 10 or 14 day).

Ease of the movement indicator shows both negative and positive values.

1. High negative values show downtrends with low trading volume. i.e. low volume is required to make a movement.
2. High positive values show uptrends with low trading volume. Again low volume is required to make a movement.
3. Low values (around zero) show corresponding trends with high trading volume indicating accumulation or distribution. Here high volume is required to make a movement.
4. Zero value is generated when there is very high trading volume for very small price changes.

Most systems generate buying signals when ease of the movement crosses above zero from below and generate sell signals when it crosses below zero from above. With most other technicals, it is advised to use other indicators and tools to confirm price changes and buy/sell signals.

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The Week Ahead: Although the White House continues to favor a privately held banking system, nationalization seems to be gaining the upper hand as many believe this to be inevitable. President Obama will address Congress on Tuesday while Ben Bernanke begins his two day testimony on Capital Hill. The Case Shiller House Price Index is also released. Existing home sales data is out on Wednesday. Durable goods and new home sales data are due by Thursday. Lastly, a preliminary look at the nations GDP for the fourth quarter on Friday will be closely watched.

Stocks to Watch: Kindred Healthcare (KND) surprised many by beating EPS estimates and lifting their 2009 target as the stock reached a 4 month high. Cabela's (CAB), the outdoor sporting goods company, also broke strongly to the upside after beating estimates for their Q4. Actuant (ATU) shares fell because preliminary Q2 sales will be off by 23%. Tim Horton's (THI), the Canadian retaurant chain, boosted its quarterly dividend by 10 cents after releasing its Q4 results. Morningstar (MORN) came in light on their Q4 EPS and the stock fell about 14%.

Special Note: The Dow Industrials are leading the market lower as it reached its lowest level since October 2002 and joined the Dow Transports in breaking last November's low. It's possible that some form of nationalization of the major banks could be the catalyzing event that would produce a more lasting low in the major indexes since the peak in October 2007 but at what level? All the major indexes are currently below their 20 year MA and long term charts indicate the 30 year moving averages at 5800, 675, and 1200 on the DJIA, S&P 500, and Nasdaq respectively.

Commentary provided by Barry Ward, Registered Principal, NobleTrading.com, Inc.

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Investing in financial instruments is a risky practice. It is this risk that often corresponds to the return, the more the risk taken the more the possibility of return. There are more than one risk associated with every investment. Here are some important ones.

1. Business or company risk – This is the risk investors take against the company’s (they invested) performance. Good fundamental analysis and careful selection of equities are the best ways to minimize this risk.
2. Liquidity risk – this refers to the flexibility of an instrument to be converted into real-money with out much loss in value. Liquidity greatly differs with products and time. In general there are many high-liquid instruments, which stay liquid throughout the year, and low-liquid instruments.
3. Non-payment risk – this is the risk of not getting timely financial assistance. Fore example you may not get timely payments of your tradeoffs and thus you can’t make further investments or can’t payoff your debts or can’t hedge your current positions.
4. Inflation and Interest rate risks – these are the risks which greatly reduce an investors buying power or reduce value of his investments. These are macro-economic phenomena which are hard to overcome personally, careful section of instruments and rearrangements of portfolio assets can help.
5. Market risk – this is the risk of reduction in value of investments because of factors that affect total market prices. Almost all instruments have market risks but the effect can vary.
6. Political risk – is the risk arises because of change in government policies and inter-state relationships.

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Gann grids are one popular tool used by traders to analyze strength of trends and to predict trend changes. Gann grid is used for squaring up time and price and is based on the most famous Gann line, the 45 degree or 1:1 Gann line which shows a strong long-term trend. It is an easy to follow indicator helpful for investors, long-term traders and swing traders.


Gann grind is a set of 45 degree lines plotted over a price chart for an instrument. Whenever the price stays above one of these ascending lines (better if it touches it in one or more points) the instrument is on a strong bullish movement. And when ever the price stays below one of these descending lines the instrument is on a bearish movement. When intersection of one line occurs it is considered that the basic trend is broken, and when the price intersects more than one line it is considered as the beginning of a new trend.

Some trading systems require more than two points (can be two lows or highs) to plot a Gann grid while some other systems allow traders to manually adjust the grid once the grid is automatically plotted. Traders can enter long positions when the price break above an ascending line and can exit trades when prices break below a descending line. Traders should also use other indicators like Fibonacci tools and volume indicators to confirm trend strengths and changes.

