TECHNICAL ANALYSIS

COURSE
TO INVEST IN THE STOCK STOCK BASIC AND ADVANCED LEVEL

ROCIO ALVAREZ AND JOSE M. FDEZ

STOCK SECRETS
 Content
1. TECHNICAL ANALYSIS: INITIATION
1.1. INTRODUCTION TO TECHNICAL ANALYSIS
1.1.1. THE THEORY OF MASSES

1.1.2. TECHNICAL ANALYSIS VS FUNDAMENTAL ANALYSIS

1.1.3. ADVANTAGES OF TECHNICAL ANALYSIS

1.1.4. TYPES OF STOCK CHARTS

1.1.4.1. Bar Charts

1.1.4.2. Japanese candlestick charts
1.1.5. MAIN COMPONENTS OF A GRAPH

1.1.6. THE VOLUME

1.1.7. STRONG HANDS : THE CRUX OF THE MATTER

1.1.7.1. What are strong hands

1.1.7.2. What is the strategy of strong hands
1.2. THE TENDENCY

1.2.1. WHAT IS A TREND

1.2.2. TYPES OF TRENDS

1.2.3. T HE TIME FRAMES

1.2.4. DOW 'S THEORY

1.3. SUPPORTS AND RESISTANCES

1.3.1. WHAT IS A SUPPORT?

1.3.1.1. Drilling a support

1.3.1.2. Condition to consider that a support has been perforated
1.3.1.3. What is a pullback and its importance in supports
1.3.2. WHAT IS A RESISTANCE?

1.3.2.1. Piercing a resistance

1.3.2.2. Condition to consider that a resistance has been
perforated
1.3.2.3. The importance of pullback in resistances
1.3.3. H OW TO FIND SUPPORTS AND RESISTANCES

1.3.4. DOUBLE ROOF

1.3.5. DOUBLE FLOOR

 1.4. DIRECTIONS AND CHANNELS

1.4.1. DIRECTIONS OR TREND LINES

1.4.1.1. Bearish trend

1.4.1.2. Bullish direction
1.4.2. ANAL CHANNELS

1.4.2.1. Bullish channel

1.4.2.2. Bearish channel
1.4.2.3. Side channel
1.5. THE IMPORTANCE OF SOCKS

1.5.1. WHAT IS A MOVING AVERAGE

1.5.2. TYPES OF MOVING AVERAGES

1.5.3. USING AVERAGES AS SUPPORTS AND RESISTANCES

1.5.4. SPECULATING WITH STOCKINGS

1.5.4.1. Trade on the intersections between the price and the moving
average
1.5.4.2. Trading at the intersections of two moving averages
1.5.5. BOLLINGER BANDS
1.6. PROFIT AND LOSS STOPS

1.6.1. THE MOST COMPLICATED THING ABOUT A TRADING SYSTEM

1.6.2. WHAT ARE STOPS

1.6.3. TYPES OF STOPS

1.6.4. WHY DOES STOP MANAGEMENT CAUSE SO MANY HEADACHES ?

1.6.5. FIXED S TOP OR DYNAMIC STOP

1.6.6. MANUAL DYNAMIC S TOP

2. TECHNICAL ANALYSIS: ADVANCED LEVEL

2.1. HOLES OR GAPS

2.1.1. WHAT IS A GAP AND WHY DOES IT OCCUR?

2.1.2. TYPES OF HOLES

2.1.2.1. GAPS NORMAL

2.1.2.2. GAPS EXHAUST

2.1.2.3. GAPS CONTINUATION

2.1.2.4. GAPS OF EXHAUSTION

2.1.3. HOW TO DISTINGUISH A CONTINUATION GAP FROM AN EXHAUSTION GAP

2.2. FIGURES OF TURN OR CHANGE OF TREND

2.2.1. IMPORTANCE OF DETECTING A CHANGE IN TREND

2.2.2. ISLANDS OR ISLETS

2.2.3. R EVERSAL DAY

2.2.4. SHOULDER - HEAD - SHOULDER

2.2.5. SHOULDER - HEAD - INVERTED SHOULDER

2.2.6. ROUNDED CEILINGS AND FLOORS

2.2.7. TREND CHANGE IN THREE DAYS

2.3. CONTINUATION FIGURES

2.3.1. T RIANGLES

2.3.1.1. Triangle symmetrical

2.3.1.2. Triangle upward
2.3.1.3. Triangle falling
2.3.2. FLAGS AND PENNANTS

2.3.3. DIAMOND
2.4. FIBONACCI TOOLS
2.4.1. WHO WAS FIBONACCI ?
2.4.2. F IBONACCI RETRACEMENTS

2.4.3. THE FIBONACCI FAN

2.4.4. F IBONACCI ARCS

2.4.5. F IBONACCI EXTENSIONS

2.4.6. THE FIBONACCI SPIRAL

2.4.7. THE FIBONACCI TIME ZONES

2.4.8. COMMON MISTAKES TO AVOID WHEN APPLYING FIBONACCI RETRACEMENTS

2.5. INDICATORS
2.5.1. WHAT IS A MOMENTUM INDICATOR?

2.5.2. TYPES OF INDICATORS

Trend followers
Oscillators
2.5.3. OVERBOUGHT AND OVERSOLD

2.5.4. DIVERGENCES
2.5.5. DEGREE OF RELIABILITY OF A DIVERGENCE

2.5.6. DIVERGENCE FAILURE

2.6. MACD
2.6.1. WHAT IS THE MACD AND HOW IS IT DRAWN?

2.6.2. TRADITIONAL WAY OF TRADING WITH THE MACD

2.6.3. INTERPRETING THE SIGNALS THAT THE MACD SHOWS US

2.6.4. COMBINING A WEEKLY CHART WITH A MONTHLY CHART

2.6.5. DIVERGENCES WITH THE MACD

2.6.6. WARNING SIGNS ON THE MACD
2.6.7. DETECTING LATERAL RANGES WITH THE MACD
2.7. STOCHASTIC
2.7.1. WHAT IS STOCHASTIC AND HOW IS IT DRAWN?

2.7.2. OR TRADING WITH THE STOCHASTIC

2.7.3. DIVERGENCES
2.7.4. STOCHASTIC WARNING SIGNS
2.7.5. COMBINING STOCHASTIC WITH MACD
2.8. RSI
2.8.1. WHAT IS THE RSI AND HOW IS IT DRAWN?

2.8.2. DIVERGENCES
2.8.3. COMBINING THE RSI WITH THE MACD
2.9. MORE INDICATORS

2.9.1. THE CCI

2.9.1.1. What is the CCI
2.9.1.2. How to operate with the CCI
2.9.1.3. The ICC's divergences
2.9.2. THE DIRECTIONAL MOVEMENT
2.9.2.1. Introduction
2.9.2.2. What is Directional Movement
2.9.2.3. Interpretation of the +DI and -DI crossings
2.9.2.4. The ADX
2.9.2.5. Operating with directional movement
2.9.3. ACCUMULATION -D ISTRIBUTION

2.9.3.1. Introduction
2.9.3.2. What is the Accumulation Distribution oscillator
2.9.3.3. Interpreting the Accumulation-Distribution Oscillator
2.9.4. MOMENTUM OSCILLATOR OR M OMENTUM
2.9.5. TRIX
2.9.6. ATR ( AVERAGE TRUE RANGE )
Using the ATR to define the Stoploss
2.9.7. PARABOLIC SAR
 Technical Analysis: Getting Started
1.1. Introduction to Technical Analysis
Technical analysis is a set of techniques that attempt to predict the future
movements of a value, index, raw material, currency, etc., based on its price
history, taking into account a multitude of stock market parameters, including
which are the trading volume and price movements.
Technical analysis is supported by the construction of graphs, which are also
called charts , with the historical evolution of prices, and where a series of tools
will be drawn and incorporated, such as averages, indicators, oscillators and
where the formation will be analyzed. or detection of certain figures or
formations that will give us a clue as to what could happen next.
Here you have an example of a technical analysis carried out with
ProrealTime on the Dow Jones Industrial.
1.1.1. The theory of masses
After having seen the definition of Technical Analysis, we can ask ourselves
why we are going to guess what is going to happen in the near future by
studying the history of what has happened previously.
 The answer is very simple, and comes from the theory of crowds , and is that
since technical analysis is so widespread among all investors, it can be shown
that psychologically in certain circumstances we tend to act all or almost all in
the same way. , and this is what makes this tool work.
However, we must never forget that everything in the world of the Stock
Market is reduced to a probabilistic question, we will never have absolute
certainty when predicting a future movement, but with technical analysis we will
be able to put the probabilities of our part, so that we can make operations with a
success rate of 70-80%, and this is one of the reasons why this is not a game of
chance, because here we can achieve high probabilities of success.
1.1.2. Technical Analysis vs Fundamental Analysis
Technical analysis is based on the premise that everything is included in the
graph of the price and traded volume, that is, it ignores economic data about the
asset that Fundamental Analysis does use, such as its GDP, results, profit per
share. (BPa), even ignores rumors and specific news, arguing that everything
follows temporary graphic patterns. This is because it assumes, with great
discretion from my point of view, that all this data has already been taken into
account by large investors when positioning themselves.
What usually happens very often in the markets is that they usually take
advantage of certain days in which an economic statement is going to be made,
such as a press conference by the president of the FED, or days in which a
company publishes its results. , to manipulate the price, that is, to make massive
purchases or sales with the aim of hooking small investors and then taking the
action to where they intended.
If you like the economic press, you will be tired of hearing how every day
there is an explanation for why a certain action has fallen by a certain
percentage: that if there is a rumor that the division of a certain country is going
to be sold, that if this, That if the other, there is always something to justify the
movements of the price.
Whoever controls the technical analysis will realize that all this is read on the
chart itself, without needing to listen to any news. In fact, if it serves as an
example, many of the best-known traders, such as Al Brooks, the creator or
promoter of Price Action, explain in his book how he prepares his trading room
at home, closing the blinds to isolate himself as much as possible. possible from
the environment, he never watches television to listen to economic news, neither
micro nor macro...
A very important issue to keep in mind in technical analysis is that it works
reasonably well in those markets that have a lot of liquidity, and this is because
in markets with little liquidity, these can be easily manipulated, and
consequently it would not be followed. the law of mass behavior, which is what
technical analysis is based on. For this reason, you have to be careful with Small
Cap stocks.
This does not mean that technical analysis will not work in this type of
markets, but that it will simply have a lower probability of success, since in
financial markets we always have to talk about probability, greater or lesser, but
probability nonetheless. after.
 Is technical analysis 100% reliable? •
Absolutely not, because as we mentioned before, in the world of investments
we always talk about probabilities, and precisely technical analysis aims to
increase the probability of success in each investment to be made, but in no way
is it a method of sure success. If that were the case, what would people do
working hard in companies, putting up with their bosses, with such rigid
schedules? Everyone would be making lots of money. If this were so,
furthermore, there would be no possibility of a market, since for someone to
win, others must lose, due to the law of supply and demand.
In this sense, technical analysis is a very powerful tool that allows you to
develop a trading system that increases your chances of success. It must be taken
into account that a good trading system has a probability of success through the
application of technical analysis of 60 70%.
Don't you think this is a good system? I assure you that with a correct
stoploss management technique and letting the trend continue once we are in
favor of the trend within an asset, and with correct capital management, people
can become rich perfectly with this level of probability of success.
This is so if with this probability of success, in winning operations we obtain
more money than we lose in operations that go wrong.
Is Technical Analysis a prophecy?
One of the main criticisms made of technical analysis is that it is a technique
without any basis, that it works because many people believe in it and use it.
This criticism assumes that, for example, the supports do not really exist, but are
an invention of the people who created technical analysis and if they work it is
because many people have believed it and buy in the areas where the price is
supposed to go. to bounce, the supports. All these people buying at that level
make the supports work.
The point is that, although it is possible that in its beginnings technical
analysis was a lie, it is currently followed by millions of investors, not only
individuals but also large institutions, which is why it has become a mass movement.
, and as such, why not follow them?
This is precisely what makes technical analysis so powerful, and anyone who
is agnostic about it should study a few charts and draw a couple of resistances
and supports, and they will see with what millimetric precision they are met. It's
really spectacular.
Technical and fundamental analysis are fully compatible…
 In this world of the Stock Market there is a true pitched battle between the
followers of technical analysis and the followers of fundamental analysis, and
that is so, because the vast majority use one of them and deny the other
completely, and that is so because of the definition of each of the analyzes.
Although I am a follower of technical analysis and I do not use the data that
fundamental analysis provides me at all, this does not mean that fundamental
analysis is worthless. In fact, there are many people who make money with
fundamental analysis, just as they do with technical analysis. Therefore, we
should stay with the fact that both techniques are equally valid.
Surely there will also be investors who combine both models and are
successful, getting the best out of each of them. I have to say that is not my case.
Here we can talk again about time frames, because as is obvious, fundamental
analysis is not going to be of any use to a trader who operates intraday.
1.1.3. Advantages of technical analysis
One of the great advantages that technical analysis offers is that it can be
applied to any liquid market, regardless of the type of financial product we use:
stocks, indices, futures, raw materials, Forex...
There is a very important premise in technical analysis and that is that it is
considered that everything, absolutely everything, is discounted in the price. And
what does this mean? It means that any rumor there is, that this company is
going to absorb that other, that a high-level fraud is being investigated in that
company, that there is going to be a war between several countries, etc., etc.,
everything That gradually influences the price, so that when the news is given
we will not see big movements, because it has already been discounted
previously.
This has the great advantage that we only have to manage the graphics with
the appropriate tools and turn a deaf ear to the news that constantly bombards us,
and I think that the moment in which I created this course, in the midst of a
financial crisis like no other For many years, he is ideal to realize this.
For example, suppose that in two days there is going to be a European
summit to discuss whether to grant a new bailout to Greece. When the day
comes, regardless of what happens, there may be some movement on the same
day, but the next day everything will return to the path we had until the day
before the news.
If you want to see an example that shows what we have just explained, we
can see it very clearly in the behavior of the stock markets around the world on
that fateful September 11, 2011.
I want you to be left with just a few glimpses of what happened that day,
because when we are done with the technical analysis and you have the
necessary tools, we will return to this graph to see it in more detail.
 The stock market fell sharply on September 11, 2011, as we all know, but
what very few people know is that the alarms had already gone off that the
market was going to fall, and in fact it began to fall sharply two weeks before the
attack.
Look at the blue line on the graph: it is the level of the Dow Jones Industrial
before the day of the attack, and observe how in approximately one month, it
recovered the level it had before, and that it was the most savage attack that
remembers the American people, and all the pre-war atmosphere that it
generated at the time.
Therefore, yes, the stock market moved, but in a short time it returned to
normal, which is why it is important that we do not panic, because strong hands
take advantage of it.
We will also see later how with technical analysis we were able to predict the
falls in the stock markets at the beginning of the great financial crisis that began
in the second half of 2008.
What is going to be our methodology to master Technical
Analysis?
The philosophy of this course is to avoid theory as much as possible, seeing
only the minimum necessary to be able to begin to interpret the large number of
graphic examples it contains, as well as to acquire the mastery to be able to
perform the exercises that are proposed to move on to the
following topics.
 A very common exercise will be to show you graphs on which we will ask
you questions about technical analysis, to identify figures, trends, interpret
indicators, oscillators, and a host of interesting tools, and then you will be shown
the solution. Of course, in the consultation section you can ask all your
questions, either about the exercises or the contents or any other related topic not
covered in the course.
You can even propose exercises on the value graphs updated on the day you
are developing the course, which will allow you to put into practice the
knowledge acquired from the first moment.
Now that we are about to delve into technical analysis, if this is the first
contact you have with it, at first the graph will seem somewhat meaningless, and
it will be impossible for you to interpret, much less be able to find a good
opportunity to invest. .
A very good simile is when a couple goes to the gynecologist so that the
future mother can have an ultrasound. The gynecologist says: Look, here it is,
this is the heart, this is the head, the legs, the spine, but the couple, who does not
know how to interpret an ultrasound because no one has taught them, the only
thing they are able to see They are a lot of stains of different shades, but nothing
baby.
Well, the same with technical analysis, for someone who has not studied it
and put it into practice it will be like an ultrasound for future parents.
1.1.4. Types of stock charts
There are many types of charts in technical analysis: line charts, bar charts,
point and figure charts, candlestick charts, etc., but we are only going to focus
on the two most widespread and used due to the amount of information. that
they provide and for their simplicity when interpreting them: bar charts and
candlesticks.

