Trend Forecasting with Intermarket Analysis E-Book

Louis B. Mendelsohn

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

Seitenzahl: 219

Veröffentlichungsjahr: 2012

Beschreibung

In this groundbreaking new edition, Mendelsohn gives you the weapon to conquer the limitations of traditional technical trading-intermarket analysis. To compete in today's rapidly changing economy, you need a method that can identify reoccurring patterns within individual financial markets and between related global markets. You need tools that lead, not lag. Step by step, Mendelsohn shows how combining technical, fundamental, and intermarket analysis into one powerful framework can give you an early edge to accurately forecasting trends. Inside, you'll discover: * Precise trading strategies that can be used by both day traders and position traders. * The limitations of traditional technical analysis methods-and how to overcome them. * How neural network computational modeling can create leading, not lagging, moving averages for more accurate forecasting. * Innovative, quantitative trend forecasting indicators at the cutting edge of market analysis. PLUS-an introduction to VantagePoint Software, which makes Mendelsohn's "new economy" trading methods work simply-and effectively. This software applies the pattern recognition capabilities of advanced neural networks to analyze intermarket data on literally hundreds of global financial markets each day.

Leseprobe

CONTENTS

Foreword

Preface

Introduction

Chapter 1: Trading in a Global Economy

One Constant Remains

Market Evolution

Brave New Exchange World

Emerging Economic Forces

Crises . . . and Opportunities

Who Wins? Who Loses?

Chapter 2: Technical Analysis for Today’s Markets

Focusing On One Factor

What’s the Market Trend?

Play the Markets or Time the Markets?

Strategies That Anticipate, Not React

Typical Route to Technical Analysis

Learning Painful Lessons

Following the Herd

Taking Off Technical Analysis Blinders

Maintaining a Broad Focus

Chapter 3: Chart Patterns: Building Blocks of Technical Analysis

Charting The Action

Different Looks, Same Analysis

Chart Patterns

Chapter 4: Technical Indicators: Enhancing Price Patterns

Predictive Nature

Trending Versus Momentum

Moving Averages

Moving Average Convergence Divergence (MACD)

Stochastics

Relative Strength Index (RSI)

True Strength Index (TSI)

Indicator Deficiencies

Chapter 5: Using Intermarket Analysis to Gain an Edge

Tapping A Different Data Stream

Why Intermarket Analysis?

Intermarket Analysis in Equities

Intermarket Analysis in Futures and Commodities

Futures, Equities Tied Together

Market Leads and Lags

Early Intermarket Analysis Failures

Improving Your Vision

Beefing up With Intermarket Analysis

Chapter 6: Mining Intermarket Data With Neural Networks

Playing the Hand You’re Dealt

Enter Intermarket Data

Enter Neural Networks

A Model of the Human Brain

The Learning Process

Tailored for Each Market

Caution: Don’t Overtrain

Chapter 7: Using Intermarket Data for Predictive Indicators

The Road to Reliability

Predicted Neural Index

Predicted Strength

Predicted Moving Averages

Predicted Crossovers

Predicted Differences

Beating the Lag

Early Warning Actions

Predicted Next Day Highs and Lows

Predicted Momentum Indicators

Putting Predictive Indicators to Work

Playing The Odds

Multi-Market Confirmation

Chapter 8: Applying Predictive Indicators to Trading Strategies

Trading Strategy Premises

Breakout Strategies

Momentum Trading Strategies

Momentum Indicator Strategies

Trading With Options

Strategies: Final Words

Chapter 9: The Synergistic Trader

Accepting Technological Advances

Maintaining the Push for Accuracy

Suggested Reading

Important Internet Sites

About the Author and Market Technologies, LLC

Copyright © 2013 by John Wiley & Sons, Inc. All rights reserved

Published by John Wiley & Sons, Inc., Hoboken, New Jersey

Published simultaneously in Canada

No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, 222 Rosewood Drive, Danvers, MA 01923, [phone], fax [phone], or on the web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, [phone], fax [phone], or online at www.wiley.com/go/permissions.

Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with the respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor the author shall be liable for damages arising herefrom.

For general information about our other products and services, please contact our Customer Care Department within the United States at [phone], outside the United States at [phone] or fax [phone].

Wiley publishes in a variety of print and electronic formats and by print-on-demand. Some material included with standard print versions of this book may not be included in e-books or in print-on-demand. If this book refers to media such as a CD or DVD that is not included in the version you purchased, you may download this material at http://booksupport.wiley.com. For more information about Wiley products, visit www.wiley.com.

