IP Lesson 4 Flashcards
1
Q
What is the single factor that causes price movement?
A
Orders placed by the whole population of traders
2
Q
Is price movement precisely correlated with economic conditions?
A
No.
3
Q
What will cause price to bounce up off a particular level?
A
Masses of BUY orders placed at that level.
4
Q
What causes a currency ( if regarded as a product ) to rise in price?
A
When demand is higher than can easily be supplied.
5
Q
What is the basic objective of technical analysis?
A
To identify where other traders are likely to have clustered their orders.
6
Q
How is technical analysis used to identify where other traders are likely to have placed / clustered their orders?
A
By the study of historical price action.
7
Q
What is the net effect of millions of other traders using technical analysis to place trades?
A
The trades create a self-fulfilling prophecy.
8
Q
What would happen if a majority of traders believed that the colour of the president’s tie guaranteed market direction?
A
The orders they placed as a result would actually move the market in that direction.
9
Q
What gives a trading method it’s viability with respect to the total trading population?
A
The degree of agreement with the method.
10
Q
BIG IDEA : Explain the effect of the psychology of the trading population as related to price movement.
A
The beliefs that traders at large maintain tend to result in self-fulfilling prophesies with regard to price action, the more widespread the use of a method of prediction, the greater validation it tends to receive as a result of the market following these opinions.
11
Q
What is the essence of technical trading?
A
To use historical patterns of price action to identify where other traders will place their orders en masse.
12
Q
What is the definition of a market making higher highs, and higher lows?
A
Up trending.
13
Q
What is the condition of a market making lower highs and lower lows?
A
Down trend.
14
Q
The condition for which most strategies are designed is :
A
Trending markets.
15
Q
When price bounces up and down around a given level, like a band, what condition does this describe?
A
Ranging.
16
Q
Which IP strategy is the fundamental strategy for capturing profit in a ranging market?
A
IP Reversals.
17
Q
In a market with price moving up and down indecisively, with no overall movement, what condition does this describe?
A
Choppy.
18
Q
What qualities does a choppy market tend to test / develop in a trader?
A
Discipline and confidence.
19
Q
What is the key element in deciding how you respond to market opportunities and risks?
A
The identification of over-all price direction.
20
Q
In any given market condition, what basic behaviours define it’s phases.
A
Runs and Pullbacks.
21
Q
While the most common trading advice is “trade with the trend” what is the actual proportion of time trending vs. indecision and pullbacks in a Trending market?
A
About 50%
22
Q
True or False, when trading with the trend, in a trending market will still be wrong half the time?
A
True.
23
Q
When do the highest probability set ups occur in trending markets?
A
When a strong trend is established, and then price pulls back.
24
Q
In a trending market, what are the best times to buy?
A
On the pullbacks.
25
In a trending market, what are the best times to sell?
On the runs.
26
What is the key factor in harnessing the power of a trending market?
Identifying when price is running or pulling back.
27
What does a swing high represent?
A peak in price.
28
What does a swing low represent?
A trough in price.
29
Why is the term "swing" used with regard to price action?
To differentiate a given price move from daily, historical, and other highs / lows.
30
BIG IDEA : The most basic principles of technical analysis are :
Support and resistance; which are price levels which have some historical significance that causes price to react to the same level. Such levels then provide valuable information for trading decisions.
31
What does support refer to?
Any level that which has proven to support price in the past.
32
What is the effect of a strong support level on price action?
It tends to act as a "floor".
33
What does resistance refer to?
Any level which has proven to resist price highs in the past.
34
What is the effect of a strong resistance level on price action?
It tends to act as a ceiling.
35
How should support and resistance be represented during trading?
By drawing horizontal lines through these levels on my chart.
36
How are support and resistance most often identified?
By finding levels that price has bounced off in the past.
37
What tends to occur when price has bounced off a certain level numerous times in the past?
Traders will tend to buy around these levels.
38
What is the effect of clearly established support and resistance levels?
Traders use of those levels create self-fulfilling prophesies.
39
What numerical characteristic tends to produce support and resistance in terms of price?
