Full View Integrated Technical Analysis E-Book

Xin Xie

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Serie: Wiley Trading Series
• Sprache: Englisch

Seitenzahl: 427

Veröffentlichungsjahr: 2010

Beschreibung

A fresh approach to technical analysis utilizing a full view (multi-time frame) integrated analytical system. Has the bear market ended? Is the rebound lasting? Everybody wants an answer but nobody can provide one with a good degree of confidence. While fundamental analysis is notoriously weak when it comes to market timing decisions and price target forecasts, technical analysis is equally timid in providing any concrete answers to the above fundamentally important questions for market participants. No existing system has produced a firm answer with a respectable degree of conviction. This book will present a system to answer those questions with a high degree of confidence. Xin Xie is the Director for Institute of International Trade and Investment at the Upper Yangtze River Economic Research Center, Chongqing University of Business and Technology and PRC Ministry of Education. He has a PhD in Economics from Columbia University in New York and a Master of Arts Degree in Statistics at Zhongnan University of Finance in China. He has extensive experiences in banking and investment industries as Senior Economists and Strategists in Bank of America and UBS AG.

Leseprobe

Table of Contents

Title Page

Copyright Page

Preface

CHAPTER 1 - The Need for a Full View Integrated Approach

1.1 THE MOTIVATION

1.2 THE NECESSITY OF FVITA

1.3 RANDOM WALK?

CHAPTER 2 - Two Basic Elements of Market Dynamics

2.1 OSCILLATORS—AN OVERVIEW

2.2 THE OSCILLATOR OF CHOICE—STOCHASTICS

2.3 TREND INDICATOR—MOVING AVERAGE

2.4 TREND INDICATOR—MOVING AVERAGE CONVERGENCE/DIVERGENCE

2.5 ADAPTIVE TREND INDICATORS

2.6 ADAPTIVE OSCILLATORS

2.7 OTHER TOOLS OF TECHNICAL ANALYSIS

CHAPTER 3 - Multi-Screen Systems

3.1 THE NEED FOR MULTI-SCREEN APPROACHES

3.2 TRIPLE SCREENS

3.3 EXTENDED INTERVAL CHARTS IN FVITA—DAILY AND UP

3.4 INTRA-DAY INTERVAL CHARTS IN FVITA

NOTE

CHAPTER 4 - Bounded, Interval-Specific Bull and Bear Markets

4.1 INTERVAL-SPECIFIC BULL AND BEAR MARKET I—CONCEPT

4.2 INTERVAL-SPECIFIC BULL AND BEAR MARKET II—CRITERIA

4.3 INTERVAL-SPECIFIC BULL AND BEAR MARKET III—LIMITS OF COUNTERMOVEMENTS

4.4 TRIPLE SCREEN SYSTEM UNDER FULL VIEW

NOTE

CHAPTER 5 - Market Turning Points and Duration of Pauses

5.1 SUPPORT AND RESISTANCE

5.2 BOLLINGER BANDS

5.3 WAVES

5.4 TURNING POINTS AFTER EIGHT AND R9 OBSERVATIONS

5.5 THRUST

5.6 TYPE I, II, AND III PAUSES

NOTE

CHAPTER 6 - Trend Reversals vs. Temporary Countertrends

6.1 TREND REVERSALS

6.2 WITHOUT THE TWO-DAY CHART

6.3 RUNNING SPACE AFTER TREND REVERSAL

6.4 TEMPORARY COUNTERTRENDS

6.5 STRAIGHT PAUSES

6.6 EXCEPTION 1: COMPOSITE BOTTOMING-UP AND COMPOSITE TOPPING-OFF

6.7 EXCEPTION 2: APPROACHING THE TURNING POINT

6.8 RELATIONSHIP BETWEEN LOW- AND HIGH-ORDER SIGNALS

6.9 TRADING STRATEGIES ON TREND SIGNALS

CHAPTER 7 - Pauses Under Different Market Conditions

7.1 PAUSING-DOWN FROM A HISTORICAL NEW HIGH

7.2 PAUSES AGAINST TEMPORARY TRENDS

7.3 TRADING STRATEGIES FOR PAUSES

CHAPTER 8 - Case Studies

8.1 CASE 1: THE 2007 FINANCIAL MARKET CRISIS—DJIA

8.2 CASE 2: THE 2000 HIGH-TECH BUBBLE AND ITS AFTERMATH—DJIA

8.3 CASE 3: THE 1990 BUBBLE AND FALL—TOPIX

8.4 CASE 4: THE 2003 REBOUND AND 2007 CRASH

8.5 CASE 5: THE 2007 CRASH—SHANGHAI COMPOSITE INDEX

CHAPTER 9 - Random Walk, Efficient Market vs. Market Activism

9.1 EFFICIENT MARKET HYPOTHESIS—THE ROOTS

9.2 EFFICIENT MARKET HYPOTHESIS—THE EVIDENCE

9.3 EMH, MARKET ACTIVISM AND THE $100 BILL STORY

9.4 FLAWED EMPIRICAL OBSERVATIONS AGAINST MARKET ACTIVISM