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Symmetrical triangle formation is one of the most common and reliable triangle chart pattern which indicate market indecision and possible breakout. The volume of trades tends to diminish as the formation develops and the breakout is noticeable with a sharp increase in volume. With symmetrical triangle formation, the breakout can be bullish or bearish. The pattern supports all kinds of long-term and short-term traders trading all financial instruments.


Symmetrical triangle formation occurs when there is high uncertainty in market. Each upward movement is followed by a downward movement and increased consolidation of price occurs. Each new high is lower than the previous one and each new low is higher than the previous. At one point breakout occurs which is noticeable with a sharp upward or downward movement crossing the line of the triangle with sharp increase in volume. If no such increase in volume at breakout then the reliability of the formation is greatly challenged and is considered that it is not a valid formation.

Many traders treat symmetrical triangle formation as continuation pattern; that is if the prior trend is bullish then the breakout will also be bullish and vice versa. But there is a high chance that the breakout can be a trend-reversal. In any way, traders who can catch the direction of breakout early can profit from the market. Traders should use other technical indicators to confirm breakout and to predict market direction.

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The Week Ahead: The holiday shortened week opens on the heels of the passing of the second stimulus plan for the economy. Markets will also digest the auto makers bailout plans on the Tuesday deadline. The FOMC Minutes from the last Fed meeting are due out Wednesday along with import prices and housing starts data. The Producer Price Index, jobless claims, and leading indicators arrive on Thursday while Friday rounds the week out with the Consumer Price Index.

Stocks to Watch: The big British bank Lloyd's Banking Group (LYG) continues its multi-month decline as it expects its HBOS lending unit to post a $14.4 billion loss for 2008. Wyndham Worldwide (WYN) reported Q4 results a penny higher than a year ago but said Q1 would only be in the .35-.40 range. TreeHouse Foods (THS) reached a multi week high after Q4 results beat year ago levels by a dime and estimates EPS rising to 11-14% for '09. Electro-Optical Sciences (MELA) had promising late trial results for its non-invasive device for detecting melanoma.

Special Note: Banking stocks have once again taken the lead on the downside in this bear market both in the U.S. and abroad. Similar to what happened to the market when the former Treasury Secretary Paulson first tried to explain the wisdom of the bailout package last September, the current Treasury Secretary Geithner is experiencing the same market reaction to his plan as well. With that said, new bear market lows below last November can't be far behind.

Commentary provided by Barry Ward, Registered Principal, NobleTrading.com, Inc.

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Average True Range or ATR is one popular volatility indicator which can be used by traders of all kinds. It was introduced by J. Welles Wilder in 1978 in his book “New Concepts in Technical Trading Systems”. Although the indicator was developed for commodity futures market, it can be used to trade all financial instruments including stocks and forex currencies.

Average true range is True Range (TR) smooth by an exponential moving average (EMA). True range is the high-low range for a day or session which is the greatest difference among the following.

1. Current high and low.
2. Absolute value of current high and previous close.
3. Absolute value of current low and previous close.

Which ever value is great, it is taken as true range.

Average true range is then calculated by taking an exponential moving average of TR for N periods. Wilder recommended a 14 period smoothing. In this case ATR is calculated by multiplying previous 14 periods ATR by 13, then adding current TR value to it and dividing the sum by 14. The periods can be hours, days, weeks or months; according to the trading style of the trader. The greater the ATR the greater the volatility.

Most common use of ATR is to generate entry signals by short-term traders. Buy signals are generated when prices cross next day open plus ATR and short signals are generated when prices cross next day open minus ATR. Many traders also use ATR for placing stop losses. But ATR only measures volatility, not trend changes, and thus the trader should use other indicators also.

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Fixed income Exchange Traded Funds (ETFs) offer many advantages to traders over bonds, mutual funds and other similar instruments. Know more about Fixed Income ETFs. Below are some advantages of fixed income ETFs.