Round numbers.
40
If a resistance line is broken, what will price often do as a result?
It will often pullback and test the line.
41
What is the effect of price pulling back and testing a line of resistance?
The line then acts as support.
42
What happens when price has pulled back and tested a line of resistance after breaking through that resistance, and transformed into a line of support?
The line supports price rallying up further.
43
What is it the name for price breaking through resistance, testing the line for support and bouncing up / rallying?
Break and test.
44
What is the value of "break and test" price action?
It is a high probability entry point!
45
Regarding trend lines, where are the lines drawn during an uptrend?
UNDER the swing LOWS.
46
What is the function of trend lines in an uptrend?
They act as support for the TREND.
47
What is the function of trend lines which support an uptrend effectively?
They signal high probability entries for the next RUN UP.
48
In a downtrend, the trend line is drawn at what level?
OVER the swing highs.
49
Downtrend lines generally are associated with what effect on price?
They act as a resistance level for the trend.
50
What is the value of Downtrend lines?
Often signal high probability entries for the next RUNDOWN.
51
What can happen if a resistance trend line is broken?
It could become support.
52
What can happen if a support trend line is broken?
It could become resistance.
53
How long can prices react to a trend line?
From hours to years.
54
When drawing lines on your chart, what is the most important thing to understand / remember?
That they are the product of my own personal opinion / perception.
55
When drawing lines on your chart, what is the main risk arising from the influence of your own opinions?
That my opinions might not clearly reflect what the market is actually reacting to.
56
What is your main goal when drawing lines on your chart?
That my lines accurately reflect the market's perception more than my own opinion.
57
Which price point MUST you draw your lines through to create accurate representation of the market sentiment?
Open and close prices.
58
Why are the open and close prices more important than the daily highs and lows?
Because the market chose the open and closing prices over the highs and lows.
59
How many touches through a line are required for the line to be valid?
3 or more.
60
BIG IDEA : What are you trying to accurately chart with your trend lines?
What others will react to.
61
What are indicators ultimately descriptions of?
Mathematical relationships.
62
What do the mathematical relationships of indicators describe about the chart?
Various aspects, including trends, volatility, and momentum.
63
What can indicators help you to do?
confirm price patterns and trade entry signals.
64
Why does the use of indicators require discretion?
Because they can contradict each other, and do not contain any more information than the chart itself.
65
Do indicators reflect changes in the market before or after those changes occur?
Only after the change has been calculated and displayed by the indicator.
66
What is the best source of advanced knowledge and insight about the market as compared with indicators?
My skill and experience in trading.
67
How many indicators do professional traders usually use?
2-3.
68
How much complexity is required of the best performing strategies?
Minimal. They are extremely simple.
69
Why do the majority of traders not use their simple strategies consistently?
They spend more time trying to improve the strategy than their psychology and mindset.
70
What is considered to be the most powerful indicator in the IP arsenal?
MACD
71
What do moving averages represent about price?
Average price over a given period.
72
What is the value of Moving averages as a trading indicator?
It is useful for identifying trend direction.
73
Moving averages provide useful information for identifying trend direction, within an average range. What is the value of this average range of price in trading?
It provides a level of dynamic support and resistance.
74
Which moving average indicator is best suited to a fast moving market?
Exponential moving averages.
75
Why are exponential moving averages more suited to fast moving markets?
They are more adaptable in fast moving markets.
76
How do Exponential moving averages adapt efficiently to fast moving markets?
They weigh recent prices more heavily than older ones.
77
The industry standard blue EMA line represents what?
20 EMA
78
The industry standard Red EMA line represents what?
50 EMA
79
The industry standard Green EMA line represents what?
200 EMA
80
Example : When using 50 EMA, and the price is above the Red line, what is indicated?
That the market is Bullish.
81
Example : When using 50 EMA, and the price is below the Red line, what is indicated?
The market is Bearish.
82
In addition to the information about dynamic support and resistance, and over all market direction, what is the value of EMA's?
Professional traders commonly place orders around the 20,50, and 200 EMA.