Library of Congress Cataloging-in-Publication Data:

FOREWORD

PREFACE

INTERMARKET ANALYSIS is the analysis of the relationships between financial markets and their influences on each other; this book explores the application of this process to trading in today’s global economy. It examines the role that intermarket analysis plays in helping traders to identify and forecast changes in trend directions and prices, in view of the unprecedented extent to which global financial markets have become interconnected and interdependent.

These include the relationships of stock indices such as the S&P 500 Index, the Nasdaq 100 Index, and the FTSE 100; gold; currencies such as the U.S. Dollar Index, Euro, British Pound, and Japanese Yen; energy markets such as crude oil, heating oil, and gasoline; interest rate markets such as Treasury Notes and Bonds; and individual equities.

As the burgeoning world economy of the 21st century has contributed to the further globalization of the financial markets (fostered by advancements in information technologies), intermarket analysis has become a critical facet of the overall field of technical analysis. Intermarket analysis empowers individual traders to make more effective trading decisions based upon the linkages between related financial markets. By incorporating intermarket analysis into your trading plans and strategies, instead of limiting your scope of analysis to each individual market in isolation, you can make these relationships and interconnections between markets work for you, instead of against you.

This book makes suggestions for how leading indicators, created through the application of intermarket analysis, can be used in conjunction with traditional single-market technical analysis indicators to provide a broadened perspective and framework of analysis for trading. This allows traders to make more effective and decisive trading decisions than would be possible by relying on traditional single-market technical analysis indicators that too often lag the market.

Offering insights into how day traders and position traders in both the equities and futures markets can improve their trading performance and achieve a competitive advantage in today’s globally interdependent financial markets, this book is addressed primarily to traders and investors who utilize personal computers and the Internet to analyze various financial markets and make their own trading decisions. The book does not attempt to give an in-depth presentation on popular technical analysis indicators, nor does it detail the underlying mathematics behind the intermarket analysis methods and strategies that are discussed.

This book will be of interest to both experienced traders and newcomers to the financial markets who are inclined toward technical analysis and intent on participating in the wealth creation of today’s global financial markets by incorporating intermarket analysis tools into their trading strategies.

INTRODUCTION

I AM VERY fortunate to have been involved in the field of technical analysis for more than 35 years and to have played a prominent role as the events surrounding the early application of personal computers to the financial markets began to unfold, and after PCs first appeared on the scene.

In the early 1970s, while studying for a M.S.W. degree in Buffalo, New York, I began trading stocks and options as a hobby, using various popular technical analysis methods. Initially, I subscribed to weekly chart services, which had to be updated by hand during the week, requiring a sharp pencil to draw support and resistance lines.

Several years later after working as a regional health planner, I enrolled in the MBA program at Boston University with an emphasis on health care management. Interestingly, I spent most of my free time at B.U. studying technical analysis and playing the stock market, although I still managed to get my MBA degree with Honors and looked forward to a career in hospital administration. During that time I also met and married my wife, Illyce.

In the years before the advent of personal computers, with only a handheld calculator available to compute numbers, I familiarized myself with the underlying theories and mathematical equations for numerous technical indicators, and devised mathematical shortcuts to expedite my daily calculations and to cut down on errors.

After relocating to south Florida to work for Humana as a hospital administrator in 1977, I read an interesting article in the Wall Street Journal about personal computers, which at the time were called “microcomputers.” That evening I drove to a nearby Radio Shack to see one firsthand. I was already quite proficient with my Texas Instruments handheld calculator and familiar with IBM mainframe computers from my undergraduate college days at Carnegie Mellon in the 1960s, but having a desktop computer and being able to write and execute programs on the spot was a whole different experience.

When I walked out of the store to my car, I had an “ah-ha” moment: I thought to myself that the world is about to undergo a profound change due to this new invention, and I was excited as I contemplated how I could apply this new technology to technical analysis and my own trading.

Shortly afterwards, I was promoted by Humana to become the Assistant Executive Director of another one of its hospitals in Tampa, Florida, and soon developed a personal friendship with a pathologist there who was trading commodity futures at the time. This was during the inflationary period when interest rates and gold prices were sky-rocketing, and a $1 million T-bill contract could be controlled with as little as $1,000 margin. So, there was an incredible buzz surrounding commodities trading—and I caught the bug. At that point I re-directed my focus and began trading commodities exclusively as both a day and position trader—all while managing a hospital.