.1.4.1. Bar Charts

The information that each bar will provide us is the following:
• Opening price
• Closing price
• Maximum price
• Minimal price
All this information, depending on the time frame that we are using in our
chart, will refer to that period, that is, if we are on a daily chart, each bar will
give us the opening, closing, maximum and minimum prices of each day; If
we use a weekly chart, each bar will give the opening, closing, maximum and
minimum prices of each week, and so on with each time frame that we use.
We said before that this type of graph gives us a lot of information, since
in each bar we have four very important pieces of information.
Once we understand that the bars give information for a period that will
depend on the time frame, we can see what each of this data means, and to
understand it better, we are going to define each of them assuming that we
work with a graph diary.
Opening price : It is the price with which a certain security begins the day,
and it does not have to coincide with the price at which said security ended up
closing on the previous day.
Closing price : It is the last price of the day, and it is what will mark the
percentage of profit or loss with respect to the closing price of the previous
day.
Maximum price : it is the highest price level that has been reached
throughout the day.
Minimum price : it is the lowest price level that has been reached
throughout the day.
In these definitions we are talking about values and prices, but this is valid
for any product, that is, we can talk about an index such as the Ibex 35, but in
this case we will talk about points instead of euros.
In the case of a weekly chart, the opening price will be the starting price
on Monday, the closing price will be the last price at the end of the trading
day on Friday, and the high and low will be the extreme levels reached during
all week.
In the same bar we have to be able to enter these four data, and to do this
we do it in the following way: A vertical line is drawn that goes from the
minimum price to the maximum price, and then a small horizontal segment is
drawn towards the left side at the opening price quote level, and another small
segment towards the right side at the closing price quote level.

Maximum
-•

------ Closing

Opening

Depending on the position of the opening and closing relative to each

other and with respect to the maximum and minimum, more or less
characteristic bars are formed.
In the following graph we can see some of the most representative ones:
 1. Bullish bar : the opening price is below the closing price, so the
value increases in price at the end of the day.
2. Bearish bar : the opening price is higher than the closing price, so the value
decreases in price at the end of the day.
3. Dodji : When the opening and closing prices coincide. These types of
bars are quite important when they occur in certain areas of the
chart, as they represent a balance between the buying and selling
side.
4. Opening at minimums and closing at maximums : It is the most bullish bar
there is, since it opens the day at the minimum and ends up closing
at the maximum.
 5. Opening at highs and closing at lows : It is the most bearish bar, as it
opens the day at the high and closes at the low.
6. Opening and closing at the maximum : It is a special case of dodji,
and usually indicates that the market is going to rise, because
although the bears have managed to lower the price to the minimum,
finally the buyers win the battle and recover everything lost by
closing at the maximum.
7. Opening and closing at the low : Quite the opposite of bar 6; It opens
at a price and after the price rises to the maximum zone, the sellers
win the battle and make it fall back to the minimum.
8. Opening at highs : It is a bearish candle with the only peculiarity that
the highest price of the day coincides with the opening price.
9. Opening at lows : It is a bullish candle with the only peculiarity that
the lowest price of the day coincides with the opening price.
Here is an example of a bar chart in a daily frame, so each bar refers to one
day.

.1.4.2. Japanese candlestick charts

The data displayed is exactly the same as in bar charts, and the only thing
that changes is the visual appearance. With candles, instead of drawing a
vertical line from the minimum price to the maximum, now a rectangle is
drawn between the opening price and the closing price, and at the ends of the
rectangle two vertical sections are drawn, one up to the maximum price level
reached in the session and another below to the minimum price level reached
in said session. These sections that protrude above and below the rectangle
are called shadows, and the rectangle is called the body.
To know which part of the body is the opening price and which is the
closing price, the criterion is followed that the body is white when the closing
price is above the opening price, that is, if the candle is bullish, and in the
event that the candle is bearish (closing price below the opening price) the
body is colored black.

As you can see, the information that the bars and the candles give us is
exactly the same, and it is simply a matter of choosing one or another
representation, with which one is most comfortable. Perhaps for a long time
the most widespread chart has been that of Japanese candles, because as we
will see in another chapter dedicated especially to Japanese candles, when we
look for patterns it will be visually easier to achieve with candles than with
bars.
Most computer packages offer among their options the choice of the type
of representation desired, which includes bars and candles. In fact, by default,
the Visual Chart will show you the bar chart, and you can change it to
candlesticks and, even by creating a template, make it automatically change to
a candlestick chart when the template is applied.
Below we show you the same 9 previous bars representing candles. The
explanation is exactly the same by changing the name of bar to candle.

This is the most common form of representation in candlestick charts, with

white color for bullish candles and black color for bearish candles. However,
this can be modified and choose the colors that we like the most or that are
clearest to us in our software.
For example, it is also quite typical for bullish candles to be colored green
and bearish ones to be colored red.
All the examples and exercises that we see during the course will be in
Japanese candlestick charts, because it is the type of chart that I usually use,
and because practically all the analyzes that you can find out there will be
represented with Japanese candlesticks.
Here you have the same example that we had in bars but in green and red
candles:
When we get to the section dedicated to Japanese candles you will be able to
see how there are a series of patterns or candle formations that can give us
very useful information about how the market is going to behave.
1.1.5. Main components of a graph
A graph or chart is made up of two main elements, which are the price or
quote and the trading volume, although we will see that we can include many
more.
On the X axis we will always have time, that is, days, weeks, months, hours,
minutes, depending on the time frame we are using. In addition, with
practically any software package you can zoom in on the time space that you
want to see in more detail.

If we want to see this graph in a little more detail, we can zoom in:
If we want to see a specific period of time in detail, we zoom in on that period
and that part of the graph will appear in much more detail, taking up the entire
screen.
You can see this effect in the following graph.
 On the Y axis we will have the quote, which depending on the type of
product can be one thing or another. For example, for stocks the Y axis will
be the quote price, which can come in one currency or another, depending on
which market it belongs to. In the case of an index, such as the Ibex 35, the
Dow Jones or the Eurostoxx, on the Y axis we will have the price in points.
As a note, tell you that it is also possible to represent the relationship
between several values or indices, and in that case on the Y axis we will have
the value of that relationship, which will not have units, because it is a
relationship or comparison.
Y axis scale (price)
With the Y axis, the axis on which we represent the price, we have the
option of choosing different scales, depending on what we want to give more
importance to. There are several types of scales, but the most common are the
arithmetic scale and the logarithmic scale . The arithmetic scale is the one that
comes by default in the graphs, and in it, we can see how the parallel
horizontal lines that we have in the graph for each price level are always at
the same distance.
Consequently, two candles that have the same size on the chart will have
the same price difference.
 In this graph we can see an example of an arithmetic scale, also called a
linear scale. It is perfectly observed how the distance between each division
of the price always remains constant. In this case the distance between two
parallel price lines is always €5.
The percentages that appear in the graph correspond to the percentage that
the price varies from one division to another. Thus, for example, if the price
increases from €10 to €15, the revaluation percentage will be 50%, if the price
increases from €15 to €20, the variation is still €5, but the revaluation
percentage is lower, specifically 33.33% (in the graph we have rounded the
percentages so as not to put decimals), and so on. At the high end, an increase
from €45 to €50, which is still an increase of €5, the percentage of revaluation
is only 11.11%.
Why are we commenting on this? Because that is the reason why we
prefer to use a logarithmic scale: When a person decides to invest in a
security, what they are looking for is to obtain a return, and that return will be
measured as a percentage of the money they have invested. Therefore, if we
use an arithmetic or linear scale, the sizes of the candles will be defined
directly by the price variation in absolute value, that is, in this type of scale
we will not be able to distinguish between a candle that rises from €1 to €2
from another candle that goes from €100 to €101; Both candles will appear on
the chart with the same size, that is, with the same relevance, when one of
them represents a revaluation of 100% and the other of 1%.
With the logarithmic scale, the distance between parallel lines is not the
same distance, since this scale works by percentage of variation. Thus, for
example, an increase from €10 to €20 will measure the same on a logarithmic
scale as an increase from €100 to €200, because the percentage of variation in
both cases is the same: the price has doubled.
The logarithmic scale is very useful especially for the long term, and it
also offers us the advantage that it depends on the percentages of increase or
decrease, and when we invest we do so to achieve a percentage of profit.
The arithmetic scale can betray us, because if we have a long-term graph
where the quote price ranges from €2 to €400, for example, it is clear that an
increase from €300 to €400 is going to seem like a big increase, but An
increase from €2 to €3 on the graph will seem like a pittance to us, in
comparison, because we have an arithmetic scale. However, if we had a
logarithmic scale, the variation from €2 to €3 would seem very important,
because as a percentage it is.

Personally, I usually use a logarithmic scale, because when working with

weekly charts, there are usually large variations in the price, and it allows me
to see perfectly where large variations in the price occur.
1.1.6. The volume
Normally, below the quote graph we will have the trading volume , which
is nothing more than the amount of securities that are being exchanged in the
market. The volume reading must always be linked to the price, because we
must interpret them together to draw conclusions about the behavior of the
current and future market.
Usually the volume is represented with a bar graph, and there is even the
option to choose the color of the bars depending on whether the buying
volume has been greater or less than the selling volume.

This example shows the quote graph and below it the volume. If you look
closely, in the volume graph, in addition to the bars, a blue curve appears.
This curve is a weighted moving average (we will see it in the chapter
dedicated to averages) and we use it to compare each volume bar with it, so
that we can know if the volume of a certain day has been exaggeratedly
higher than the volume from previous days.
When we get to the chapter in which we will design a trading system, we
will take into account the evaluation of volume at all times.
With the price and volume we have the basic configuration, and from here
we can add an endless number of technical tools, indicators, oscillators to the
graph, to restrict market entries as much as we want. Obviously a balance
must be reached, because if we are very conservative and use 20 indicators
and 5 averages and hope that a combination of all of them will occur to have a
good market entry signal, we will never enter.
This is where one of the difficulties lies when defining our trading system,
achieving a balanced system, and for this we will look at each of the tools to
see what each of them gives us and what they are usually used for.
The elements that we incorporate into our price and volume graph may be
incorporated into parallel graphs below the volume graph, or even some of
them superimposed on the same quote graph, such as the drawing of the
technical formations that we detect in the graphic.
The importance of volume
Volume is a very important tool and should be part of the conditions that
we ask of a value so that our trading system gives us the OK to take positions.
However, it has always been questioned and criticized by many traders,
who do not consider it when making decisions.
A typical example of traders who do not usually take volume into account
are those who use Price Action as an operating system, that is, those who
exclusively follow the price evolution. One of the most famous traders who
have relaunched this operation is Al Brooks, and it is usually a very followed
type of operation, especially in futures trading.
In particular, I am of the opinion that volume is essential for our
operations to have a greater probability of success. I use it as one more
condition to add to the rest of the parameters of my system, and it normally
serves as confirmation.
But why can volume be so useful to us?
We should all know that the most complicated thing in the technical
analysis of a value is knowing how a stock is going to behave when it
approaches a support or resistance zone. If the bounces at these levels were
perfect, we would all make money on the bounces at supports and resistances,
but the reality is quite different from this situation.
We are always going to encounter traps that will make our stops jump, and
what at first seems like a resistance break ends up ending and falling again
and even stronger than it did before.
Through the volume, we can distinguish at these points if the breaks are
going to be good or not. We always look for long-range movements, and we
discard operations if we are going to be able to get 10-15% at most. In many
cases the difference is made by volume.
For this reason we add it to our trading system, even though we will miss
operations that are ultimately positive, but we will have the advantage that we
will get rid of many more that are not.
Volume is also a key factor when a change of stage occurs in the chart,
such as when the resistance of an accumulation phase is broken to enter a
bullish phase. If the volume does not accompany, it is very likely that it is a
false breakout or that the value is going to pull back towards the recently
broken resistance.
Don't worry if we talk about concepts that you don't know, such as
supports and resistances, pullback, stops, etc. We will see all of them soon
and with the detail they deserve.
 Here we can see an example of an accumulation phase change to a bullish
phase 2. After the price breaks the resistance in red. Observe the great
increase in volume that occurred at that moment, which gave consistency to
the movement. In fact, the share went from €5.60 to €12.12, that is, it
practically doubled its value in just under a year. What a profitability!
To have a clear reference of what a considerable increase in volume is, in
the volume graph we incorporate a moving average that gives us the reference
of the volume that has occurred in previous weeks, so if the volume bar is
greater than the average then the volume has increased, especially if the
volume bar rises above the average by at least the amount below it, that is, the
volume doubles the average volume of the previous weeks.
In the example we have seen, the volume in the break week was triple that
of the weighted average of the previous 10 weeks.
 In this other example you can see a possible entry (green arrow) How
was the volume at that time? Above the weighted average of the volume but
not at all there has been a considerable increase and, consequently, if we had
entered, and the people who follow a similar operation but without the
volume would have done so, you see where the action: to hell.
These types of situations are what we filter with the volume, so as not to
have more scares than normal.
We will take the volume into account for purchase operations. When we
go short (downward operations) there is no need to take it into consideration,
because just as for a value to rise the volume needs to accompany it, for short
operations this requirement is not essential, since it is much easier than a
value goes down, and for this to happen such a large increase in volume is not
needed for the fall to have a significant impact.
 Here you have an example of the short sale entry that our system gave us
in the months before the outbreak of the financial crisis that we are
experiencing, where you can look at the volume; It is even smaller than the
average of the previous 10 weeks, and yet you see where the value went, from
€13.66 to the €4 area, that is, it divided its value by more than three in a year
and a half, and no increase in volume at the time of the support break (green
line).
In summary, personally I always consider volume as a condition added to
the filters of my trading system, and this gives me more security in my
operations, even if I pass up others that finally turned out good, but even so
overall I earn much more money taking it into account. account and passing
through operations that do not meet the volume criterion.
Even so, it is clear that there will be operations that we will tear our hair
out for having overlooked them because the volume condition was not met,
meeting the rest of the filters, but we have to have psychology, and think
about those operations that we have avoided thanks to the volume And,
furthermore, losing is not the same as not winning.
1.1.7. Strong hands: the crux of the matter
These two words that appear so much in many stock market analyzes and
comments have a very relevant importance, because if we manage to
understand their meaning and operation, we will have a better chance of being
on the right side of the market at all times.