83
Why is it valuable to know that professional traders commonly use the 20,50, and 200 EMA to place orders?
Because it results in regular bounces from these levels.
84
Where is the MACD indicator found?
Below the chart.
85
What type of indicator is MACD in a technical sense?
It is a momentum oscillator.
86
What does the EMA generally indicate with regard to a trend?
Indicates if momentum is high or low.
87
How does MACD calculate / find if momentum is high or low?
It subtracts long period EMA from short period EMA.
88
What common error can be made by beginners with regard to MACD?
Attempting to develop entry signals.
89
What is the correct use of MACD?
Identifying convergences and divergences in price.
90
What is indicated when the price action is mirrored by the MACD line?
Convergence.
91
What is indicated when price action is NOT mirrored by the MACD line?
Divergence.
92
What does convergence, as communicated by MACD, indicate?
Market Momentum is in accord with the prevailing trend.
93
When Market Momentum is in accord with the prevailing trend, what can be reasonably expected?
A continuation of the trend.
94
What does divergence as communicated by MACD, indicate?
That Market Momentum is not in accord with the prevailing trend.
95
When Market Momentum is not in accord with the prevailing trend, what can reasonably be expected?
An immanent reversal.
96
What does RSI stand for?
Relative Strength Index.
97
What is RSI technically?
A momentum occilator.
98
What does RSI measure?
The speed and change of price movements.
99
What is the range through which RSI occillates?
between 1-100
100
Where is RSI generally found on it's 1-100 scale?
Between 30-70.
101
What is indicated when RSI is below 30?
The market is OVERSOLD, undervalued.
102
What is indicated when RSI is above 70?
The market is OVERBOUGHT, and thus overvalued.
103
What can be reasonably expected of Oversold markets?
They are due to move up.
104
What can reasonably be expected of Overbought markets?
They are due to move down.
105
What can RSI be used to identify?
Divergences in price.
106
What does the Stochastic Oscillator measure / represent?
It identifies overbought / oversold market conditions.
107
How does the Stochastic Oscillator identify overbought / oversold market conditions?
By comparing closing price to total price range over a given period of time.
108
Why should RSI and Stochastic Oscillators be used in conjunction?
Haha! Trick question! They should not!
109
Why should RSI and Stochastic Oscillators not be used in conjunction?
Because they provide similar information. Reduce clutter.
110
What is the basic function of the choppiness index?
To standardize the definition.
111
Over what timeframe is choppiness measured by the choppiness index?
A 4 day period.
112
What does the height of the line of the choppiness indicate?
The choppiness!
113
At what level is choppiness considered too high to trade?
60 is too high for trading.
114
What does Average True Range indicate?
The breathing cycle of the market.
115
What is ATR used to gauge?
Good times to enter or wait.
116
The metaphor of an object being thrown into the air, then slowed and reversed by gravity can be applied to what market behaviour?
The market's breathing cycle.
117
What phase of the market's "breathing" would you use ATR with the intent to capture?
When the Market is losing steam.
118
Why would you use ATR to ascertain when the market is losing steam?
Because it is the best time to enter the market for the next run.
119
Why is it important to only enter the market when it is slowing down?
Because this is the best opportunity to catch a low-risk, high reward entry.
120
When should you enter an accelerating market?
Never.
121
You observe that candles are getting progressively smaller relative to one another. What does this indicate?
The market is slowing.
122
You observe that the candles are getting progressively smaller relative to one another. What does this say about the current trading opportunities?
It's the best time to enter a trade.
123
You notice that an uptrend is losing steam, so you choose to enter what kind of trade?
Short.
124
You notice that a downtrend is losing steam. What kind of trade will you enter?
Long.
125
When gauging candle sizes, what are they measured against?
Relative to one another.
126
You observe that the candles are getting progressively bigger in size. What does this indicate about market conditions?
The market is accelerating.
127
You notice that the candles are getting larger relative to one another, how does this affect your decision to enter trades?
I choose to wait out the run, and enter when it slows.
128
ATR is useful to beginners for what reason?
To learn to identify relative candle size.