On evenings and weekends I taught myself a programming language called Basic and started writing trading software programs to automate various technical analysis indicators that I previously had been calculating by hand. It didn’t take long for me to realize that trading software would dramatically change technical analysis and richly reward software developers who understood the financial markets from a trader’s perspective and could program that knowledge into trading software.

Although I had been hooked on technical analysis for nearly a decade by then, and found commodities trading practically addictive, it was the challenge of applying personal computers and software to technical analysis, more so than trading itself, which crystallized the intellectual and entrepreneurial passion that I had sought but never found in the health care industry.

In 1979, at 31 years old and intent on pursuing my passion, I started a trading software company that, through several name changes over the decades, became known as Market Technologies. I was determined to develop trading software that would revolutionize technical analysis. A year later, just after our first son, Lane, was born and with Illyce’s encouragement and her income from a tutoring agency that she had started in Tampa, I left Humana and hospital administration to devote my full attention to developing trading software and trading on a full-time basis.

Working alone and at a near-feverish pace, I literally spent day and night for the next few years researching the commodities futures markets, studying more sophisticated aspects of technical analysis, and examining my winning and losing trades for patterns to incorporate into my evolving trading strategies. Most importantly, I continued to develop and refine trading software for my own use and ultimately to license to other commodities traders who, I believed, would be hungry for trading software to help them make more effective and profitable trading decisions.

In 1983, after three years of nearly “solitary confinement,” I completed my first trading software program that I felt proud enough to share with other commodities traders and began licensing it under the name ProfitTaker Futures Trading software.

I received personal encouragement from several already-prominent technical analysts and commodities traders with whom I shared my ideas about the strategy back-testing capabilities that I had incorporated into ProfitTaker. Foremost among these individuals was Darrell Jobman, who at the time was the editor of Futures magazine. He recognized the significance of applying this new technology of personal computers and trading software to the financial markets and published a series of my articles in Futures. In these articles I introduced the concept of strategy back-testing and optimization for personal computers and detailed the impact that I thought back-testing would have on the conduct of technical analysis.

Almost immediately upon its release, ProfitTaker was recognized in the financial industry as the first commercially available strategy back-testing and optimization trading software for personal computers. This was a momentous year in which my wife and I celebrated both the birth of our second son, Ean, and that of ProfitTaker.

During the next few years I introduced new, more powerful versions of ProfitTaker, wrote more articles on technical analysis in various trading publications, collaborated on several books on technical analysis, and gave presentations at industry conferences. I spoke about the application of personal computers to trading and warned about the pitfalls of curve-fitting and over-optimization in the design and testing of trading strategies.

In early 1986, while running my software company and recovering from a car accident, I started noticing subtle changes taking place in the markets that seemed to involve their interaction with one another in a way that, I believed, if quantified, could prove useful in identifying and forecasting trend changes. This, I concluded, would eventually help traders make better trading decisions, and ultimately more money.

I attributed these changes in market dynamics to advances that were occurring in both computing and telecommunications technologies worldwide, which tended to bring the world’s previously distinct financial markets closer together. I didn’t know at the time that this emerging phenomenon that had piqued my interest would come to be referred to as the “global economy” years later.

It was becoming increasingly apparent to me that the prevailing approach to trading software, in which each market is analyzed by itself in terms of its internal dynamics by using trend-following, lagging indicators (such as ProfitTaker’s), might become outdated. I concluded that this market-by-market focus, which had been the mainstay of technical analysis for decades, would no longer be sufficient in the future.

Because I had previously pioneered strategy back-testing for personal computers, and thrived on staying at the cutting-edge of trading software development, I felt that it was imperative for me to push trading software to the next generation. I wanted to introduce a whole new approach to technical analysis that would look at the markets from a broader perspective.

My goal was to quantify the links between related financial markets and to use this “intermarket” information to make accurate forecasts of market trends. This would allow traders to make more effective and timely trading decisions than could be done with the narrow, single-market approach that still dominated the trading software industry, which, by then, had begun to mature as more competitors entered the field.

By late 1986, I had developed a working prototype of what would become my second trading software program, which focused on market interdependencies. The program, which I named Trader, later gained recognition as the first commercially available intermarket analysis trading software for PCs in the financial industry. It used a spreadsheet format to correlate the expected trend direction of a target market with those of related markets, as well as with expectations regarding various fundamental economic indicators affecting each target market.

Despite these early efforts at performing intermarket analysis that went beyond simple ratios of, or differences between, markets or commodity contract months, I was not satisfied with the underlying mathematical rigor used to correlate intermarket data in the Trader program and felt compelled to continue my search for a more robust mathematical tool.