.1.7.1. What are strong hands

The strong hands, also called lions, sharks and other carnivorous
adjectives, are the groups of people and entities that move enough capital to
be able to take the market wherever they want. Among these groups are large
financial entities that move the money of all their clients, through, for
example, their investment funds.
Depending on the liquidity of the asset, this will be more or less easy for
them. For example, investing in a blue chip is not the same as investing in a
chicarro.
When we carry out a study of an asset, we sometimes wonder what caused
a rise during a continuous period of large declines, or why a value that had
been dormant for a long time suddenly wakes up and rises like foam. If the
movement has a long run, the answer is always the same: the strong hands
have entered.
It is essential to try to find out at all times whether the strong hands are
bullish or bearish, to try to operate in the same way, and not become one of
their victims, that is, we do not want to be gazelles, but lions, as our friend
Mr. Carpathians would say. .

.1.7.2. What is the strategy of strong hands

Let's imagine that we are in a period of lateral trend, where the market has
not yet decided whether it is going to go up or down, and the strong hands
want to turn the market bullish, buying cheap to later obtain some juicy
profits after the rise of the asset. To do this, taking advantage of the fact that
the price is close to the resistance of the bullish channel, and on many
occasions taking advantage of good economic news about the action, such as
better than expected profits, introducing a large amount of money by
positioning long positions in said action. .
During the following days or weeks they continue to inject money so that
the stock continues to rise, trying to convince the weak hands, that is, us, that
it is a good opportunity, also backed by good economic data. Then, we get
into the action, so that, little by little, the strong hands stop buying, even
selling a small part of the shares that they had previously acquired, in such a
way that the continuation of the rise is carried out weak hands, not strong
ones. In this way, the price continues to rise, and the strong hands rub their
hands, seeing the profits they will have in the short term, at the expense of the
capital of the herd of gazelles.
When weak hands perceive that the price is already too high, or strong
hands decide that the price is not going to rise much further, then the latter
sell abruptly, possibly taking advantage of the break of a support or some
technical return signal, so that the weak hands are trapped, what's more, even
during the decline, the weak hands will continue to buy because the price will
be cheaper than in previous sessions, so the carnage will be even greater.
In this way, the strong hands will have won a lot of money, while of the
weak hands, only those who have realized from the beginning of the
movement, both up and down, will obtain benefits, that is, those gazelles that
have seen the movement will be saved. the trail of the lions. Everyone else
will have lost their money.
We can find a simile in the animal world to this strategic movement, and it
would be the moment in which cattle have to cross a river infested with
crocodiles because they need to cross to the other bank in search of new
pastures. Only the smartest survive, those who swim best, the fastest and
strongest.
 1.2. The tendency
1.2.1. What is a trend
The movements that occur in the stock markets are cyclical, with
continuous ups and downs, but with sufficient insight, it can be observed that
any market always follows a main trend, understanding as a trend what its
name indicates, That is, where the market tends to go, up, down, or is it
stopped or stagnant.
Everything in technical analysis begins with trends, and it will be essential
to know how to identify at all times what the general trend of a market, value,
index, or whatever it is that we are analyzing is.
1.2.2. Types of trends
In the graphs we are going to have to identify what type of trend a value is
in at the time we want to study, and to do so, said trend can be of three types:

Much of the time markets tend to be sideways, and when this

sidewaysness ends and a trend begins, opportunities to operate successfully
appear.
If there is no trend or if the trend is weak, the price will behave erratically
and the trading systems will give a lot of wrong signals. Right now I prefer to
be out of the market, although there are non-trend systems that work quite
well, but the problem is that with the high degree of chaos that exists, it is
quite difficult to know when this behavior is going to end. That's why I prefer
to trade only when there is a perfectly defined and strong trend.
I tell you this because when I started trading on the stock market and
learned to use technical analysis, when I saw a value in a lateral trend, where
the price remained perfectly channeled between two lines, the lower one and
the upper one, I thought that everything was a piece of cake, that What I had
to look for was precisely values in a trend or lateral range and wait for the
price to fall to the lower line to buy and then wait for it to reach the upper line
and sell, which would easily obtain a profit equal to the distance between the
bottom and top lines. I have had quite a few setbacks trading this way,
because right after I bought it, the price began to break the line and go out of
the lateral range and start a downward stretch.
That is why my advice is that even if you are tempted to operate in a
lateral trend, do not do it, and wait for it to break and we see a confirmation of
that break.
Here is an example of what can happen if we operate in a lateral range.

Grifols remained in a lateral range for three months, and at the end of
October, when the price once again approached the lower line of the range,
we decided that since it has been behaving the same for three months, it could
be a good opportunity to buy in the 12 zone. €5 (see green arrow that marks
the purchase) and wait for it to touch the top line on the
area of €13.6 and earning €1.6 per share, which represents a profitability
without counting commissions of 8.8% and in a very short space of time,
because if you look at the graph there have been rebounds from the bottom
line to the highest in five days, and obtaining 8.8% profitability in one week is
not achieved just like that.
Now look what happened after our purchase, the price quickly turned
around, pierced the lower line and in less than a month fell below €10.5.
 We will see during the course that these lines have names, as well as the
rest of the indicators that appear on the graph. But at the end of everything
you will understand that all the tools that technical analysis provides us have
the objective of trying to find when trend changes can occur in the markets
and being able to take advantage of the right moment to invest.
I would like you to keep a phrase that you should carry with you whenever
you operate on the stock market: “ The trend is your friend ”, which means
that you will have a much better chance of success in your operations if you
do it in the same direction that it tells you. the trend, that is, if the trend is
bullish you should buy and if the trend is bearish you should sell.
It may seem very basic, but it is the quiz of the question, and in fact, I am
going to give you an example that will surely sound familiar to you and that
implicitly explains the importance of following the trend.
Does that sound like buying Gamesa because it's overpriced? I'm sure you
all know someone who has invested based on this argument: since it has
already fallen a lot and the price is low, now I can buy cheap and it will go up.
The phrase “You always win in the long term” is true but with an important

qualification: “In the very long term you always win.”

The fall of a value may never stop, as happened with the “dot coms” at the
time: everyone invested in these securities linked to the Internet between 1997
and 2001, and in a matter of a year they disappeared. It was what was known
as the dot-com bubble .
Most of these companies belonged to the Nasdaq index, which together
with the S&P500 and the Dow Jones are the three main American indices.
These indices are, roughly speaking, like the Ibex 35 in Spain. In the specific
case of the Nasdaq, it is made up of technological values.
Well, in March 2000 the Nasdaq was close to 5,000 points (point 1 on the
graph), given the euphoria that existed at that time for this type of companies,
and in a very short time it went to trading at 3,000 points, and in October In
2002, its value was 800 points (point 2 on the graph), reaching values similar
to those in 1996. That is to say, in less than two years the index fell by 83%,
and with it, obviously all or at least many of the companies that belonged to
it.
This fact affected all world stock markets, including the Spanish one, of
course. Here you can see the graph of the Ibex 35 in the same period of time:

And what does all this have to do with the trend?

Well, if we analyze the graphs at that time, we would have observed that
six months after reaching highs, all the alarms of a change in trend went off
and the people who had bought shares in this type of company had to have
sold, and yet there were many people who did not sell, and others who also
bought because the prices were very attractive.
You have to see yourself in the situation of being able to buy a security
that is now worth 83% less than a year ago; It seems like a real bargain, but
we would be playing against the trend.
With the bursting of the dot-com bubble there were many people who lost
all their money, because many of the companies even disappeared.
With trends, things get a little complicated, because like everything, there
is not only black and white, but there are countless intermediate tones. Well,
the same thing happens with trends, and to understand it well, we are going to
explain what time frames are in technical analysis, because we will see that
depending on the time frame, the trend can vary and this can confuse us when
making a decision.
1.2.3. The time frames

With the technical analysis we

are going to
have the opportunity to do our studies with different time frames, that is, we
will be able to study daily graphs, weekly, monthly, annual graphs, hourly
graphs, 30 minute, 15 minute, one minute, tick graphs …
And why do we need all those time scales?
It is not that we are going to use all of them, but we must keep in mind that
depending on what type of product we are going to operate in, what our
trading technique is and our prospects when it comes to obtaining profits, we
will use one framework or another.
Let's give several examples to understand it better:
A person who wants to operate with stocks, it is best to use the daily chart
upwards, not hourly or minute charts. Furthermore, if you are a person who is
not in a hurry to make profits, that is, you are a long-term investor, it will be
enough for you to work with weekly or even monthly charts, because you will
not undo the position in a short period of time, for example. which does not
need to be refined much more.
However, a person who wants to buy to sell in a short time, for example in
one or several months, may have to use a daily chart to further refine their
entry into the market.
A person who trades futures will most likely do so intraday, that is, they
enter and exit on the same day, so they will need shorter frames: 15 minutes,
5 minutes, 3 minutes, 1 minute or even ticks.
Therefore, depending on what they are looking for, each person will use
one or the other, and furthermore, once decided, they will not be interested in
seeing other frames, because as we will see later, what in one frame is a
bearish trend in another time frame can be bullish and vice versa, so in the
end our decisions will depend on the framework we use.

This is a weekly chart of Mapfre, where it is clearly seen that the main trend
is bullish, and we highlight one of the cuts in red to see it on the daily chart:
 We can see how on the daily chart the main trend in the marked period
was bearish. Therefore we see how different things look depending on the
time frame we choose to decide when investing.
In the example shown, if we use the weekly chart, if we obey the fact that
the trend is our friend, in the case of trading we should do so by buying, to
follow the movement. However, if we had made the decision from the daily
chart we would never have bought, paying attention to the aforementioned
criteria, since the trend is bearish.
What kind of time frames do we use?
For stock trading we mark the main trend with the weekly chart, and also
in this framework is where we decide that the value is appropriate to enter or
exit. Then, if I want to refine the entry a little more to try to get between 1 and
5% more profit, we take a look at it on the daily chart, but we have already
made the decision on the weekly chart. With stocks we don't use any other
type of time frame, and experience so far tells us that this is the best
combination for consistent long-term profits.
For futures trading we use the intraday, specifically the 15-minute charts
to see the main trend and the 5-minute chart to find the entry or exit moment.
In any case, we forget about futures trading in this course, because
although technical analysis is also used, trading is much more complicated
and risky than with stocks.
1.2.4. The Dow Theory
Charles Henry Dow was a visionary who at the beginning of the 20th
century wrote a series of basic rules to interpret the markets, and a century
later they are still fully in force and constitute the basis of the technical
analysis that we all know.
We owe him, in addition to the theory that bears his name, the prestigious
economic newspaper The Wall Street Journal, and with the purpose of
reflecting the economic health of his country, in 1884 he created, together
with his colleague Edward David Jones, the first stock average. stock
exchanges, with a closing of eleven securities, of which nine were railway
companies and two were manufacturing companies.
In 1887 he created two stock indices again, one made up of the 12 largest
industrial companies, the well-known Dow Jones Industrial Average (DJIA)
(currently made up of the largest number of companies) and another called
Dow Jones Railroad AVerage with 22 railway companies (currently It is
made up of 20 securities from the rail, land and air transportation sector,
which was later renamed the transportation index, Dow Jones Transportation
Average (DJTA).
These two indices are the most used to see the state of the markets
worldwide.
Basic principles of Dow theory
1. The averages discount everything , since it is considered that all the
information that the operators have is already discounted in the
averages. For this reason nothing else is needed, and stockings are
the main tool as they summarize all the others.
Later we will talk at length about stockings, as they are essential
when looking for trends.
2. The market has three trends: the primary or main, the secondary and
the minor. The primary or main is the long-term trend, the secondary
corresponds to the corrective rebounds that occur against the main
trend, and the minor corresponds to daily or intraday movements.
3. The main trend has three phases: accumulation phase, intermediate or trend
following phase and distribution phase.

a. For a bull market:

i. Accumulation phase: It is one in which the best-

informed investors (strong hands), seeing that the
market is very depressed, are willing to buy the shares
of the hopeless investors and progressively increase the
buying positions. At this stage, the economic and
financial reports are still bad and most investors do not
want to get into equities.
Why is it called the accumulation phase? Because the
strong hands want to raise the price, but since the
volume they need is very large, they cannot

put it all in at once, because like the rest of the

investors they are not willing to buy because the market
is coming off a sharp drop, if they do they would have
to buy at higher and higher prices, and that is not of
interest to them. Therefore, they do it in a discreet and
 slow way, and hence the name accumulation.
Strong hands always try to ensure that the price does
not rise too much, and to do this, together with the
purchase packages, they put in small amounts of money
to make the price fall, and when it goes down they re-
enter with large volume and quickly return it with little
volume. to make fall.
When the process ends, the strong hands want to make
the operation profitable, and now they are going to be
interested in the price going up, and going up a lot. At
this moment they buy at any value, but with little
volume, the one they have left, and in this movement is
when the rest of the investors (weak hands) start to buy
following the path of the strong hands.
In most cases this tactic causes the start of an uptrend,
what Dow calls the intermediate phase.

In this Jazztel chart we can see a clear accumulation phase, how the price has
stopped after
coming from a strong fall, and the price stabilizing
within the band between the two blue lines. In the last
part of this phase, the volume begins to increase,
although we have not included it in the chart here,
warning that the time is near to break the lateral range
and begin the next bullish stage. You can clearly see
how the price, once the band breaks, multiplies its price
 almost by two in less than two months.
ii. Intermediate phase: It has a fairly regular advance and
increasing activity, and equities are looking better,
encouraging investors. This is the phase in which a
trader should be able to make the most profit.
iii. Distribution phase: The market is very active, due to the
prevailing euphoria, the news is good and the advances
in prices are very strong. This is a phase of pure
speculation in which the volume continues to increase,
but nevertheless the “chicharros” are the ones that rise
the fastest, while the “blue chips” do not do so as much.
This is a phase that we must try to locate, especially if
we are bought, because from here on the trend will
change.

b. For a bear market:

i. The first phase is distribution. The better-informed

investors (strong hands) realize that the stock price has
gone far enough and dump their shares. The volume is
still high, and the weak hands (investors like you and
me) buy because we are still bullish and the volume is
large, but the price does not go up because the strong
hands are getting rid of a lot of paper.