• They allow traders to profit indirectly from performance of bonds.
• Unlike bonds, they are traded in organized exchanges, where one can trade flexible shares of it.
• ETFs have less expense ratio than mutual funds thus have less tracking errors.
• They can be short-traded and intraday-traded and can be traded on margin even from a retirement account; this can add great flexibility in trading.
• They are very good instruments for long-term trading as they can offer both monthly dividends and great diversification with single trade.
• They are good instruments for short-term trading like swing-trading as they allow traders to profit from market changes. For example a trader can short fixed income ETFs on Government bonds if the interest rate is going to be increased.
• They are also good instruments for hedging interest rate change risks. For example a trader can short or long trade (also on margin) ETFs to hedge against interest rate fluctuations.
• Unlike bonds, there is no maturity date, you can sell off them whenever you want and can hold them as long as you want.
• There are TIPS (Treasury Inflation Protected Securities) bond ETFs which can offer protection against interest rate changes.

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Gann lines is one widely used and simple indicator for finding support and resistance levels, and to analyze trend strengths and to predict trend reversals. Gann lines are derived from Gann angles; in fact almost all Gann applications like Gann fans and Gann grids are derived from Gann angles. Know more about Gann angles.

Gann lines are the lines drawn on charts with a 45 degree angle; the most important of all Gann angles. This is also called as ‘One to One Line’ (1 x 1) as it represents one unit increase or decrease in price with every unit time. Gann lines are long term trend lines which are created by defining two points on charts; two highs or two lows that fall in (or near) 45 degree angle.

With Gann lines a strong uptrend is realized when prices are above an ascending Gann line. In this case the line serves as a strong support for the trend and its reliability increase with the number of price lows touching the lines. A strong downtrend is realized when prices are below a descending Gann line. In these bearish trends the line serves as a strong resistance level and the reliability increase with the number of times the price touches it and bounce back.

Trend reversal or trend weakening is predicted when the price intersects the Gann lines. Trend changes are also expected at areas where Gann lines meet Fibonacci levels.

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Upside gap two crows is a bearish market reversal pattern which indicates the end of an uptrend and start of a downtrend. This three day candlestick pattern closely resemble two crows pattern; the difference is in third day candlestick which opens above the second day candlestick and closes below the same candlestick without completely filling the gap.

The requirements of bearish upside gap two crows pattern includes

It should form at the top of a significant uptrend.
The first day should be a bullish day with a long white/colorless candlestick.
Second day should be a bearish day with a small black/colored candlestick which gaps above to the first day candlestick.
The third day should also be a bearish day with a candlestick opening above the second day candlestick and closing below the same candlestick.
The real-bodies of neither the second-day nor the third-day candlestick should completely fill the first formed gap.

Bearish upside gap two crows pattern forms when bulls fail to keep their momentum even after two high openings. After a long bullish first day prices opens at new highs on second day (above a noticeable gap). But bears dominate the day and bring the prices down but they are not able to fill the gap. This tempt bulls to try again on next day and prices opens at new highs on third day but again the bears have managed to dominate the day. This causes the bulls to loss their confidence and the trend is reversed.

Bearish upside gap two crows is a highly reliable pattern, but is not as much as bearish as two crows pattern. Confirmation is highly suggested which can be a lower opening or bearish candlestick on fourth day.

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Fixed Income Exchange Traded Funds (ETFs), also known as bond ETFs, track performance of fixed-income securities usually bonds. They offer the traders the flexibility of trading stocks and same time offer benefits from investing in bonds. Fixed income ETFs were introduced in 2002 and now there are a number of ETFs available in this category which track broad bond market or track specific sectors like government, mortgage-backed or corporate bonds.

Fixed income ETFs moves just like stocks, they can be intraday-traded and can be short traded at any time. Any thing that affect the performance of trading bonds affect prices of ETF shares; this include interest rate changes, changes in bond yields (in comparison to other bond, usually a US Security bond), and changes in yield curve (yields from bonds of different maturities). Unlike fixed-income bonds where capital gains and interest are paid semi-annually, these ETFs usually pay interest dividend on monthly basis and capital gains on annual basis.

Fixed income ETFs greatly benefit long-term traders and traders who trade from their retirement accounts. These ETFs can also be used to other purposes like for profiting from interest rate changes, for short-term profits, or to hedge account risks. But they are not devoid of trading risks and active trading of them can cost high as they include same brokerage fees like stocks.

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Most investors are afraid of investing when the prices are falling or at bottom. But many others, especially value investors, take this as the good opportunity to invest. Here are some tips for investing in bear market.