9.5 A FUND TO SHOW EFFECTIVE MARKET ACTIVISM

9.6 A THEORETICAL ARGUMENT FOR TECHNICAL ANALYSIS

NOTE

CHAPTER 10 - Integrating Macro, Fundamental, Quantitative and Technical Analysis

10.1 THE FRAGMENTED STATE OF MARKET ANALYSIS

10.2 INTEGRATING DIFFERENT TECHNICAL ANALYSES UNDER FVITA

10.3 MACROECONOMIC ANALYSIS AND FVITA

10.3.1 Integrated Approach to News Processing

10.4 FIRM FUNDAMENTALS AND FVITA

10.5 OPTIONS AND FVITA

NOTE

CHAPTER 11 - Other Issues

11.1 STATISTICAL ANALYSIS

11.2 TECHNICAL ANALYSIS AS PUBLIC KNOWLEDGE

CHAPTER 12 - Concluding Remarks

Glossary

References

Index

Copyright © 2011 John Wiley & Sons (Asia) Pte. Ltd.

Published in 2011 by John Wiley & Sons (Asia) Pte. Ltd. 2 Clementi Loop, #02-01, Singapore 129809 All rights reserved.

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Preface

As an economist by training, I was instinctively very skeptical of technical analysis. However, the years working at UBS and Bank of America doing macroeconomic analysis of economies across Asia after the 1997 Asian financial market crisis, and through the bursting of the high-tech bubble in 2000, taught me a first-hand lesson: macroeconomic analysis has its limitations, especially when used as the base for investment strategies. Macroeconomic forecasting is a mixture of art and science. To get the forecast right, the forecaster has to be sensitive and insightful about the unique nature of each circumstance. Making investment decisions solely based on macroeconomic analysis involves a high degree of risk both because of the uncertainty in macroeconomic forecasting itself and the unpredictable link between economic fundamentals and market performance. The same things can be said about firm fundamental analysis. Stylized fundamental analyses cannot fully account for the observed complexity of real macroeconomic and firm activities, let alone offer robust forecasts of financial market dynamics.

The International Monetary Fund (IMF), for example, employs teams of economists around the world and uses large structural equation models to analyze the world economy, but its forecasts often look somewhat distant from reality in the eyes of financial market economists who make forecasts with much simpler models but follow the economies closely. This is despite the impressive analyses of various issues faced by the world economy accompanying the forecasts in the annual IMF World Economic Outlook. The discrepancy between the impressive analyses of the issues and a weak forecasting performance suggests that the problem is not with the IMF or any other particular organization doing the forecasts, but rather lies with the inadequacy of the stylized fundamental theories in capturing the complexity and ever changing economic conditions with fixed parametric systems specified in the structural forecasting equations.

Furthermore, even when the forecast is done accurately, with a few notable exceptions, it does not translate easily to financial market forecasts or the right investment decisions. Even in retrospect, the observed macroeconomic and firm fundamentals do not account for all the observed market dynamics. Instead, the market is mostly driven by issues of concern to market participants at the time, which may or may not be directly related to what is happening in the economy. Right timing is often more important than the right forecast; and perceived issues are often more important than the actual issues, in the short run at least. While the real issues will eventually transpire in the long run, it may no longer matter by the time this happens for two reasons:

1. The investor may not have the risk-bearing capacity to wait for the real issue to transpire, not knowing when it will happen.