The same strong hands that in the accumulation phase

led the price to change trend to start the price rise, the
moment comes when they think that the bullish
movement does not go much further, and then they
begin the reverse process to the accumulation , which
we know as distribution. The way of operating is
exactly the same as in the accumulation process but in
reverse, that is, in a few so that the rest of the investors
do not realize that they are selling, and thus prevent the
price from falling very quickly.
The difference between the accumulation phase and the distribution phase is
that the latter is much faster than the first, since in the distribution investors
panic and sell at any price, causing it to fall very quickly.

In this Abertis graph you can see how after a strong

bullish stage, the price enters a lateral range, between
the two blue lines and as soon as it breaks it the price
completely changes trend and begins a sharp decline.
ii. The second stage is panic , and buyers begin to become
scarce and sellers increase, and by not finding many buyers
the only way to sell is to sell cheaper, which causes the
price to fall rapidly. The fall can be practically vertical and
the volume increases greatly. After this panic phase there
may come a long secondary recovery or a period of
sideways trend to finally begin the third phase.
iii. The third and final phase is demoralization selling by
those investors who are carrying heavy losses and those
who bought recently because the price was cheap and
then everything turned around. The news about the
markets is starting to get bad. The downward
movement becomes less rapid, and finally everything
begins again.
4. The Dow Jones Rail and Dow Jones Industrial averages must confirm
each other , and the movement of just one of the averages does not
produce a valid trend change signal. This principle is completely
obsolete, since it is no longer used, but we wanted to list it so that
you have all the principles of the widespread Dow Theory.
5. A trend remains in force as long as there is no clear signal of a change
in direction. This is the principle that prevents us from getting out of
a trade too quickly, since it is considered that we should maximize
profits while we are on the trend, and only when some sign appears
that the trend is going to change will we get out.
We must think that in the Stock Market price movements will
always be in the shape of a sawtooth, we will never have continuous
rises or continuous falls in a straight line. Therefore, once we have
got the trend right and we are inside the market, we have to be able
to distinguish a mere cut from a change in trend, and to do this we
will later see that the averages are going to help us a lot when it
comes to making this distinction.

In this example of an Abertis chart, it has been bought in the area

close to €7 (green arrow) and there may be the case of breaking out
in the €11 area (red arrow), after having seen how the price has
reached at €12 then it dropped to €11. It is a situation in which if we
are not psychologically prepared we will want to sell at the first
opportunity to secure what we have earned. However, there is no
indication that the trend was going to change, and in fact it has not
changed and the price reached the €16 area. We would have missed
out on the entire shaded area by deliberately leaving out.
In order for us to make money in the Stock Market, we must start
 from the premise that we absolutely need to earn more money in
winning operations than we lose in losing ones, and the only way to
do this is by limiting losses with stop-loss ( we will see them later)
and letting the benefits flow, that is, staying in until the end.
As an example, I can cite the great fall that the Ibex 35 had since
March 2000 and that lasted several years, and every time there was a
cut upwards, the media pointed out again and again that this was the
good rise, that the downward trend had ended, but it was not like
that, because there was no indication or signal that told us that the
fall was close to its end.
As you gain experience with technical analysis, you will laugh at the
amount of nonsense that is said in the media about everything related
to the Stock Market; There is always a justification for each daily
movement: today the Ibex 35 rose because Spain placed all the
planned debt, today the Dow Jones fell because there are internal
conflicts in the government,...
6. Volume moves with the trend: In a bull market, volume increases
when prices increase and decreases when prices decrease, and in the
case of a bear market, volume increases when the price falls and
decreases during recoveries. Perhaps volume becomes much more
important when we are in a lateral range and suddenly the price
breaks this range upwards and does so with little volume. Most
likely it will be a manipulation of strong hands to make us fall into
the trap and then make the price fall.
After having seen the Dow theory, we are in a position to explain what an
uptrend and a downtrend are.
An upward trend is defined as a succession of rising bottoms. Therefore, at
least two rising bottoms and two rising tops are needed to confirm the start of
an upward trend.
In the same way, the bearish trend is defined as a succession of decreasing
bottoms, and at least two bottoms and two decreasing ceilings will be
necessary.
In any case, when we get to the chapter on averages we will see that these will
be an essential help to evaluate the type of trend that is in force at any given
moment.
About a third of the time the market will be in a sideways trend, which is
known as the operating range. In this state there is a balance between the
buying and selling force, and therefore the price oscillates in a relatively
narrow price band, although there are cases in which this range can be
important, even 100%.
Here you have a graph from Abengoa, where you can perfectly appreciate
the lateral range and its enormous amplitude, which goes from €15 to €25,
which represents a margin of 66.66%.
Later we will see that we have tools in technical analysis to be able to locate
the accumulation and distribution phases, so that we can enter when we need
to enter and get out before everything collapses.
 1.3. Supports and resistances
The first technical formations that we are going to learn are support and
resistance, because despite being very easy to understand and detect, they are
perhaps one of the most important formations within technical analysis, and
you will see why.
1.3.1. What is a support
A support is a price level that, within a bearish movement, concentrates
enough demand for securities to stop the fall in price, and even bounce in the
opposite direction.
www.ProRealTime.com__GRF GRJFQLS 15.5400 (*0.10%) Weekly Feb 29, 2012 11:11
Price MM (Weight at 30) MM volume (30)

Jul Oct 2008 Apr Jul Oct 2009 Apr Jul Oct 2010 Apr Jul Oct 2011 Apr Jul Oct 2012

.3.1.1. Drilling a support

If the demand for titles were exhausted, the support would stop
functioning as such and what is known as support perforation would occur.
When a support is pierced, we will see that said support begins to act as
resistance, or at least that is most likely, since we already mentioned that there
are no absolute certainties in the markets.
Here is an example of how a support is pierced and then the support begins
to act as resistance from the bottom side.
 Ferrovial falls to the minimum indicated with the green arrow and
rebounds upwards, defining support in the €7.87 area. In the next attack of the
price to the support zone, it is penetrated, and from then on you can see how
again and again the price bounces downwards every time it approaches the
level of €7.87 that had worked as support. Consequently, since the
perforation, the support begins to act as a resistance, and to distinguish it well
on the chart we have separated the support into a green line to indicate when
it worked as such and another strip in red to indicate when it works as
resistance.

.3.1.2. Condition to consider that a support has been

perforated
When the price graph crosses support, does it always do so in the same
way? How much does the price have to fall below the support to consider that
it has been breached?
For this there is no mathematical rule, but it is quite widespread to use the
criterion that the price must fall with respect to the support between 5 and
10% to consider the support as pierced.
In addition, it is also convenient that when the price is in the support zone
we observe the volume, because if the volume at the time of the breakout is
large, the price will surely go down quite a bit. In any case, although volume
is important, it takes on much more importance with piercing resistance than
support, because it is easier to fall than to rise.

In this example we have a Stock and Markets chart, with support at €16.23
defined by the July 2009 lows. In March 2010 the price attacked the support,
and simply two small tails (the tails of the candles are called shadows)
slightly penetrated the support and the price bounced up. In the next attack, in
May and June 2010 (yellow shaded area), we already have candle closes
below support. This is the moment in which we have to try to find out if the
support is really going to be pierced or on the contrary it is a trap for people to
sell. Well, if we take into account the shadows of the candles, the highest
percentage of penetration is 7%, not enough, from my point of view, to
consider a support as broken. If in addition, instead of taking into account the
shadows of the candles we take into account the closings, which are more
important, the maximum penetration percentage is around 3-4%.
If we look at the volume at that time, we see how it has been falling
throughout the period in which the price has been struggling in the lower
support zone. This clue also helps us when figuring out the hypothetical
perforation of a support.
 Once the area shaded in yellow has ended, the price returns to above the
support, and from that moment on, it makes two more attempts (green
arrows), but the result is the same, and in the last one you can see the great
increase in buying volume that there has been, producing the strong rise
shown in the graph.
When a support is tested on so many occasions and continues to respond
as such, it becomes increasingly more reliable, and drilling it will be more
complicated. This information will give us many clues when looking for the
most appropriate times to invest.

.3.1.3. What is a pullback and its importance in supports

We are going to introduce a concept that will be fundamental for you from
now on, and it is the following: when a support is pierced, the price falls
below it, and in many cases a recovery occurs to the support that has just been
pierced and that now works. as resistance, and the price here will bounce and
fall again, now with much more force. This is what is known as a pullback ,
and it will give you great opportunities, both entry and exit.
The pullback is a very important figure, because it serves to confirm
movements. For example, with supports, if the price breaks the support and
the pullback occurs, this is confirmation that the price is almost certainly
going down.
 This is an example of Técnicas Reunidas, where we have defined support
in the €37.77 area. We found the first candle below support in mid-May. In
the graph you have the area where the pullback occurs enlarged, so that we
can see it in more detail. After the first candle with a close below the support,
the price returns above the support, two days later it is already below it. If we
look at the first black candle that is defined by the orange horizontal line (it is
better seen in the increased area), that candle is decisive, because it is below
the support, and from there the price will test the levels again. €37.77. We
have marked this small recovery with a green arrow. The orange line that we
had drawn for the candle that we mentioned before is nothing more than a
reference to confirm the pullback. It is drawn there because it is a
representative minimum below support.
You can see how the price, after testing the support, falls again, and
pierces the orange line, confirming the pullback and subsequent fall. We have
marked this point with a red value exit candle.
Notice the brutal fall that came afterwards and how fast it was, because if
you look closely, the graph is a daily graph, not a weekly one, so each candle
represents one day. The pullback was confirmed at the beginning of June, in
the area of approximately €36.50, and at the beginning of August it was
already below €25, that is, a devaluation of 35% in two months.
 Next, in the resistance chapter, we will see that we also have the pullback
formation, and that in this case it can give us good buying opportunities.
1.3.2. What is a resistance
A resistance is a price level that, within an upward movement, concentrates
the supply of securities sufficient to stop the rise in price, and even rebound
downwards.

2.1. Piercing a resistance

If the supply of securities were exhausted, the resistance would stop
functioning as such and what is known as resistance perforation would occur.
As with support, when a resistance is pierced upwards it will function as a
support.
In this BBVA chart we have resistance in the €7 area, and the price is not able
to overcome it until it does so at the end of 2003. From this date on, the price
is supported twice by €7, which now works as support (green stripe), and
from here the price completely changes trend and goes to the €9.5 area in
2005. .
.3.2.2. Condition to consider that a resistance has been
pierced
We can consider the same criteria that we explained with the supports to
decide if a resistance has been pierced or it has simply been a market trick or
trap.
In the following example we have a Grifols chart, with resistance in the
€16.70 area, defined by the weekly highs of November 2007.
This resistance was surpassed in May 2008, and has remained slightly
above it until October of the same year (yellow shaded area). If we look at the
volume we can see how at the moment of the break the volume not only did
not rise but rather fell, which already indicated to us that the movement was
not going to have much distance.
Finally, in October 2008 it once again fell below the resistance and the
price fell definitively to the €8 area in May 2010.
It is a clear example of a false resistance break, and it is very important
that we pay attention to the volume. We already mentioned it before, but in
upward movements, it is necessary that there be volume to give a certain
guarantee to the movement, which is not so relevant in downward
movements.

Surely you will see cases of graphs where the breaking of a resistance without
volume accompaniment has been good, but we always bet on the winning
horse, and for this the volume has to accompany the movement.
.3.2.3. The importance of pullback in resistances
The explanation of the pullback is exactly the same as with the supports,
but in reverse, that is, when the price pierces a resistance, after a short time it
can fall again to the same level, where the resistance will now function as
support, and the price will bounce back up. In these cases, the pullback often
offers a second buying opportunity, as we will see at the end of the course.
In the following Inditex chart we can see the important resistance that the
value had in the €48 area, and how after two consecutive attempts during
2010, the price manages to penetrate the resistance, and after the second
candle above the Likewise, the price turns around and returns to €48, where it
supports itself perfectly and begins a second upward movement, this time
exceeding the maximum marked with the orange line, and thus confirming a
textbook pullback and a perforation of the full resistance.
Note that the way to draw the orange line is the same as what we have
explained with the pullback on the supports. In this case, the maximum of the
first bullish movement is taken above the resistance, while with the supports
we took the minimum of the first bearish movement below the support.

Both supports and resistances reveal the psychological aspect of technical

analysis, because you will see that time and time again they tend to function
as barriers, as if the people who have been selling, upon reaching a
support things will change and everyone will buy, or when everyone is buying
but when a resistance level is reached everything changes and everyone will
sell.
You will also discover over time how in important support or resistance
zones in the graphs of the main stock indices, the media publish news to try to
justify the rebounds in them, and sometimes it is not the media, but It is the
strong hands that take advantage of the moment to change their position.
1.3.3. How to find support and resistance
Okay, now we know what support is and what resistance is, but how do we
know where to find them?
There are a series of rules that work very well when locating and drawing
supports and resistances, and over time you will see the skill you will acquire
when drawing them.
In principle, any minimum that stands out on the price chart is likely to be
support, and depending on the importance of that minimum, the support will
be more robust and difficult to penetrate.
To assess the importance of this minimum there are some considerations
that we can take into account:
• If it is a historical low , that support will be vital, and the
probabilities of it being pierced are minimal, and furthermore, the
further away in time that historical low is, the more importance it
gives to the support.
We understand by historical minimum the minimum price at which a
security has been quoted, meaning that no one has been willing to
sell below that price, and they usually constitute the most resistant
supports, difficult to overcome. However, if the historical minimum
is surpassed, the value enters what is known as virgin territory and
we must consider that from there onwards it can fall as much as it
wants, because panic will set in on the value, and a great stampede
will begin.
In this Ebro Foods graph we have an example of what we have just
explained about historical lows. Pay close attention to the scale of
the graph; It is a quarterly chart, that is, every four candles represent
one year. Therefore it is a very long term. In fact, this graph shows
the evolution of prices from 1998 to 2012. This broad time scale is
very useful when looking for historical highs and lows, because we
can see the entire price evolution in a snapshot.
In this specific case you can see perfectly how the historical
minimum of the value is in the area of €5.27. For us, this will be the
most important support that Ebro Foods will have, since no one has
ever been willing to sell below this price.
And what happens when support at all-time lows is pierced?
 What we mentioned happens: the value enters virgin territory and
fear sets in among investors, especially the weakest ones, and the
setback is fundamental. In this bimonthly chart of Bank of America,
which had support at historical lows of €14.32 and which was in
force for more than 10 years, at the end of 2008 it broke it,
generating a devaluation of its securities of 79% in just two months.
• The volume that has been traded in the area where the minimum we
are considering has occurred is important. If there has been a large
increase in volume, it means that at that price level there has been a
great change in the battle fought between buyers and sellers, and the
most normal thing is that the same thing happens again when
reached. It is important, as we mentioned before, that this minimum
be as far away as possible (temporarily speaking) from the current
price levels.
Likewise, any maximum that stands out on the chart will be susceptible to
forming resistance, and the criteria to give more consistency to said level are
the same as those we have discussed for supports.
All-time highs work as well as all-time lows, and once surpassed, you also
enter virgin territory and the value has a
great upside potential.