• Keep the basics right – good analysis, stock screening, risk-management, portfolio allocation, etc.
• Look for long-term profits and keep your profit goals realistic. It is also good to invest in stocks which are expected to offer good dividend.
• Never make quick investment decisions without thorough analysis.
• Explore the market history – although history does not repeat exactly, it can provide you significant insights about where the markets are heading.
• Diversify your portfolio investments so that collapse of one industry/sector does not wipe out our money.
• Get more involved and be an explorer – read some good books and reviews, constantly monitor market trends, get advice from experts, and compare current prices to historic highs and lows.
• Invest in markets and products that you know, so that you can expect them to perform well.
• Use leverages logically (you should use that), and carefully use derivatives to maximize your profit and to limit your risks.
• Start with the mind open and paper clean; no presumptions. Treat all things according to their merit.

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The Week Ahead: Unemployment reached its biggest monthly decline in 35 years with nearly 600,000 jobs lost accelerating plans for economic stimulus via TARP II by the new administration. Look for testimony to Congress from both Ben Bernanke and Timothy Geithner on Tuesday regarding the financial crisis. By Thursday new weekly jobless claims numbers come out along with the retail sales and business inventory figures.

Stocks to Watch: Aon Corp. (AOC), an insurance brokerage, surged after beating estimates for Q4 business, but revenues did decline by 4% in a cautious environment. Pitney Bowes (PBI) saw Q4 earnings beat expectations by .03 showing that the manufacture of mail processing equipment can be resilient in a slow economy. Skechers USA (SKX) warned of a coming Q4 loss as analysts worry about inventory build-up of the company's footwear products. Mettler Toledo (MTD) which makes scales came in light on Q4 results and reached a new 52 week low.

Special Note: Similar to the circumstances that surrounded the first Economic Stimulus Plan last September, the current plan again is being rushed through under the supposed threat of catastrophe if the plan fails to pass even though the DOW fell over 3000 points anyway in the aftermath of the first plan and the banking crises intensified. Once again the new plan's focus is on getting people to spend not save as if encouraging more debt will solve the problem.

Commentary Provided by Barry Ward, Registered Principal, NobleTrading.com, Inc.

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NobleTrading Direct Access Trading

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email: info@nobletrading.com
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Gann angles, originally known as Geometric Angles, are some of the major tools used by W.D. Gann to profit from the market. These angles can be used to find support and resistance levels, to analyze the strength and direction of trends and to predict price reversals. Gann angles are drawn from high or low points of a trend and are representations of time to price relationships.

There are 9 major Gann angles of various degrees, which represent fixed rates of speed of trends. These angles are figured out as units of Time x Price (T x P), pronounced as Time By Price. The 9 angles are

1. 1 x 8 = 82.5 degrees
2. 1 x 4 = 75 degrees
3. 1 x 3 = 71.25 degrees
4. 1 x 2 = 63.75 degrees
5. 1 x 1 = 45 degrees
6. 2 x 1 = 26.25 degrees
7. 3 x 1 = 18.75 degrees
8. 4 x 1 = 15 degrees
9. 8 x 1 = 7.5 degrees

Gann angles offer best results when used in weekly charts. They can be used in any time-scales but for accurate results traders should always keep the correct time by price proportions. Gann angles provide significant market insights.

• High degrees of angles represent swift trends and low degrees represent small trends. Usually these trends are less reliable and less durable.
• During strong up-trends the price stays above a significant angle (1x2, 1x1 or 2x1). Similarly during a downtrend price stays below a significant angle.
• If one angle is penetrated (price reversal) the price tends to fall to the next less steep angle (e.g.: from 1x1 to 2x1).
• 1x1 is the single most important angle, which gives a 45 degree angle, showing a perfectly balanced trend (up or down). Whenever the price broke this angle a significant trend change is indicated.
• When Gann angles crosses a significant pivot point or other past angle then there is a higher change of trend changes.

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Two crows is a bearish market reversal pattern which indicates the end of an uptrend and the beginning of a downtrend. This is a three-day candlestick pattern which resembles dark cloud cover pattern and evening star pattern. Bearish two crows pattern includes a bullish (clear/white) of first day, and a small and long bearish (black/colored) candlestick on second and third day respectively.