2. Many new market concerns may emerge to mask the impact of the issue when it occurs.

The significant uncertainty associated with using fundamental analysis as the tool for investment decision-making led me to study technical analysis. Despite initial skepticism, the value of technical analysis quickly became apparent upon closer examination. First, most indicators apparently have some explanatory power on market dynamics. Next, and more importantly, it succeeds where fundamental analysis fails. It helps to understand short-term market movements whereas fundamental analysis is most ineffective in explaining short-run market dynamics; it can be used to forecast future market dynamics whereas fundamental variables often lag behind financial markets. While the deviation of market prices from fundamentals may be used to forecast the eventual reverting back of market prices towards realignment with the fundamentals, the expected realignment has not yielded exploitable opportunities for consistently higher investment returns as a result of the difficulty in timing the price reversal based on fundamental analysis. Lastly, while individual indicators have fairly high rates of failure, different indicators capture different aspects of the market dynamics. Thus, the information offered by different technical indicators, if effectively put together, offers promising prospects for a good understanding of market movements.

On the other hand, it is equally apparent to anyone who is serious about using technical analysis for investment decision making that despite significant amounts of accumulated knowledge, the current approaches are far from being satisfactory. First, it fails too often. The explanatory power of any given individual indicator is too low and resulting uncertainty is too high. Skills accumulated over many years of experience may help to reduce the uncertainty and increase the success rate. But this suggests that a crucial part of the knowledge remains tacit and cannot be easily passed on to other people. Furthermore, when indicators fail to offer the right signal, there is no good explanation; therefore, one is condemned to repeat the mistake the next time around.

Second, a rich set of indicators and an abundance of different approaches to technical analysis offer different perspetives on market dynamics, thus can potentially be used together to provide significantly better understanding about market movements. However, in reality, not much effort has been directed at exploring the joint explanatory power and the collective wisdom of this diverse set of accumulated knowledge.

Third, given the lack of an integrated approach between different technical analyses, it is not surprising that the complementarities between technical analysis and fundamental research are left completely unexploited. In fact, most times, one is likely to get a derisive response from both technical analysts and fundamental analysts on mentioning any attempt to put fundamental and technical analyses together. Technical analysts in particular often make a conscious effort to avoid being influenced by fundamental analysis or any other market related information. This is completely unjustified given that the path taken in the past is a reflection of what is expected of the future and that there is a difference between the realized and the expected future.

Given the unexploited potential and the unsatisfactory state of the existing approaches to technical analysis, the way forward is clear. In order to reduce the rate of failures, we need to understand the reasons for the forecasting errors generated by the indicators and use the indicators conditionally in the absence of the factors causing the failures, rather than unconditionally. In addition, we need to explore the joint power of different indicators as well as harvest the combined wisdom of technical analysis and fundamental analysis.

As it turns out, the two roads lead to one destination—a broad understanding of market dynamics rather than a narrow focus on isolated individual patterns. For a broad understanding of market dynamics, the following three observations are fundamental:

1. The market is driven by many different trends each with bounded duration.

2. The operation of the trends is not independent of each other.

3. Different trends are best captured by different interval charts or data series of different interval sizes.

Because of the influence from higher order time intervals, the analysis of the patterns will be associated with a high degree of uncertainty if the focus is on a single or a limited few interval charts. The uncertainty will be further increased if the analysis is done by using a single indicator. To obtain robust results, a full-view approach must be adopted to take all trends of different durations into consideration; and an integrated approach must be adopted to incorporate information about different aspects of the market dynamics from multiple indicators.

This book presents such a system, named Full View Integrated Technical Analysis (FVITA). The broad understanding of the market dynamics obtained through FVITA naturally lends itself to being integrated with fundamental analysis, making it possible to further enhance the explanatory power of the analytical system and deepen the understanding about broad market dynamics.