In this quarterly BBVA graph you can see how between 2006 and 2007 a
historical maximum was formed at €15.30, defining the resistance of
historical maximums as a very important reference to take into account in the
evolution of the price.
Just as we saw with the breaking of all-time lows, we can see what
happens when a stock enters virgin territory by surpassing previous all-time
highs.
In the graph that we are going to see below we have the evolution of
Apple's price on a monthly basis. Perhaps Apple is one of the most
spectacular stocks in recent years, and you only have to look at its graph to
realize it.
Apple began a strong rise since 2004, breaking previous all-time highs one
after another. But let's look at the historical maximum of 2007 in the area of
€202.87. Here the value fell, like the vast majority of world stock markets,
and starting in 2010 it broke this level and from here it has risen no more and
no less than 167% in two years, and still shows no signs of weakness, so that I
could continue to be.
It is important to note that the longer the time frame, the more important the
supports and resistances become, precisely because of what we have
mentioned: the greater the time distance, the greater the robustness.
1.3.4. double roof
If we have understood the importance that a resistance can have depending
on parameters such as volume, amount of time it has been in effect, etc., now
we are going to add a new condition and we will obtain what is called double
top .
A double top is formed when there are two relevant maximums, such as
those we were looking for to define a resistance, and ideally these maximums
will be at the same price level, although a small variation is allowed.
With a double roof it is very important that the two points that define it are
as far apart in time as possible. The greater the time distance between the two
points, the stronger the double top will be and consequently the more difficult
it will be for the price to break through it.

In this weekly Abertis chart we have a triple top, which is the same as the
double top but with a third maximum through which the resistance passes.
Obviously it has even more strength than the double top.
Note that the distance between the first two maximums is two years, which
gives it a lot of strength, and in fact the third maximum was formed at the
same price level at the end of 2007, and continued in force, since the price
from of the third maximum completely collapsed.
If we trace the support at the inflection point formed between the last two
maximums that define the triple top (orange line), we see that as soon as it is
broken the volume increases a lot, for what we have just explained, and we
could already assure that the ceiling It was not going to be cleared.
Here is an example of how you should not draw a double top, with candle
highs that are not temporally far enough away or choosing highs that are not
relevant on the chart.

With the double top, volume is also very important, because as always it
describes how investors are behaving at critical price levels.
We are going to explain what would be the most common behavior of
investors (and consequently the volume) in the situation in which a double top
is formed.
Normally, the volume rises quite a bit on the first high and then falls on
the subsequent pullback. Many investors have been trapped at the first high
and do not sell because they still have hope that the price will continue to rise.
The retracement that follows this first minimum is produced by investors who
decided to take profits, which for the most part are not investors who have
entered recently, but rather those who have entered much lower and decide to
reap the rewards. For this reason, the volume usually decreases on the way
down. Then the price rises again towards what will be the second maximum,
increasing the volume, although to a lesser extent than that which occurred at
the first maximum, since at these levels the number of people willing to buy is
smaller.
Here the psychological factor comes in again and as the second maximum
coincides with the first and in the first the price fell, in the second the movie
repeats itself and the second setback occurs. If we draw a support for the
minimum that was formed in the first retracement, we have marked the area
that will end up confirming the double top figure, because if this support is
pierced, the stampede occurs and all the trapped investors sell at the same
time. producing an increase in volume.
We have another very important parameter, and it is the distance that the
price separates from the double top once the first point has been defined. This
is of vital importance because in the event that the double top is not pierced,
the theoretical drop target is given by the distance from that inflection point to
the double top.
In the example we saw before of the triple top in Abertis, we have drawn
the minimum drop target when the formation is confirmed. The minimum
target is indicated by the blue line, which is the same distance from the orange
line as the orange line is from the triple top.
You can see how the drop target was not only reached, but far exceeded.
Emphasize that we have given an example of a triple top, but the operation
is exactly the same as that of the double top, with the only difference that in
the triple top we take the last two maximums to define the inflection point
that defines the orange support line. .
Here we leave you a graphic diagram of the formation of a double top, with
the line that marks the minimum objective, so that it is much clearer.

DOUBLE ROOF

Inflectio MINIMUM DECAY TARGET

n point
1.3.5. Double
floor
A double bottom is formed when there are two relevant minimums, such as
those we were looking for to define support, and ideally these minimums will
be at the same price level, although a small variation is allowed.
With a double floor it is very important that the two points that define it are
as far apart in time as possible. The greater the time distance between the two
points, the stronger the double bottom will be and consequently the more
difficult it will be for the price to pierce it.
Everything we have explained for the double top is valid for the double
bottom but in reverse.

Inflection
point
Confirmation

DOUBLE
FLOOR
 This is a Banesto chart showing the formation of a double bottom,
choosing two very important minimums separated by no more and no less
than 6 years.
The following example is of a double bottom defined by two minimums
separated by just 3 months on the weekly chart, where it was soon pierced due
to its lack of consistency. However, although it was inconsistent, the bearish
implications when it is pierced are tremendous; Hence the importance of
knowing how to define these trainings well, because they can be life
insurance.
 1.4. Guidelines and channels
1.4.1. Guidelines or trend lines
Until now we have seen supports and resistances as horizontal lines that
pass through a certain minimum or maximum. Now we are going to see that
these lines can also be oblique, and they will set the trends for us. These lines
are known as guidelines or trend lines .

.4.1.1. Bearish trend

A bearish trend is what we can draw when we have successive decreasing
highs, and in such case we will have a bearish trend line .

In this weekly chart of Banesto you can see how we can draw a bearish trend
through the three shaded maximums, maximums that are decreasing, so that
we can conclude that it is a bearish trend.
When the price manages to break a bearish trend upwards, a trend change
is likely. When we talk about a change in trend it does not mean that there
must necessarily be a change from a downtrend to an uptrend, but rather it can
simply move into a sideways range, but at least we can know that the
downtrend can end, at least for a while. space of time.
The treatment given to a bearish trend is the same as that of a resistance,
because in fact it is, only in this case it is an oblique resistance.
Therefore, if it has the same treatment it implies that when the price is able to
pierce it, it will function as a support.

In this graph you have the evolution of the Banesto graph that we have
shown you before to give you an example of a bearish trend. Notice how in
April 2009 the price penetrates the guideline, then the price retraces
downwards again, but rests perfectly on the guideline, which acts as a
support.
It is exactly the same as we explained the behavior of resistors when they
are pierced.
And what happened after breaking the bearish trend?
The price supports the green line at the bottom and another less inclined
bearish trend, forming a figure that we will see later, characteristic of a lateral
range. Banesto has ended its decline and has entered a phase of greater
balance between buyers and sellers.
An aspect that is quite relevant with the guidelines, both bullish and
bearish, is their inclination; The more inclined the guideline is, the less
important it will be when considering its robustness. The smaller its
inclination, that is, the closer it approaches a horizontal line, the greater
relevance it will have.
.4.1.2. Bullish direction
When we can draw a line with consecutive increasing lows we will have a
bullish trend .
The operation is exactly the same as the bearish directive but in reverse.

In the event that an upward trend is broken, the implications are, if

possible, more drastic than what happens with the bearish trend, since
whenever we talk about a downward movement, the movements are much
more abrupt, given that the Panic takes over the market.
A very clear example of what the breaking of a long-term bullish trend
(weekly chart) can imply is the following BBVA chart. The price of BBVA
fell from €14, which is the price at which the security was trading at the time
of the guideline break, to the €4 it reached in 2009, which represented losses
of 71%.
1.4.2. Channe
Channels arelsa variant of trend lines, and in this case two parallel lines can
be drawn forming the so-called channel.
.4.2.1. Bullish channel
For a bullish channel , we will first draw the bullish guideline by tracing it
through the rising lows, and then we will draw a parallel to this guideline
through the rising highs. In this way the price is perfectly channeled by both
lines.
The minimum line, which is where the price is supported during the rise,
is called the channel floor , and the upper line, where the price bounces down,
is called the channel ceiling .
The vertical distance between both lines (do not draw perpendicularly)
gives us the price difference between the floor and the ceiling, and is called
the channel range. The wider the channel range, the stronger the bullish trend
will be.

What happens when a bullish channel is breached? Does it have the same
implications if it breaks above as if it breaks below?
 It is obvious that in a bullish channel the trend is bullish, so in the event
that the channel is pierced at the top, we will not have a minimum price
objective; It simply indicates that the upward trend is accelerating, and we
will have to try to look for an upward trend with a greater slope than the one
we had with the channel.
However, if the drilling is from the bottom, there is a theoretical minimum
price objective, since it is an important change in the trend, or at least, a stop
along the way.
To calculate this minimum objective , we use the range, as shown in the
following example:

You can see how after the first candle closed below the channel floor, in
just 8 days Técnicas Reunidas fell the same height as the channel range,
which as we saw is the minimum price objective to reach after the breakout.
In this specific example, not only was the minimum target reached but
there was a radical change in the value's trend, going from bullish during the
channel to bearish after the breakout.
.4.2.2. Bearish channel
For a bearish channel we will first draw the bearish guideline drawn by the
decreasing highs and then one parallel to this guideline that passes through
the also decreasing lows.
As occurred in the bullish channel, the minimum line, which is where the
price is supported during the fall, is called the channel floor , and the upper
line, where the price bounces downwards, is called the channel ceiling .

When the situation of piercing the bearish channel occurs, if it does so at

the bottom it simply means that the bearish trend becomes more pronounced,
and we will have to look for a bearish trend with a greater slope.
On the other hand, if the perforation occurs at the top, the minimum target
price is obtained in exactly the same way as we did in the bullish channel,
from the channel range.
Below we have a graph from Telefónica, where we have traced the bullish
channel that I saw developing since April, until in October the price pierced
the channel at the top, producing a change in the trend and reaching the
minimum objective marked by the figure in the month of November.
Note that the movement is quite explosive, especially seeing the great fall that
Telefónica had during the bearish channel.

.4.2.3. Side channel

Finally, it may be the case that parallel lines are horizontal; This is what is
known as the lateral channel .
The operation in a lateral channel is exactly the same as in the bullish and
bearish channels that we have just explained. The only difference is that in
this case we have a target price to reach, whether it breaks above or below.
As with conventional supports and resistances, when the price is close to
any of the channel lines, we must observe variations in the trading volume,
because it can give us clues as to whether the price is going to respect the
channel and leave. to produce the rebound or on the contrary there will be a
high probability that the channel will be pierced and the price will escape.
As with the guidelines, with the channels you have to take into account the
inclination of the lines: the steeper the lines are
 that configure the channel, the less relevance it will have and the more likely
it will be that the price will move out of it, but the smaller the slope, the more
consistency the channel will have, reaching in the extreme case the lateral
channel that we just saw.
 1.5. The importance of socks
1.5.1. What is a moving average
A moving average is the average of the price of a certain security during a
specific period of time. Although when we introduce a moving average in our
software it allows us to apply the average to the maximums, minimums,
opening prices and closing prices, the most common thing is to use the
moving average on the closing prices of the security.
Moving averages are a very powerful tool to know at all times what the
direction of the trend is and what its strength is, and they also allow us to see
it in a smooth way, which is much easier to interpret than the saw teeth that it
makes. the price.
To define a moving average we have to indicate the period we want to use.
So, for example, a 30-session moving average is the average of the price of
the last 30 sessions. The next day, the moving average removes the oldest
session of the 30 sessions that were used in the previous session and adds the
latest one to it, and so on. For this reason it is called a moving average.
The shorter the period of the average, the faster it will be and if we use it
to look for buy or sell signals, it will indicate them to us faster. On the
contrary, the shorter the period, the more the average becomes similar to the
price, and consequently it becomes more and more rippled, so we can reach a
situation where it loses the functions that an average is supposed to have.
If, on the other hand, the period of the average is long, the curve will be
smoother, but the average will be slower, and the signals will be late, making
us useless when investing.
Therefore, it is important to find a balance and, of course, find the period
that works best for us depending on our way of operating. In fact, it is very
common to use several averages on the price chart, one for the shorter term
and another for the longer term. In this chapter we will see which are the most
common.
It is obvious that once the moving average period has been chosen,
depending on the time frame we are using in our chart, this is how the
sessions will be defined. Thus, if we have a 30-session moving average on a
daily chart we will have the 30-day average; If we have a 200-session moving
average on the weekly chart we will have the 200-week average.
1.5.2. Types of moving averages
There are many types of moving averages, but we are going to stick with
the three most used and widespread.
1. Arithmetic or simple average: It is calculated as the arithmetic average
of the prices within the time period that is considered in the average.
Therefore, since it is an arithmetic average, it does not make
distinctions and gives the same importance to the last prices of the
period as to the first ones.
The only simple average I use in my analyzes is the 200 session
simple average, which is a long-term average to see the underlying
trend. Historically, the 200 session average has always been one of
the most used to decide the main trend of a value. In our graphics it
appears drawn in red and in lines.
2. Exponential average: Introduces a correction factor that gives greater
weight to changes in the latest prices within the period considered,
and also smoothes out market noises better, and is faster than the
simple average. Being faster will also give more false signals, but
that's part of the game.
This is the average that we use in our trading system and that you
will see in all the graphs that we show you in the course. Personally,
I use the 30-session exponential moving average, and it appears on
our charts drawn in green.
3. Weighted average: It also gives greater weight to the most recent
changes, assigning a multiplier value equivalent to the day in
question, this multiplier being greater the closer the value is to the
current period.
This is the average that we use in our trading system and that you
will see in all the graphs that we show you in the course. Personally,
I use the 30-session exponential moving average, and it appears on
our charts drawn in green. We also use it in the volume, because
what we are looking for is to compare the volume of one day with
the volume of the previous days, but the comparison with the two
previous days is more important than with the previous ones. For
this reason, we use a 10-session weighted moving average applied to
volume.
 In the following Abertis graph we have simultaneously drawn each of the
averages that we have just explained, so that you can observe the variations
between them. If you notice, the average that best adapts to the price is the
weighted average (curve in green).
To see how quickly an average adapts to price variations, it is best to study
the graph in an area where a large variation has occurred, as happened with
Abertis in June 2008. At that time, practically the three averages of 30
sessions were more or more flat, and the one that takes the slope of decline
the fastest is the weighted one, followed by the exponential and lastly the
simple average. This coincides perfectly with what we have just explained to
you.
If you look at the dashed red curve, which corresponds to an average of
200 sessions, you will realize that in the entire section in which the price has
moved in a lateral range and the three exponential averages are the same, the
average of 200 sessions was completely bullish, and did not become
horizontal until the great decline that led Abertis to be trading below €8 had
ended. This is the problem that we were telling you about, averages with very
long periods react very slowly to sudden variations in price.
1.5.3. Use of stockings as supports and
resistors
As we mentioned previously, one of the most widespread averages in
Technical Analysis is the 200-session simple average, to such an extent that
there are many investors who consider that a value is bullish if the price is
above the 200-session simple average. and bearish when the opposite
happens, and furthermore, when the price approaches said average, it often
functions as support or resistance. The majority of the time, when the price
approaches this average, it is not able to penetrate it, at least at first,
producing a technical rebound. From this moment on we will monitor the
value, because when it manages to break the average the resulting movement
is usually quite strong.
If this technical rebound does not occur and the stocking is pierced the
first time, the movement also tends to be quite violent.
Below we have a chart from Banco Popular, where we can see the 200-
session simple average in dashed red line, and how the price, in a clear
upward trend, touches said average up to three times. The second attempt
takes place even with a candle close below the 200 session average, but
following the criterion that we had seen when we studied the breaks of
supports and resistances that if said break does not represent more than 5-10%
it is not considered as such.
Note that the slope of the 200-session average is bullish, indicating the
main trend of the value, as a guideline.
 In the following Bankinter graph you can see how at the beginning of the
graph, with the great fall in value, the average of 200 retains the fall acting as
a support, and when said average is pierced in June 2008, it begins to act as a
resistance, as occurs with conventional supports.
In the period considered, two contact points can be observed at the average
of 200 and the third test occurs a little further from it, but it can be considered
a rebound, because the distance is very small.
 We can also observe what happens when an average of 200 is pierced: the
price suddenly fell from €8.5 to €5, a drop of 41% in two months. Then it
recovers levels, it reaches the average on two occasions and finally it cannot
and the fall is even greater, to €3.5.
Another average that works very well is the 30-session average, because
when the price is in trend, all the cuts that occur lead the price to rest on said
average and subsequently continue to follow the trend. This usually gives us
good opportunities to enter a stock that is trending.
You can see an example of this in the following weekly Abertis chart,
where the price has been maintained for four years using the average of 30 as
support, and all the cuts have been supported by it, and then continued with
the upward trend.
1.5.4. Speculating with stockings
When we started the course we told you that our main objective is to
design or configure a winning trading system. Now that we have seen the
averages, we are going to start designing our first trading systems, very
rudimentary systems but that will be very useful to you to configure your
own, because we will see the strengths and weaknesses of each one of us.
exposing.