129
What do Bollinger bands measure?
They measure volatility.
130
How do Bollinger bands represent market volatility with their graphic?
With bands above and below a moving average.
131
You notice your Bollinger bands widening. What does this indicate?
Volatility increasing.
132
You notice your Bollinger bands narrowing. What does this indicate?
Volatility decreasing.
133
Which two methods primarily use Bollinger bands as an indicator?
The bounce and the Squeeze.
134
When ENTERING a bounce, how would you use Bollinger bands?
Enter at the Bollinger band itself.
135
You have entered a Bounce at the Bollinger band, where will you trade the movement to?
Back to the middle.
136
When using the Bollinger bands, and observing that they have squeezed together, what is indicated?
A breakout is immanent.
137
What does Parabolic SAR indicate about market behaviour?
Price and time related to a given trend ( This needs clarification. )
138
What does Parabolic SAR depict on your chart?
Parabolic SAR produces dots trailing behind price over time.
139
What is the value of the dots produced by Parabolic SAR?
They form an excellent level for trailing stops.
140
When Parabolic SAR dot appear below price, what is the trend?
An uptrend.
141
When Parabolic SAR dots appear above price, what is the trend?
Downtrend.
142
What can fibonacci ratios indicate about the market activity in the IP method?
To indicate potential reversal levels.
143
What naturally occurring numerical ratio tends to also identify critical points that cause price to reverse?
Fibonacci ratios / retracement levels.
144
After a run, what do fibonacci ratios often suggest about the movement of price?
How far it will pull back.
145
What is the most common degree of pullback after a run?
61.8%
146
What does Volume refer to?
The number of contracts traded by the entire market in a given period.
147
What is the value of determining volume for a given trading period?
It determines the significance of a market move.
148
Upon what indicator does the perceived strength of a movement depend?
The volume of trading during that period.
149
What does the magnitude of the volume say about a particular move?
The higher the volume, the more significant.
150
Where is the Forex central exchange located?
Everywhere and nowhere.....
151
Why is it impossible to keep track of true Forex volume?
No central exchange.
152
Does Forex volume follow any discernible patterns?
Yes, it peaks at the same time daily.
153
What is the value of knowing the time of day with the highest volume?
It allows the effective estimation of relative volume.
154
During which times daily does Forex volume generally rise?
Between 7am and 2pm GMT
155
What typically occurs during the 7AM to 2PM GMT high volume period?
The big move of the day.
156
What is the major move of the market day called?
The power move.
157
Is it possible to identify the daily power move in advance?
Yes, and with an impressive strike rate.
158
What is required in order to identify the daily power move?
Correct analysis.
159
What are price patterns?
Distinctive formations created by price movement.
160
What do price patterns reflect / communicate?
interaction between buyers and sellers.
161
What forms and guides price patterns?
The laws of mass human behaviour.
162
What is the value of price patterns to the professional trader?
Often leads to a predictable market move.
163
In general, what characteristic of a pattern indicates it's significance?
The length of time it takes to form.
164
In general, a price pattern that takes longer to form is...
More significant.
165
What are the two types of price patterns?
Continuation and Reversal.
166
As compared with candlestick patterns, what type of trends are indicated by price patterns?
They signal long term trends.
167
What is a continuation pattern?
When an established trend pauses, and then resumes it's original direction.
168
What is the significance of a continuation pattern?
Can provide excellent entry point to capture the next run on the trend.
169
Common continuation patterns include which 3?
Triangles, Rectangles, and Flags.
170
In a continuation triangle, what is it formed by?
two trend lines that meet at a point.
171
In a continuation triangle, what is the criteria for a valid triangle?
each trend line touches price at least twice.
172
A symmetrical triangle in a down trend indicates what?
Bearish outlook.
173
A symmetrical triangle in an uptrend indicates what?
Bullish outlook.
174
What is indicated by an ascending triangle?
It is Bullish!
175
How does an ascending triangle appear on your chart?
Flat upper trend line, and rising lower trend line.
176
What is indicated by a descending triangle?
A bearish outlook.
177
How does a descending triangle appear on your chart?