The presentation of FVITA in the book will largely follow the thought process described above. Chapter 1 discusses broad deficiencies of the current approaches to technical analysis and the necessity for a new approach. Chapter 2 examines various indicators being used currently to capture two important aspects of market dynamics—trends and perturbation around the trends. The deficiency of each indicator in the context of the current technical analysis is discussed. Based on the discussion, the best ones from each group of the indicators are selected for FVITA.

Chapter 3 sets up the physical structure of FVITA by constructing a set of interval charts that offers complete coverage of the market dynamics. Chapter 4 introduces the concept of bounded trends associated with the chosen set of intervals. Chapter 5 completes the building blocks of FVITA with a catalogue of various indicators associated with different market pausing points.

Chapter 6 presents the main body of analytical contents of FVITA—the signals for confirming a trend reversal and temporary countertrend movements respectively. Chapter 7 continues the analytical discussion focusing on different market turning points and durations of temporary pauses. Chapter 8 is a collection of five case studies that employ the FVITA system to examine recent episodes of bubbles and crashes in three major markets.

In introducing the indicators and analytical rules in the first seven chapters, I have opted to use actual market data in the illustrative charts for the sake of presenting an actual market environment where the indicators are observed. However, in those cases, the detailed market conditions such as the date, the particular market, and the full view market environment will not be discussed; the focus is on the main technical properties of the indicator of concern. Furthermore, the charts used are not related to each other unless clearly indicated.

On the other hand, in the case studies presented in chapter 8, the broad market conditions and the specific market being considered become important for the analysis. For effective FVITA analysis, it is very helpful to have the broad market conditions in mind. For this reason, two most recent episodes of bubbles and crashes are selected for the case studies so that the fresh memories of broad market conditions and the macroeconomic context make it easier to follow the discussion.

Chapters 9 to 11 address broader issues with regard to technical analysis. The theoretical foundation of technical analysis is first examined, followed with a discussion of the general direction for the integration of technical analysis with macro and firm fundamental analysis, as well as quantitative finance.

At the very least, by pointing out why and where the existing technical analysis fails, the analytical framework presented here should help readers avoid costly mistakes. With the concept of bounded bull and bear market marking the effective ranges of market forces of different duration, it will help to increase the robustness of the existing indicators by providing the necessary conditions for their correct usage. Most significantly, the FVITA framework offers an effective way to exploit the collective wisdom of the existing technical analysis and provides a systematic, consistent, and open framework to understand the broad market dynamics. It is the author′s hope that the analytical structure of the full view integrated approach to technical analysis and the empirically robust main body of results offered here will lay the ground for a more productive conceptual framework for conducting technical analyses and facilitate the integration of technical and fundamental analyses in financial market research.

CHAPTER 1

The Need for a Full View Integrated Approach

1.1 THE MOTIVATION

1.1.1 The Need for a New Paradigm

Technical analysis provides useful information about market dynamics, but one needs many years of experience and to be one of the best in the industry to do it right and do it with a degree of consistency. While much work has been done in accumulating significant amounts of knowledge in the field, important parts of the knowledge required for effective application of technical analysis are still not formalized and codified. This is reflected in the fact that most people do not get consistent results from technical analysis. For the majority of people who depend on technical analysis for making trading and investment decisions, the experience is often frustrating due to frequent failures and the lack of a meaningful way to conduct postmortem analysis about the reasons for the failures. The reason behind the uncertainty is simple, most technical analyses, consciously or unconsciously, use one fixed-time interval chart as their main focus. Although there are a few commendable efforts in employing multi-time-frame analysis, they are not widely followed, partly because further improvement is needed in exploiting the added power in order to justify the increased complexity.

In reality, the effective range of indicators calculated on one interval chart is very limited. The independently effective range, i.e., the range where movements are not driven by factors associated with other intervals, is even more limited. On average, analyses based on, say, a one-day interval chart are effective probably no more than 20 percent of the time. For the remaining 80 percent, analyses are purely operating on chance; the direction of the market is not related to the indicator values of the selected interval chart, but rather driven by factors that would be reflected in the values of the indicators from charts of other time intervals.