The requirements of bearish two crows candlestick pattern includes

• The pattern should be formed at the top of a significant uptrend.
• First day should be a long bullish day.
• Second day should noticeable with a small bearish candlestick which opens above a significant gap from first candle.
• The real-body of second day candlestick should not completely fill the gap.
• Third day should be a bearish day where the candlestick opens with in the real-body of second candlestick and closes within the upper half of real-body of first day candlestick. (if this candlestick closes below the half of first day candlestick then the pattern is ‘evening star’)

Bearish two crows candlestick pattern occurs when bulls are unable to bring prices to new highs after the prices opens at a gap on second day. Bears dominate the second day but are unable to fill the gap formed. Third day bulls try one more time by getting a high opening but bears also dominate the day and are able to close the gap. Now the bulls loose their confidence and market becomes bearish.

Bearish two crows is a moderately reliable candlestick pattern. The reliability increases with increase in trading volume and with strength of prior uptrend. Confirmation of trend reversal is highly suggested which can be a bearish candlestick on forth day or a lower opening.

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Accumulation/Distribution or A/D indicator can be used to trade stocks, currencies and futures. Know more about Accumulation/Distribution Indicator. It can be used to both confirm and predict price trends. A/D is a simple indicator to follow and to use and offers better results when used in conjunction with other indicators. A/D can be used for both short-term and long-term trading; short-term traders like day traders should use intraday charts.

1. Bullish/bearish signals are generated when A/D line shows corresponding rise/fall to the stock price movement. The greater the correlation the greater will be the reliability of the signal.
2. Buying/selling signals are considered weak when accumulation/depreciation indicator moves sidewise in a trendy market. In this case, usually the bullish/bearish trend does not have much buying/selling pressure.
3. Bullish signals are generated when A/D indicator shows a positive divergence from price movements; that is price is falling but A/D line is rising. The reliability of the signal increases with increase in degree of divergence and with longevity of the divergence.
4. Selling signals are generated when A/D indicator shows a negative divergence from price movements; that is price is rising but A/D line is dropping. Like bullish signals, reliability increases with divergence and its longevity.
5. When trading A/D divergence, most traders place stop-losses closer to recent low (for long positions) and to recent high (for short positions).

There are also some drawbacks with A/D indicator. 1) It does not consider price gaps and 2) It is difficult to track small price and volume changes, especially for day traders.

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Exchange Traded Funds (ETFs) are multi-purpose investment instruments which can be used to achieve various portfolio goals. The diversity, simplicity and low-expense of ETFs make them flexible instruments to handle. ETFs are mainly used to achieve following portfolio goals.

1. When used as primary investment instruments, ETFs offer the traders indirect exposure to different market or sector. A simple buy-and-hold strategy enables traders to profit whenever the tracking product/index (stock, commodities, currencies, market indexes, bonds, etc) goes up.
2. ETFs can be used to profit from growth of a specific sector, region or economy. There are many sector ETFs, currency ETFs, regional ETFs and emerging market ETFs for this purpose. Trading ETFs is much easier and lesser risky than directly investing to these sectors/regions/markets.
3. ETFs are good hedging instruments. The easy to go short when ever one need can be used to hedge risk of taking long positions on equities, currencies and other instruments. Many ETFs can be used as options.
4. ETFs are very good instruments for portfolio diversification. ETFs which track broad markets and sectors themselves are diversified.
5. ETFs can be used for quick profit and for steady returns. There are many ultra and smart ETFs which can be used for maximize returns. There are also many low-risk ETFs which offer small but steady returns.

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Accumulation/Distribution or A/D is one of the most widely used indicators for predict and confirm price changes. This is a leading momentum indicator which tracks the relationship between price and volume of a stock or similar instrument. Accumulation/Distribution indicator derived from a simpler indicator, On Balance Volume (OBV) indicator, and is used by all types of traders including day traders.

The underlying assumptions behind Accumulation/Distribution indicator are 1) volume precedes price – that is changes volume can indicate change in price, and 2) the more the volume associated with a price movement the significant the movement is and is more likely to go on.

The formula for calculating Accumulation/Distribution is

A/D =

(Close - Low) – (High - Close) (High - Low)

x Volume

A/D is a continuous indicator which is derived by adding a days to value to previous days values to form a Accumulation/Distribution line. If the closing price is close to the day’s high, then the part of the volume is added to line so that the line moves upward indicating accumulation of stock (indicate bullish movement). If the closing price is close to the day’s low, then the part of the volume is subtracted from the line so that the line moves downwards indicating distribution of stock (indicate bearish movement). Most often movements in A/D indicator corresponds that of price movement of the stock. The divergence of A/D indicator from price movement indicates a possible trend reversal.

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