As a flat lower trend line, and falling upper trend line.
178
When a pair of horizontal trend lines, which both touch price at least twice appear, what is this called?
A rectangle.
179
What is represented by rectangle formation on your chart?
Indecision in the market causing a period of consolidation.
180
What kind of market conditions are communicated by rectangles?
Ranging market conditions.
181
Can range bound markets provide profitable opportunities?
Yes! And they require the right strategies to do so.
182
Which indicators flourish in ranging markets?
Those that signal reversals.
183
When a sloping triangle against the dominant trend appears, it could be what kind of formation?
A flag.
184
What do flags represent?
A pullback.
185
When do flags most commonly appear?
After a sharp run in price.
186
When in the course of a trend will reversal patterns occur?
BEFORE a major change in the direction of the trend.
187
How are Reversal patterns often used with regard to open positions?
To close existing positions.
188
How are reversal patterns used with regard to placing new trades?
To enter trades in the opposite direction.
189
What market condition must be present to allow a reversal pattern to develop?
There must be an existing trend.
190
Which of the reversal patterns is noted for it's power in Forex trading?
Head and shoulders.
191
Describe the basic shape of head and shoulders patterns.
3 price peaks, highest in the middle.
192
In regard to the head and shoulders pattern, what does the shorter 3rd peak represent / communicate?
It indicates a weakness in the trend.
193
What is indicated when a head and shoulders pattern appears inverted, following a down trend?
A reversal of the down trend.
194
What is a head and shoulders pattern which appears as a mirror image of the regular pattern called?
Inverse head and shoulders.
195
Which is the most common reversal pattern in technical analysis?
Double tops or bottoms.
196
When, in relation to price, do double tops or bottoms appear?
When price reacts to the same level twice.
197
What is indicated by double tops & bottoms?
A strong level of support or resistance.
198
With regard to the various forms of technical analysis, which is considered the most reliable form?
Candlestick patterns.
199
Under what two market circumstances do candlestick patterns show very predictable movements?
After sharp runs or strong support.
200
Which candlestick pattern occurs when a pair trades significantly higher than it's opening and close?
High test.
201
High test candlestick patterns are found in up or down trends?
Both.
202
In a high test pattern, the pair trades high as compared with it's open and close; where would the open and close be found relative to one another?
Almost at the same level.
203
What does a high test candlestick pattern communicate about the market's activity?
The high was tested before being rejected by sellers.
204
Observing a high test candle after a powerful movement up, what is indicated?
A good reversal signal.
205
What is indicated if a high test candle is formed on a strong resistance level?
A good reversal signal.
206
BIG IDEA : What is technical analysis in general terms?
The study of price movements, and what causes them.
207
How high does the wick of a high test candle need to be relative to the rest of the entire candle formation?
2x as long.
208
Low test candles occur in up or down trends?
Both.
209
When in terms of price action do low test candles occur?
When a pair trades significantly lower than it's open / close.
210
At what level relative to the opening price does a low test candle close?
Almost at the same level.
211
Why, in terms of market activity, do low test candles form?
Because the low was tested before being rejected by buyers.
212
What is indicated if a low test forms after a powerful movement down?
A good reversal is indicated.
213
What is indicated if a low test candle forms on a strong support level?
A good reversal signal is indicated.
214
What is the length of the low test wick relative to the rest of the entire candle formation?
At least 2x longer.
215
When is a doji formed, in terms of price action?
When open and close price is virtually the same.
216
What is represented by the formation of a doji?
Equilibrium between buyers and sellers.
217
What do doji's tend to indicate?
The end of a run or pullback.
218
What is the normal size for a doji?
relatively small.
219
In evaluating a doji formation, what is the pip difference between open and close?
a few pips, smaller is better.
220
What kind of formation is created by two or more candlesticks with equal highs?
Tweezer tops.
221
What do tweezer tops indicate?
That buyers were not able to push price up any longer.
222
Regarding tweezer tops, what might be inferred by the fact that buyers are not able to push price up any longer?
That the buyers may be weakening.