.5.4.1. Trade on the intersections between the price and the

moving average
One of the oldest trading systems is to buy when the price goes above a
certain moving average and sell when it goes below . To do this we will simply
have to find the average period that best adapts to the market or security in
which we want to invest. This method was very laborious a few years ago, but
with the software packages we have available today it is suck. For example, if
we want to evaluate whether in a certain security the 30-session exponential
moving average is going well or badly, we will program an operating tactic in
our software that will test our newly created system throughout the history of
the security or market in which We are carrying out the evaluation, and it will
result in a lot of data, including the total profit/loss, the maximum profit, the
maximum loss, the best winning streak, the worst losing streak, etc. We will
see all this when we have finished with the technical analysis.
Without getting into programming strategies now, I can tell you that this
way of operating with the moving average is very beneficial if the market or
value is in a strong trend, but the moment it goes sideways the system will
cause a lot of losses, for example. Our conclusion is that we have to look for
something more complex than a simple average.
The criterion that we can consider when the average crosses occurs
depends on taste: one possibility is that it comes with the candle cutting the
average, another possibility is that the entire candle is above or below the
average in Depending on whether it is a purchase or a sale, another would be
to wait for there to be three full candles above or below the average once the
cut has occurred... Depending on which of these criteria we will be more or
less conservative and the assumed risk will vary.
In the following BBVA weekly chart we show you the operation with a
weighted average of 30 sessions and considering as a signal the first candle
close above the average to buy and the first candle close below to sell.
In the graph we attach the results of each of the 11 operations, where you
can see that with this operation 5 operations have been good and the
remaining 6 bad, so the reliability of the system is below 50%. However, the
net profit throughout the period has been 46.95%.

But how is it possible to have obtained this benefit if the system has failed
us in more than half of the operations?
The reason is that in some of the winning trades the profitability has been
very high, while the losses are all below 5.20%.
Where has this trading system failed the most?
It has failed in the sections where the market has turned sideways, that is,
operations 4, 5, 10 and 11 especially.
What if instead of considering the close of the candle we consider the first
candle that is on the other side of the average?

In this case, for the same example, the system gives us entry for three
operations, all of them being good, with a final profitability in the period
considered of 74.97%.
The result is obvious, since we are being more restrictive, thus doing more
filtering.
If we apply the same system to a period in which the price is in a lateral
range, it becomes clear that this system is not valid, generating quite a few
losses.
In the first example we have taken the closing of the candle as a criterion,
and the system has given us 9 entries, 8 of which have generated losses and
only one has generated capital gains. Finally, losses of 36.56% have been
obtained in the period considered.
In the second example we have taken as a criterion that the entire candle is on
the other side of the average, just as we did before. In this case, better filtering
is also done, reducing the number of operations from 9 to 3, but all 3 have
also been negative, with losses of 31.67%.
We wanted to present these examples to you so that you can see that such
a simple trading system has the drawback that it behaves completely
differently depending on the trend.

.5.4.2. Trading at the intersections of two moving averages

If we want to filter the system we just saw a little more, we can use two
averages from different time ranges, and use their crosses to look for signals.
For example, we can use one with 30 sessions and another with 10 sessions.
The 10-session moving average will be much faster than the 30-session, so a
buy signal will be given when the 10-session moving average cuts upward to
the 30-average, and a sell signal when the 10-session moving average Cut
downwards to the average of 30.
In the following example we see a market moment in which there was a
strong upward trend, and we can see how well this system works with such
well-defined trends. A weighted average of 30 (green) and another of 10
sessions (orange) have been chosen. The cuts are marked by the fast one over
the slow one, that is, the 10 over the 30.
The system has given us a buy signal in the first bullish short from the
average of 10 to the average of 30 in October 2004, and the averages do not
cross again to the downside until June 2007, where we undo the position,
obtaining an impressive profit of 861% with a single operation.

Things are not always as easy as this example we just saw, but it helps us
demonstrate how well this simple system works when the trend is strong and
well marked.
To see the contrast with a more or less lateral market we have this other
example of Accione on a weekly chart, where the system gives us three
entries, all three with losses and with total losses of 20.78%.
 Even so, although it is a better system than the first one we have seen, it
still gives many false signals when the price goes into lateral movement.
As a summary, we can conclude that either of the two trading systems that
we have seen work very well when the market is strongly trending, and will
guarantee that we will always be on the right side of the market when the
trend takes place, but in lateral movements. We will obtain a lot of false
signals, and these false signals will be many, because in a lateral market both
the crossings of the price with the average and the crossings between the two
averages themselves will be repeated on many occasions in a very short space
of time, so it will be difficult to compensate for the losses obtained in the
lateral range.
1.5.5. Bollinger Bands
Although Bollinger Bands are considered an indicator in any technical
analysis software package, we have preferred to explain them now, just after
having explained how the averages work, because as we will see, they have a
lot to do with it, and the concept will become clearer. .
Bollinger bands are nothing more than two curves that move on both sides
of a moving average, forming two bands, one upper and one lower, where
these bands vary in thickness, that is, the distance between the bordering
curves varies. to the central moving average. This distance variation occurs
depending on market volatility.
To draw Bollinger bands you must choose the period of the exponential
moving average.

With these bands, what we achieve is to have the quote graph perfectly
channeled, and when the price reaches any of the limits of the bands, both
above and below, it tells us that we should buy in the opposite direction of the
movement, because the most likely is that a rebound occurs and the price
returns to within the
bands.
The narrower the bands are, the more important the price movements
become.
On a practical level, after a long time investigating its operation in
different values, products and markets, we have not found much application
for it, at least to use the bands as a method to search for entries. It does seem
somewhat more useful in those cases in which we are bought and we don't
know where to leave. In this case, one way to look for an exit would be to
look for price contact with the upper Bollinger band. Likewise, if we are sold,
we can use the price contact with the lower Bollinger band to close positions.

In this example from Inditex we have indicated with arrows what we

should do according to the position of the candles with respect to the
Bollinger bands. Thus, for example, where we have placed the green arrows
we indicate that the price has gone out from the bottom, which tells us that
there is a high probability that the price will return to the bands, and this has
been the case in the three cases.
However, where we put the red arrows would indicate exit points in the
case of being long, but they do not work very well except for the last one,
because it is assumed that the price would have to fall to go towards the
center of the band and yet the price has remained for much of the rise stuck to
the upper edge of the Bollinger bands.
That is why we mentioned before that we do not see much application for
it to operate, except in those cases where we do not know where to exit when
we have accumulated profits.
 1.6. Loss and profit stops
1.6.1. The most complicated thing about a trading
system
For those of you who have already had some contact in real trading on the
Stock Market, have you ever wondered what part of your trading system has
given you the most headaches? What is the element that has been the most
difficult for you to configure and that has cost you the most time and money?
This question is also valid for people who are starting out, from the point
of view of caution when developing an investment system.
The answer to these questions, at least soon, will most likely be to develop
a trading system that shows us the moments in which it is optimal to enter the
market, and with which we can obtain a percentage of success in the
operations carried out. 60-70%.
Given how hard it was for me to define my trading system, I was also of
this opinion, at least in my first stage as an apprentice, but after years, I have
realized that something that was apparently simple would become the most
difficult part. complicated and frustrating of our systems.
Do you already know which part of the system we are referring to?
Yes, to stops , both losses ( stoploss ) and profits ( stop profit ).
Don't you agree? I am going to give you some reasons why it is so
complicated to manage stops properly, and I will finish by explaining what
my stop management system is.
But first of all, we are going to briefly explain what stops are and what we
use them for.
1.6.2. What are stops
When, for example, we make a purchase of shares, it is assumed that if we
buy them it is because we have come to the conclusion that that value is going
to rise. We want to think that the way in which this decision was reached was
because we have developed a trading system and it has given us a buy signal
because all the necessary conditions to do so were met.
However, as we already know, whether or not we succeed in the operation
will depend on the probability of success of our trading system, but even if we
had the best system in the world, it would not have 100% reliability, so we
will always have a percentage of risk in our operations, a risk that for a fairly
decent trading system will be around 60%.
Can we cover ourselves somehow when our trade goes wrong?
Yes, and this tool is the stop loss or stoploss. A stop loss is an order that
we enter in the market in the opposite direction to that of our previous
operation, that is, if we have bought shares at a certain value, a stoploss order
will be a sell order at a price that is initially lower than the price. entry, price
that is calculated based on the maximum amount that we are willing to risk in
the operation.
Therefore, a stoploss order is an order conditional on a price that we have
to determine based on the risk we are going to assume.
We can enter the stoploss whenever we want, even most online brokers
allow us to enter a stoploss order attached to the order to buy the security, so
that we do not have to be aware of whether the price turns around.
In any case, not being pending is a saying, because we have to have the
value under control at all times, since it could be the case that since it is a
conditional order that price does not cross and the price continues to fall
without the operation is executed.
Up to this point we have explained the simple part of its operation,
because things get complicated if we want to move that stoploss as the
The price increases, with the intention of securing part of the accumulated
profit in the event of a possible price return.
We must keep in mind that the percentage of our capital that we are
willing to risk in a transaction should be automatically given by our capital
management system, which we will see in this course; We shouldn't choose it.
On the other hand, if we want to achieve consolidated profits over time we
will have to lose less in bad operations than we win in good ones, otherwise it
will be completely impossible.
1.6.3. Types of stops
• Stoploss : It is the conventional stop loss, so that it is set at a certain
price level and if the price falls below for a transaction in which we are
long, it will take us out of it, guaranteeing us a maximum loss, which
we are willing to accept. risk and based on which we have set the
stoploss price. In the event that we are short, the stop loss will be
triggered when the price exceeds the stop level.
We start from the consideration that the stoploss price is going to be
crossed in the negotiation, because if the order we have entered is
conditional it may happen that it does not jump.
In this example we have a buy order (we enter long) and the price
represented by the green line is chosen as the stoploss. If the price turns
around and reaches the green line, the stop will be triggered. In this
specific case we see that this situation has never happened. If what we
want is to enter downwards (enter short) the stoploss price will be
given in this case by the price indicated by the red line. For this last
case, if the price turns around during its decline and reaches the red
line, the stoploss will also jump.
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Dynamic stoploss (Trailing stop):

Unlike the previous one, the stop loss level is a
variable stop, and this variation can be achieved
depending on many parameters. Some typical
examples are a variable stop based on the change
in price, others are variable based on volatility or
the ATR indicator (we will see this later), so if
we have high volatility we keep the stop further
away from the price. to allow for more variations and not leave us out of the
operation at the first opportunity. In the case of a variable stop with the price,
we aim to make the amount we are willing to lose in the operation smaller and
smaller as the price moves in the direction we had anticipated with our trading
system. In this way we can even reach the situation in which the stoploss is
above the entry price (in the case of positioning ourselves long), which
guarantees that in that operation we will never lose money, since a percentage
will already be lost. we have insured.
When the stoploss is at a price such that we cover the position, that is, we
would not gain or lose anything, it is called being in break even .
Stop profit : It is the profit stop, that is, there are many investors who, in
the same way that they decide to set a loss stop before entering the market,
also enter a profit level with which they would be satisfied, because they
think that the value It's not going to go much further. These types of stops
have the disadvantage that you can miss a large part of the movement by
exiting early, and it is not very good to settle for 20% when you could
have multiplied those profits by five if you had continued until the end.