As the forces behind the globalization of the financial markets continued to gain strength, as evidenced by the global stock market crash of October 1987, I was sure that technical analysis was on the verge of a total transformation in scope. I concluded that the interdependencies of the world’s equities, futures, and derivatives markets would necessitate the inclusion of an intermarket perspective, and I was determined to find a more precise way to quantify these intermarket relationships in software. I was particularly desirous of being able to do so from a multi-market perspective in which the software could handle multiple markets simultaneously affecting a given target market.

Subsequently, in the late 1980s, while my wife and I were dealing with severe medical problems that our third son, Lee, had at birth, I continued to investigate and apply various ways to quantify intermarket relationships. While our son underwent several surgeries at Children’s Hospital in Pittsburgh over the following two years, I began experimenting with a mathematical tool called neural networks, which is a form of “artificial intelligence.” I remembered this vaguely from academic material I reviewed while an undergraduate at Carnegie Mellon University in the late 1960s. A professor there, Herbert A. Simon, was an early pioneer in the field of artificial intelligence and its application to decision-making under conditions of uncertainty.

In neural networks I found the right tool for the job! Through my research, I was able to quantify multiple intermarket relationships and find hidden patterns between related markets that were increasingly responsible for price movements in the emerging global economy of the late 1980s.

In 1991, I began licensing my second-generation intermarket analysis trading software program to commodities traders. This program applied neural networks to intermarket data. I named the program VantagePoint Intermarket Analysis Software because I felt that intermarket analysis would afford traders a broader “vantage point” on the markets than could be achieved by analyzing individual markets by themselves. At first VantagePoint only dealt with the 30-year Treasury Bond. The following year I added several currencies.

By the 1990s strategy back-testing had become the backbone of single-market technical analysis software being sold throughout the world. To the huge influx of new traders during the dot com boom (who were just learning the basics of technical analysis through their first exposure to trading software), it must have seemed as if back-testing had always existed in software. These traders didn’t have the faintest clue about the evolution of trading software since the advent of personal computers, which is understandable. But, more importantly, they had little or no appreciation for the growing interdependencies between global markets and the need to incorporate an intermarket perspective into their trading strategies.

CHAPTER 1

TRADING IN A GLOBAL ECONOMY

Change is one of the constants of life. If you’re a long-time trader, it’s been coming at you with increasing speed in the last few decades, totally altering the landscape of the traditional open-outcry auction market that characterized trading since the middle of the 19th century.

The 1970s introduced financial futures contracts on currencies and interest rates for the first time, as well as a new energy market and the ability for U.S. investors to own gold again after a more than 40-year hiatus. Throw in a steep stock market setback and inflationary conditions that propelled prices of commodities, such as soybeans and sugar, to astronomical levels, and investors began to flock to the commodity trading arena in a big way.

The 1980s produced a number of new trading concepts and instruments—cash-settled futures contracts, options on futures, and futures and options based on stock indexes. As inflation cooled, the markets shifted from contracts based primarily on physicals to new offerings based on paper. The advent of personal computers opened up participation in these markets to a new generation of individual traders and, as personal computers advanced, software designed to analyze and trade markets proliferated as more traders turned to technical analysis techniques to help them make their trading decisions.

The 1990s brought the Internet, a quantum leap in global communications that ushered in the global economy and opened up the information world to traders. This set the stage for electronic trading, which culminated in the technology stock “bubble” that took the stock market to unprecedented levels before the “irrational exuberance” of day-traders and others caught up with the market. Right now, personal computers and analytic software continue to undergo significant improvements in speed, performance, and user-friendliness.

The 2000s built on the technological advances of the Internet and personal computers in all areas of business and daily life, perhaps most notably in the trading industry’s shift to electronic trading. Within a short time after contracts became available on electronic platforms, trading volumes set records in currencies, stock indexes, and many other markets as hedge funds, loaded up with bundles of cash needing to be deployed, became dominant market players with which individual traders had to contend and compete. Electronic trading played a big role in changing the face of the financial markets and trading industry as the global economy expanded and various exchanges throughout the world merged with one another or made the transition from membership organizations to publicly owned companies.

ONE CONSTANT REMAINS

Yet, with all the advances in technology and all the resources now available to individual traders, one statistic has remained relatively constant over the years: The overall success rate of individual traders from a profitability standpoint has not improved materially since the days of pit trading. One reason, in my opinion, is that technical analysis has continued to emphasize a market-by-market approach and has not kept pace with structural changes that have occurred in the financial markets related to the emergence of the global economy. Another important reason is that individual traders often lack an adequate understanding of market behavior, dynamics, and the mechanics of trading. As a result, there is an enormous need for education and training, particularly for novice traders who are just getting involved in the global financial markets.