223
What characteristic of tweezer tops indicates the power of the formation?
The greater the height of the wicks.
224
What should the size of the two tweezer top candles be relative to one another?
about the same size and shape.
225
How high should the tweezer tops be relative to the size of the entire candle formation?
At least the same size as the rest of the entire formation.
226
What is indicated by tweezer top formations?
They are bearish!
227
In what kind of trends are tweezer tops found?
up and downtrends.
228
How do tweezer bottoms appear on your chart?
As two or more candlesticks with equal lows.
229
What do tweezer bottoms indicate about price action?
That sellers were not able to push price down any longer.
230
What can be inferred by tweezer bottom formations, given that they indicate sellers were not able to push price down any longer?
That sellers may be weakening.
231
What aspect of a tweezer bottom formation indicates it's power?
When the wick is significantly lower than the body.
232
What size should tweezer bottom candles be relative to one another?
About the same size and shape.
233
How long / low should the tweezer bottoms be, relative to the rest of the entire candle formation?
At least the same size as the rest of the formation.
234
What is communicated by the formation of tweezer bottoms?
They are BULLISH.
235
Are tweezer bottoms found in up trends or down trends?
Both!
236
When a small candle of either colour is followed by a large green candle that has a body at least 2x larger than the small candle, what is this pattern?
A Bullish engulfing pattern.
237
What is communicated by the presence of a Bullish engulfing pattern?
That buyers are taking control.
238
What is to be expected as the result of buyers taking control, in the formation of a Bullish engulfing pattern?
They are sending price up with a powerful movement.
239
What do Bullish engulfing patterns indicate about downtrends?
That they have run out of steam.
240
How large is the Bullish engulfing candle, relative to the previous candle?
At least 2x larger than the entire previous formation.
241
What kind of pattern is formed when a small candle of either colour is followed by a red candle which is twice as large as the entire small one?
A bearish engulfing pattern.
242
What does a bearish engulfing pattern indicate about uptrends?
That the up movement has run out of steam.
243
What does a bearish engulfing pattern communicate about market activity?
That sellers are taking control.
244
What can be expected when sellers take control of the market, as indicated by bearish engulfing patterns?
They are sending price down with a powerful movement.
245
How large is a bearish engulfing candle relative to the smaller preceding candle?
the body is at least 2x larger than the entire smaller formation.
246
What type of formation occurs when a candlestick formation is completely within the preceding candle?
An inside bar.
247
Regarding inside bar formations, what kind of low does it have relative to the preceding candle?
It has a higher low.
248
Regarding inside bar formations, what kind of high does it have, relative to the preceding candle?
A lower high.
249
What is signalled by an inside bar formation?
A run is losing momentum.
250
What is the value or significance of inside bar formations?
It's a great low risk entry.
251
What is the significance of an inside bar formation, after a run up?
It's bearish.
252
What is the significance of an inside bar formation after a run down?
It's bullish.
253
What is the relative size of the inside bar candle to it's preceding candle?
It's half the size.
254
Once signals are understood, what can you do to increase the probability of your hit rating?
Combine multiple signals.
255
What happens when all of the MA, trend line, and candlestick traders are all trading at the same time?
The chance of a move is much greater.
256
What is the key to technical analysis mastery?
The ability to identify what other traders are thinking.
257
What is a common term for the combination of signals?
Confluence.
258
If the market is not choppy, what will the market typically be doing?
Running or pulling back.
259
What kind of pattern does volume form over the course of a week?
A 5 peak sine wave.
260
What in very basic terms, is the daily approach to swing trading?
Enter when the market is quiet, and wait for the daily power move.
261
What is the value of using / identifying price patterns?
To determine long term continuations or reversals.
262
Which form of technical analysis is best suited to short term runs and pullbacks?
Candlestick patterns.
263
What is most critical to learn in order to be able to foresee the next few trading days with impressive accuracy?
Learning candlestick patterns.
264
What metric tends to indicate how powerful a candlestick pattern is?
The length of the timeframe.
265
On which timeframe are candlestick patterns are not very significant?
On the minute or hour basis.