In this Telefónica chart we have made a purchase with a

stoploss at €8.37 and we have entered a stop profit at
€13.4, which corresponds to a profit of 30%, because at
the time we considered that it seemed like a good surplus
value, which in fact it is. Once the price has reached that
level, the stop profit sell order is executed, we gain 30%
but nevertheless the price has continued to rise to €20,
which would have meant a profit of 93%. Therefore, in
this operation, because we have used a stop profit and
tried to be conservative, we have not been able to reach
higher.
• Break even : This term means placing the stop loss at the same entry
level of the operation, or slightly higher (purchase operations) or
slightly lower (for short positions) enough to cover the commissions.
Obviously this will not be the stop with which we enter the operation,
but rather a movement of it to the entry level when we see that the right
moment occurs based on the behavior of the value.
1.6.4. Why does stop management give so many
headaches?
First of all we have to know where we should put the stoploss. The answer
to this question involves two aspects: firstly, technical analysis and secondly ,
mass psychology .
Technical analysis allows us to mark the different supports and resistances
on the price chart of a value, based on representative maximums and
minimums, it allows us to identify very reliable patterns such as double or
triple bottoms and ceilings, it allows us to draw representative graphs of the
trend such as all types of averages, simple, moving, weighted moving, etc.
With all this we can set stoploss levels, for example a support, the average
itself, that is, the stop will be skipped when the price pierces the 200-session
average downwards, a double bottom, etc. In the case of shorts we would use
resistances, double tops, the average when it is pierced upwards, etc.
For those of you who have ever invested using stoploss, how many times
has it happened to you that you have placed a stoploss on a reference support,
said stoploss has jumped and then the price has continued in the direction that
you had determined when you entered the operation? Surely many more times
than you would have liked, because the face that remains is for framing.
 You can see in this example from Enagás how after having entered longs
for whatever reasons, and placing our stoploss, if we had set it automatic, that
is, you would have placed a stop order at the time of buying the shares, in the
candle of the long tail you would have missed the stop and you would have
been left out of the operation, missing out on the subsequent rise that the
value made according to what you had initially assumed. This is a very
common trap in the markets.
For this reason we talk about mass psychology, because we will have to
try to think about how the strong hands operate, the people who really move
the market, because they are the ones who are going to make the stoploss of
small investors like you and me jump.
Can we solve this first obstacle?
The answer is yes, and in two ways, compatible with each other and
depending on the way each one operates.
One way is to place the stoploss a little away from the reference level, but
only a little, because if it cannot happen that the stop level is triggered, and if
you have good capital management, when you have a high stoploss the
system will set You have very little capital at your disposal to invest, because
you understand that the risk is too high.
The second way, and the one I like the most, is not to work with automatic
stoploss, that is, I decide when I trigger the stoploss. This strategy is quite
useful if you work with weekly charts, not daily ones. The problem it implies
is greater control of the value, since we cannot get lost, because we have no
net if we fall.
What is the argument? The answer is that in this way, I take care of the
price oscillations, that is, I do not take into account the tails of the candles,
because I only take into account the closing price of the candle, on the weekly
chart. It is also possible on a daily chart, but in my experience this way of
operating works much better on weekly candlestick charts, where there is less
market noise.
This way, I can easily get rid of the swings in the candle caused by strong
hands to blow up my stoploss. What I do is see at the end of the week if the
closing price of the candle is below my initial stop level or not. If it is below
(for purchase operations) what I do is launch the sell order on the following
Monday.
This method has saved me from a lot of cases in which if I had not done it
this way I would have been left out of the operation, missing the subsequent
bullish movement.
The only drawback it has, but very important, is that you have to be strict,
since it is up to us to exit the operation, since in this case we do not have a
stop order launched into the market to not worry about the value, knowing
that the stop will jump when I have to do it.
Therefore, anyone who does not want, does not like or does not have the
possibility of using this second strategy, should at least apply the first,
because it is guaranteed that if we place the stop at the same level as the
support, the stop will jump.
Another factor that we must take into account is what type of stop order
we launch into the market, that is, if it is a best order, a market order or a limit
order, because the operation is completely different, not only because the type
of order itself, but also by the asset in question, especially its range.
If we want to guarantee that our shares will be sold at the same stop price,
we will have to enter a limit stop order , which guarantees that if the
shares are sold they will be sold at that price and no other. However, this type
of operation has a risk, as we have already seen, and that is that the price at
which we have the stop has not been negotiated, for example when a gap
occurs. We can have a stoploss at €10.30, the price being at €10.40, and
suddenly drop to €10.20, without going through €10.30, so in this case, the
stock has fallen and However, our stop has not jumped. Do you see the
danger?
On the contrary, if what we want is that if the value of the share falls
below the stoploss the shares are sold immediately, we will have to use a
best or market order , but in this case, our shares may be sell well below
the stoploss. This will depend on the liquidity of the security we are trading.
As you can see, even the simplest things can be made as complicated as
we want, and the solution will always be relative to our way of operating, the
asset, the market, the broker, etc.
1.6.5. Fixed stop or trailing stop
Unfortunately there is no answer to this question, at least not an absolute
answer, that you can write down as a general rule to incorporate into your
trading system.
The disadvantage of the conventional stoploss is that by not moving it, if
we do not have a stop profit that makes us exit when we reach a certain
percentage of profit in the operation, it may happen that, after making profits
of 30%, the value turn around and end up jumping the stop... We would enter
a deep depression, and if we accumulate three or four of these we will surely
consider moving away from the stock market as much as possible. We must
avoid this at all costs. Then we'll see how.
In the following example from Enagás we have bought at the green arrow
with a stoploss marked by the orange line and by not having moved the stop
over time, we have managed to gain 28% and yet the price has completely
turned around and our stop has jumped, losing everything we were earning
plus the stoploss percentage, that is, we ended up losing money.

The dynamic stop or trailing stop helps us in these cases, since, starting
from an initial stop, we can automatically make it so that when a certain
percentage of profit or a percentage of increase in price is reached, the stop
moves to a level that we we set, and from there it will go up at fixed intervals
each time there is an increase in price or profits by a certain percentage.
It seems like a panacea, right? That seemed to me when I discovered it in
the futures market, but the degree of desperation was the same level as in the
previous case, because since the stop is so close to the price, any small
oscillation in the price makes you jump the stop. , leaving you out of play and
missing the best of the movement.
The break even is very typical, especially in the futures market, in
intraday operations. In the stock market it is not so common, but if the
operation is book, that is, according to our trading system it is an operation
that has absolutely everything in mind to go well, we can take the risk and
when we have a small percentage of profit we place in break even, so that we
only have to wait for the stock to rise. The great advantage of this movement
is the degree of tranquility and relaxation that comes to you, because you
know that you are not going to lose, and if you have made the right move, you
will see how your profits go up without risking any of your capital, only what
you you are winning in that operation.
1.6.6. Manual dynamic stop
To finish, what was promised is what was promised: There is a variant of
the trailing stop and that for me is the best option, and it is a manual trailing
stop based on a series of pre-established criteria.
I have taken all the buy and short operations that my trading system has
indicated to me in the last ten years with all the Ibex 35 shares, and I have
tried all types of stop combinations, and the best result has been the
following:
1. Place an initial stoploss based on the technical analysis carried out
on the value and placing it slightly above or below the support or
resistance that you have taken as your next reference. Normally
these supports and resistances are obtained from relevant minimums
and maximums. This point is not easy to learn, and there is no
choice but to practice and practice until you get the hang of it.
Initially, a lot of supports and resistances are drawn that in the end
are not, because the reference candles have not been selected well.
2. When at some point a 10-15% profit has been reached, that is, we
take into account the tails of the candles, we go into break even.
3. When we are long, in the event that the price continues to rise, we
wait for it to reach 20% profit, and at that moment, we see where the
stop line would be at 10% profit with respect to the weighted
average of 30 sessions, that is, if the 10% level is above the average,
we cannot yet move the stop to this level, because it is very likely
that it will leave us out. So, from here, as the price rises, we move
the stop slightly below the average, until the 10% level is below the
average, at which point we leave it fixed, until let's reach 30% profit.
When we reach this level we repeat the play, and so on. I can
guarantee you that the feeling is incredible, seeing how our profits
are increasing and at the same time we are guaranteeing them.
4. If we are short, the operation is the same but in reverse, and we will
have to see at each moment if the new stop level is above the average. If it is
below we will not be able to place it there and we will have to move the stop
slightly above the average.
5. When it comes to exceeding a stop level, wherever we have it, it
must be at the close of the candle, not the tails, which is why we
commented earlier in this article.
 Here you have the previous example where we had lost everything in our
operation with Enagás by skipping the stoploss that we had initially, after
having managed to have a profit of 28% in our hands, but now applying a
trailing stop manually in the manner mentioned.

Once we have achieved a profit greater than 10% we go into break even.
When 20% profit is reached, we move the stop to the blue line marked on the
graph corresponding to 10% profits. The value does not reach 30%, so there is
no new movement of the trailing stop, and we skip the stop, gaining
approximately 10% when the value breaks the stop. We see that the stop was
very well selected, because once it was broken, the stock fell to practically
half its value in at least a few months.
Personally, it is the stop management system that has given me the best
results by far, at least in stock operations, because with futures it is a different
story.
For all the above, I told you at the beginning of the article that the
management of stops is the most difficult aspect of trading to configure, and
furthermore, it requires great composure; As they say, you have to have a cool
head and warm feet. I assure you that it is very difficult for you to have a stop
in an area close to 30% with 50% profits, because you will be constantly
thinking that you can lose almost half of what you had earned in one fell
swoop. However, we must think that we would already have a guaranteed
30% profit, so the perspective changes radically.
 Technical analysis: Advanced level
2.1. Holes or gaps

.1.
2.1.1. What is a gap and why does it occur?

The gaps are a range of

prices between two consecutive
candles where no buy-sell operations have been crossed.
These gaps, known in the jargon of technical analysis as gaps , are of vital
importance when making decisions in any operation, since they give us a lot
of information about how the market has behaved and, what is more
important, what that in the not too distant future it can do.
On countless occasions, gaps are caused by some news of certain
relevance, especially when it is released outside of trading hours.
At the moment in which a gap has formed, a support or resistance zone is
automatically generated, depending on the part of the chart where said gap
has formed. This support or resistance zone is defined by the gap itself.
But in order to correctly interpret the information that the gaps give us, it
is important to distinguish the different types of gaps that exist, because the
meaning that each one of them carries is very different in each case, and we
should not make the mistake of interpreting them. everyone equally when
making a decision to invest.
2.1.2. Types of holes
We can consider that there are four types of holes :
2.1.3. normal gaps
They are those that close in a few sessions and have no implication in the
trend, which is why they usually occur in lateral markets.

In the Sacyr Vallehermoso graph we can see how in a practically lateral

market, a bullish gap is produced with a considerable increase in volume, and
how using the 200 session average (dashed red curve) as resistance, in less
than two weeks it fills perfectly the previous gap and the market continues in
its lateral range preceding the gap.
In the case of Técnicas Reunidas the same thing, a gap is created in a
lateral phase, the price makes support right at the opening of the gap and in
just over a week it fills the gap and everything returns to its place.
2.1.4. exhaust holes
They imply a change in trend, especially when the value was in a lateral
range. It is assumed that the reason why the gap occurred has been important
enough for the markets to make the value take off, either up or down,
depending on whether it is an upward gap or a downward gap. .
Here we can see the escape gap that Telefónica made at the beginning of
2010, where after being sideways for two months, the price makes a bearish
gap, breaking the support of the lateral channel just after the price had also
broken the previous day. average of 30 sessions (green curve). The volume is
enormous, and you can see what happened next, the collapse in price
anticipated perfectly by the escape gap.

These types of gaps do not usually close in the short term, although this
does not mean that they cannot do so and, in fact, they sometimes do so as a
pullback, and then continue with the new trend.
Here is an example of what we just mentioned, how it occurs
 the gap, the price returns to the same area a few days later forming the
pullback, and finally the price rises, not very spectacularly but rises, to finally
end up in a 3-month lateral range.
.1.4.1. Continuation gaps
They occur during a large trend, always in the direction of said trend, and
usually give greater potential to said movement.
Here you have an example of a clear continuation gap, where we are
starting an upward trend (see 30-session average slope), the price makes a cut
to the average, forming resistance in the €18 area. The bullish gap occurs
when said resistance is broken (which is why it can also be considered an
escape gap), the gap is not filled in the short term and the price continues its
rise.
We can see that in December of the same year the gap was closed, but it
took half a year for it to be covered.

.1.4.2. Depletion gaps

They occur when a trend is coming to an end, and therefore they give us
precisely this information, that the trend is ending. Like continuation gaps,
they occur in the same direction as the trend, which is why they are
sometimes confused.
 You can see in the Santander chart how after a sudden bearish movement,
a bearish gap occurred, closing that day's candle right at the 200-session
simple average (dashed red curve) and bouncing off it, closing the gap. ,
radically changing the trend and confirming that it is an exhaustion gap.

It is very important to reflect on the relationship that the trading volume

has with the gaps, and that is that in the escape, continuation and exhaustion
gaps the trading volume is usually quite high, as you have seen in all the
examples that we have seen in the chapter.
If we take a look at a chart in minutes of any security, it is very common
to see how it opens at a price quite separate from the closing price of the
previous day. Depending on the type of gap, it usually closes or not, although
the most common thing is that the gap ends up closing in a relatively short
period of time.
Given the importance of the zones marked by continuation, escape and
exhaustion gaps, their limits act as supports and resistances, and also,
logically, the greater the trading volume when the gap, support or marked
resistance will be more consistent.
 If we recap the different types of gaps we have seen, I am sure that many
people will wonder how you can distinguish a continuation gap from an
exhaustion gap, since both occur in the direction of the trend, and yet The
implication of each of them is completely opposite to the other, since the
continuation gaps indicate precisely that, a continuation of the main trend,
while the exhaustion gaps are intended to warn of an imminent change in the
direction of the trend, either to the contrary or at least to a lateral range.
A clear example of the relationship between the gaps and the averages is
in the Santander graph that we have seen before where the average of 200
sessions acts as support, confirming to us at the same moment in which the
gap is formed that it is a exhaustion gap.
Differentiating both types of gaps is very complicated, and looking at the
candle itself and the volume will not give us any clue as to the type of gap it
is, because both usually have a large volume and both open the gap. gap in the
direction of the trend.
So, if the connotations of continuation and exhaustion gaps are totally
antagonistic, it is essential to try to identify what type it is as soon as possible,
but how do we do it?
2.1.5. How to distinguish a continuation gap from an
exhaustion gap
As we just said, the information about the candle and the volume does not
reach us in itself, and we will have to resort to other technical analysis tools to
try to identify the gap in question.
• For example, if the area where the gap occurred is a support or
resistance area, it is most likely an exhaustion gap, since the resistance
or support is more likely to be respected than to be breached. break
However, we should also look at the volume that has been traded in the
previous movement towards said support or resistance, because if, for
example, we have a resistance and the volume has been increasing as
the price approached said resistance, there is Quite likely that
resistance will be broken and then act as support, especially if the
increase in volume comes from strong hands.
• Another tool is the divergences between the price and indicators, such
as the MACD or the RSI; If there is a divergence between one of these
indicators and the price, we already know that we are in a position for
the market to take a trend turn, and therefore the gap will be one of
exhaustion, as in the previous case. (We will see the Macd and the RSI
later).
• Any type of technical analysis tool that can act as support or resistance,
as is the case of moving averages, typically the 200 session average
and the 30/50 session average. These three types of averages, whether
weighted or not, usually work very well as support and resistance
zones, especially in trend markets, but not in the lateral ones, where
they leak on all sides.
• Consequently, if, for example, we are in a bearish trend, and the gap
occurs in a cut of several preceding countertrend candles (candles that
make up the cut) towards the mean, it is almost certainly an exhaustion
gap, indicating that It is only a cut and not a change in trend. It would
be different if the gap occurs after the price has broken the average in
an upward direction, because then we would be talking about a
continuation gap, because not only has the resistance been left behind
but it also very likely acts as support.
 • Another classic example is Fibonacci retracements, which will have the
same connotations, or trend lines and trend channels . (We'll look at
Fibonacci retracements later.)
• Finally, the information that the analysis of Japanese candlesticks can
give us, especially if a typical trend reversal formation occurs, for
example. (We will look at some typical candlestick formations later.)
The big problem with the analysis of gaps is that they are not at all easy to
identify in terms of their typology, and if we do not have enough experience
and that instinct that is only achieved with real practice, what will happen in
Many times it is that we lose the operation because by the time we realize the
type of gap it will be too late and the stop will be too large to enter the
operation.
Finally, comment that the time frame is of utmost importance , and I explain
why: the shorter the time frame, the more holes we are going to find; Thus, it
is more likely to find a gap on a daily chart than on a weekly or monthly
chart. This means that if we find the gap in a long-term graph, larger than
daily, such as weekly or monthly, this gap will surely be very important and
give us a lot of information, just as it happens with the rest of the charts. the
information that technical analysis gives us, that the levels we find in a
weekly or monthly chart are much more important than those we find in a
daily one.
This in itself shows that most of the gaps are filled in very few sessions,
hence it is more difficult for us to find gaps in weekly charts and I am not
saying anything in monthly charts.
 2.2. Figures of turn or change of trend
2.2.1. Importance of detecting a change in trend
One of the objectives, if not the main one, of technical analysis is to try to
predict when a change in the main trend will occur and take advantage of it to
take positions in one direction or the other.
There are endless figures, some of which we have seen indirectly when we
have talked about supports, resistances, guidelines and channels, double
bottoms and double tops...
Next we are going to see other types of formations or figures that are
usually quite reliable when it comes to predicting that there is going to be a
change in trend.
There are figures of this type to write a book about, but we have preferred
not to clutter you with theory and to see only those figures and formations
that give good results in the markets.
We must remember that we will have to be able to buy at the right time,
which as we will see will never be at the lowest point, and we should not get
off the train until we see one of these trend change figures from bullish to
bearish, because otherwise we will not be able to achieve the final objective:
earning more money in successful operations than we lose in operations that
have gone wrong.
Likewise, in order to catch the train, we will have to be capable and astute
to look for when a downtrend is coming or has come to an end, and locate the
ideal moment to get on the new uptrend.
All the tools that Technical Analysis provides us are oriented in this sense,
to detect changes in the markets.
Next we are going to see the most representative and reliable return figures
that we can find within Technical Analysis.
.1.
.2.
2.2.2. Islands or
When there islets
are two relatively close gaps, they produce a figure known as
an island , since the price graph between the two gaps is completely separated
from the rest of the graph.
For purists, they are considered islands only in the event that the two gaps
that determine the island are in opposite directions, that is, a bullish gap and a
bearish gap or vice versa.
As with most gaps, islands take on a lot of importance in strong trends,
marking the end of them, while if they occur in lateral markets they do not
usually bring any relevant implications.