With the speed and extent of data and news now available, mass psychology and market sentiment seem to change daily, if not hourly. Based on the latest tidbit of information—or misinformation—market sentiment abruptly shifts from bullish to bearish and back again. One day a futures market or individual stock is overbought, the next day it is oversold. One day concerns over higher oil prices, due to a threatened hurricane’s effects on oil rigs in the Gulf of Mexico and refineries on the Gulf Coast, or problems in the U.S. mortgage credit markets spreading elsewhere are of paramount importance to traders; the next day these subjects are practically forgotten as traders move on to the next hot button topic.

Just as television viewers hop from one sound bite and one hot topic to the next and switch channels with the touch of a remote control, traders have a difficult time maintaining their focus, discipline, and perspective as they try to make sense of often conflicting information about interest rates, economic growth, inflationary expectations, terrorist threats, hurricane forecasts, employment numbers, and many other day-to-day concerns and influences on the markets. To the novice, these sudden shifts between greed and fear, bullishness and bearishness, optimism and pessimism, hope and resignation, seem to take place with little rhyme or reason.

However, despite what seem like erratic and unexplainable shifts in opinions, patterns of market behavior often repeat themselves over and over again. They can be found within every market at different periods in time and by analyzing various relationships between related markets. The global financial markets now, more often than not, move in concert, driven by common financial, political and economic forces affecting the global economy.

No longer can traders rely solely upon single-market technical analysis methods, which were designed for, and more appropriate to, the relatively independent and less volatile domestic markets of the late 20th century and may have sufficed in a previous period. Intermarket analysis tools that can identify reoccurring patterns within individual financial markets and between related global markets give traders a broadened trading perspective and competitive edge in the 21st century global financial markets.

The increasing interconnectedness between financial markets, even seemingly distantly related, in the global economy and the growing interdependencies among global commodity, futures, debt and equity markets has made intermarket analysis an important and necessary facet of research and market analysis by traders. Because the markets are a financial version of Darwin’s survival of the fittest competition, intermarket analysis tools and methodologies that build and expand upon single-market analysis methods demand serious attention by traders if their involvement in the financial markets is to be profitable and not just a short-lived, costly and painful learning experience.

MARKET EVOLUTION

The emergence of a new era of global electronic communications was heralded by the first transatlantic satellite transmission in 1962 and was greatly expanded by the rapid development of the Internet since the early 1990s. Together with the creation of new currency, interest rate, oil and stock index products in the 1970s and 1980s, the world’s futures and equity markets, previously distinct from one another, have merged into one giant global financial network.

The proliferation of financial futures since the mid-1970s laid the early foundation for the global integration of the financial markets following the decision by the United States to abandon fixed exchange rates in 1971. Those developments have made intermarket analysis a necessary adjunct to the more traditional single-market technical analysis that proliferated following the advent of personal computers in the late 1970s, as volatility in interest and exchange rates, as well as energy prices, created new trading opportunities and risks for speculators and hedgers. This included multinational corporations and the growing number of hedge funds that scour the world’s financial markets for places to put their leveraged capital to work.

In the past, trading was conducted on a local level within separate time zones on individual domestic stock and commodity exchanges. Japanese and other Far East stocks traded primarily in Tokyo or other Asian trading centers. European stocks traded in London and elsewhere in Europe. U.S. stocks traded in New York while domestic and foreign commodities and futures traded primarily in Chicago and New York. With the links between the financial centers of the world established and their influence on each other becoming more evident every day, the melding of the debt, equity, futures, derivative, and options markets throughout the world has continued unabated, most significantly in the global foreign exchange market known widely as the FX or forex market.

As these interrelationships of previously disparate markets have developed and strengthened, exchanges worldwide have been moving at a frenetic pace in the first decade of the 21st century to establish linkages with each other. Hardly a week goes by without some announcement of exchanges merging or acquiring trading partners in other areas of the world, expanding into other market arenas, or launching new electronic trading facilities. In addition, many exchanges have moved from member-owned organizations to for-profit publicly owned corporations in the last few years. It is not an exaggeration to describe these rapid changes among exchanges as a complete revolution in the trading industry, further accelerating the globalization of the financial markets.

BRAVE NEW EXCHANGE WORLD