Here you have an example of what we have just discussed, how a bullish
gap and a bearish gap form an island, and how this marks the end of the
bullish trend and gives way to a major bearish one.
Telefónica made an upward gap close to €17 when it was in the maximum
zone. The price then rose almost to the €18 area, and at that price level it
formed a new resistance, in the form of a double top, for almost two months.
In January 2010, the support of the lateral range formed with a bearish gap
was broken, generating a section of the graph between both gaps, the island.
This island, as we have explained, marks the end of the strong upward trend
that Telefónica had.
We can see a more recent example, after the sharp fall that the Ibex 35 had
been suffering during 2011.

You can see perfectly in the graph how an island is formed in the area
shaded in red, and how from here the fall ends and the Ibex goes from 7,500
points to exceed 9,000 points.
When this island formation occurred in the selective, more factors
coincided that warned us that the end of the downward trend was imminent,
but we are not going to comment on them now because we have not yet seen
the tools we need.
2.2.3. Reversal Day
Usually, when a value or market is close to the end of the trend according
to which it was moving, the last section of the trend is usually the most
violent. In fact, there are statistics that say that in bearish trends, around 80%
of all losses occur in the final 20% of the fall, and this normally occurs due to
the effect of panic on investors who are long (meaning because he is long on
the one he is buying), and because the strong hands end up doing the trick to
sweep away all their opponents.
We are going to explain how this effect occurs at the end of an uptrend: If
we are immersed in an uptrend, there will come a time when the strong hands
realize that there is not much further to go up and they want to give it a try.
They go back to the market selling everything they have, but, as we have seen
before, they cannot do it all at once because then there would be many more
people who would want to sell, and there would be no investors who would
want to buy the shares that the strong hands want to sell. This is why the
process we called distribution occurs. For them, the ideal is that, except for
them, the rest of the market is a buyer, so that they give compensation, so that
there is a lot of volume, and in this way they will be able to sell quickly and
finish the distribution process.
How do they get it? How do you get the majority of the market to want to
buy?
Strong hands “heat up” the market, raising the price strongly, above what
was rising in the previous trend and closing the day in the area of daily highs.
With this, people are encouraged and will want to buy. Therefore, the bait has
already been thrown and the poor weak hands are chopping one after another.
The next day the strong hands will do the same, but as the end of the day
approaches, they begin to sell, closing the day in an area close to the session
lows, where the volume will be very high because they will have gotten rid of
a lot of paper.
If this has happened, and obviously what we have explained in two days
may take much more time, the most normal thing is that the collapse will
begin the next day. Depending on the virulence of the movement, sometimes
it may happen that the collapse even begins on the second day that we have
explained after reaching highs, turning around and not waiting for the next
day to begin the new downward movement.
 The movement could be explained exactly the same for an accumulation
phase after a downtrend.
Well, the latter that we have just explained is what is known as a one-day
return, and is characterized by:
1. In an uptrend for a candle in which its maximum is higher than
the previous maximums, the closing of the same takes place at the
minimum of the day or very close to the minimum, and in
addition both the close and the minimum are lower than the
minimum from the previous day and, of course, most
fundamentally, there has to be a large increase in volume.

2. In a bearish trend for a candle in which its low is lower than all
previous lows, its close takes place at the high of the day or very
close to the high, and both the close and the high will be higher
than the
 maximum of the previous day and, likewise, the increase in volume must
be important.

The return in one day is one of the safest trend change figures when it
comes to predicting a possible trend change, as long as the volume
accompanies the movement. However, they are not easy to see.
This figure usually occurs quite often when volatility is high (Later we
will see how we can evaluate market volatility).
In the following daily Banesto graph, you can see a return in one day
coming from an upward trend, which runs out and radically changes to a
bearish one. Note how all the conditions required in the sail are met compared
to the previous one.
As you can see in the example, the volume increased a lot in the formation
of the candle.
In this other example you have another figure back in one day but in the
opposite direction, that is, from a bearish to bullish trend.
2.2.4. Shoulder-head-shoulder
This is undoubtedly one of the safest trend change figures that we can find
in technical analysis. The problem is that they are not easy to find, but when
they do occur they are usually quite reliable.
We are going to see that in order for us to conclude that a shoulder-head-
shoulder figure has been given, it is not going to be enough for us to identify
the figure, but rather a series of guidelines have to be given with the volume,
both in combination.
Left shoulder
There must be an initial rise in price with large volume, at least higher
than the average of the last few days. Next we will have to see a drop in price
to form the first shoulder, and it must occur with a drop in volume.
Why do we need a significant decrease in volume in the price drop? The
answer is simple: there are buyers who think that the price will continue to
rise and decide to stay bought.
Head
A new rise in price occurs with an increase in volume, although in many
cases it will not be as high as the one that took place in the formation of the
left shoulder. Once up, the head is formed with a drop in price and a
consequent drop in volume compared to what took place during the rise. Once
again, buyers risk staying, but when this new drop occurs towards the same
price level where it fell when the left shoulder was formed, they begin to get
worried, and things no longer seem so clear.
Right shoulder
We have a new rise but now the volume will be much lower due to the
unrest that is beginning to reign in the value. After the rise we have a new
decline to finish forming the right shoulder and also the traded volume is low.
We already have the figure formed, and now what?
The price has risen three times and fallen three times, all to end up at the
same price level, but what has changed compared to the situation prior to the
formation of this figure is that there are a lot of people buying and very few
people who is now willing to buy.
Therefore, if the price level is broken now, the fall will be monumental
and with strong volume.
This price level that we are talking about, which is the one that unites the
falls in the formations of the left shoulder and the head, is called the clavicular
line , and acts as support, in such a way that if this support is broken, the
minimum objective of Fall will be marked by the distance from the clavicular
line to the head. We will project this distance from the clavicular line
downwards and we will obtain the minimum objective.
Ideally, this clavicular line should be horizontal, that is, the price to which
it has regressed in the formation of the shoulders and head should be the
same. However, a slight inclination is admitted to consider the figure as such.

In the following example from Acciona you can see an HCH formation,
where the right shoulder is lower than the left, probably because there were no
longer enough buyers to take the price higher again, after the declines in the
left shoulder formation. and the head.
The clavicular line has been drawn in green on the graph, and is shown
how the line is drawn to calculate the minimum target of the figure, which as
can be seen was reached without any problem in less than three months, once
the clavicular line was broken (red arrow), and that the value was clearly
bullish.
 The shoulder-head-shoulder pattern usually marks the end of an uptrend,
and after its formation, the stock chart completely turns around and goes into
a bearish phase.

It is very common that when the clavicular line is broken, a pullback

occurs, just as it occurred with the breakage of the supports, since, as we have
mentioned, the clavicular line is a support. If this pullback occurs and the
price falls we have a very clear confirmation of the trend change figure.

2.2.5. Inverted shoulder-head-shoulder

The inverted figure can also occur, and occurs when a bearish stage ends.
The breakage of the clavicular line will indicate a buy point.
The explanation is the same but in reverse, with the same criteria when
considering the volume in the formation, except for the decrease produced in
the formation of the head, which here the volume must be high, unlike in the
normal figure.
 MINIMUM GOAL

clavicular line

Breaking point

This is an example of an inverted HCH figure. The explanation is the same

as in the previous example but in reverse, as is logical. It is worth noting the
large increase in volume in the candle that breaks with the clavicular line, and
that in this case a double pullback to the clavicular line is produced to end up
meeting the minimum objective, also quite quickly.
 As you can see, the HCH figure and its inverted figure are figures that
confirm a radical change in the trend, because they achieve that even though
the value comes with a strong trend, after the figure the trend becomes
completely opposite and also quite abrupt. .
For this reason, it is perhaps one of the most reliable trend change figures
that we can find in technical analysis.
2.2.6. Rounded ceilings and floors
They are also known as “ soupers ” or “ cups ”. This is a very reliable trend
change figure, especially because it requires a long time to form, which
means that the trend change literally occurs due to pure exhaustion.
We talk about tops and bottoms because we can find this figure both at the
end of a downtrend and at the end of an uptrend. However, those that mark
the end of a downward trend are more common.
Even so, they are quite difficult to find, but when they form it is worth
keeping an eye on them because when the breakout occurs, after a very long
period of accumulation or distribution by strong hands, it is usually very
abrupt and with a large margin. of profit.
Looking at the volume, on a rounded floor it falls a lot during formation,
and at the bottom of the tureen it is even lower. For this reason these
formations are also known as sleeping soils .
The volume will increase rapidly when the breakout occurs.
You can see all this perfectly in the following Jazztel weekly chart.
2.2.7. Trend change in three days
This pattern occurs when there are three consecutive candles in which
there is not much movement in the price and in the fourth candle the price
jumps sharply up or down, and at the end of the session it ends at or above the
high of the three preceding candles. or below the minimum of these three
candles.
It is a fairly reliable pattern and that is why we must try to identify it when
it occurs.
Let's look separately at the behavior of the pattern when it occurs in one
direction or the opposite.
Breakouts to the downside
• The low of the fourth candle must be below the lows of the 3
preceding candles, as we have explained.
• However, we ask that the high remains below the highs of the
previous 3 candles.
• Finally, the close must occur below the open and below the close of
the 3 preceding candles.
Breakouts to the upside
• The high of the fourth candle must be above the highs of the 3
preceding candles.
• The low must be above the lows of the previous 3 candles.
• Finally, the close must occur above the open and above the close of
the 3 preceding candles.
 2.3. Continuation Figures
2.3.1. Triangles
In technical analysis we can find up to three types of triangles: ascending,
descending and symmetrical.
Regardless of the type of triangle, they all tell us the same thing, and it is a
situation of uncertainty in value. This is why they are so important, since
there comes a time when this situation changes and the value increases, either
up or down.
.3.1.1. Symmetrical triangle
The situation of uncertainty comes because on the one hand sellers want to
sell as soon as possible because they think that the price will not rise any
more, and on the other hand buyers want to buy as soon as possible because
they think that small drops in price are mere rebounds. technical and the price
will continue to rise.
With this technical tie the triangle is formed. This triangle is formed by
drawing a bullish trend drawn by increasing lows and a bearish trend drawn
by decreasing highs.

The most common thing is that the breakage of the triangle occurs on the
side that implies a continuation of the previous trend, that is, if the situation
prior to the triangle the trend was bullish, the most logical thing is that the
triangle
 breaks at the top, and if, on the other hand, the trend was downward, it is
most common for it to break at the bottom.
Normally the breakage of any of the guidelines usually produces a strong
movement.
Regarding the volume, it is characteristic in the formation of a triangle that
the volume decreases during the formation and increases drastically during
the breaking of the figure.

In this graph of the Ibex 35 we can see the formation of a symmetrical

triangle. The sides of the symmetrical triangle do not have to have exactly the
same inclination. What is important is that it is formed by a guideline that can
be drawn by several consecutive ascending minimums and another by
consecutive decreasing maximums, as is the case.
It should be noted that in this example, where the trend prior to the
formation of the triangle was clearly bearish, the triangle was pierced by the
bullish side, although it is more common to see how the triangle is pierced by
the side that allows the continuation of the trend. preceding trend.
Perhaps a possible explanation is that in the example the slope of the
bullish trend is greater than that of the bearish trend, motivated because the
lows were increasing more than the highs were falling, a sign of more interest
on the buying side than for sales.
 We can also notice that in this case, once the breakup of the triangle
occurred, the price retraced the bearish trend of the triangle on two occasions,
acting as support, which perfectly confirmed the confirmation of the breakup
of the figure.
.3.1.2. Ascending triangle
In this case, one of the directions of the triangle is horizontal, specifically
the upper part, therefore it is a resistance. In this case, the buying interest is
increasing, since the minimums are increasingly higher, and the majority of
sellers are only willing to sell at the price set by the resistance. For this
reason, buyers have to buy at increasingly higher prices.

The ascending triangle can break on both sides, but it is more likely to
break above as buying force is building. However, this is not always the case.
As in all triangles, the volume must increase at the moment of the
breakout of the figure.
In the following example we can see an ascending triangle on a weekly
Abengoa chart.
The value had been showing an upward trend until April 2004, where the
price entered an ascending triangle, with resistance in the €7.20 area and an
upward trend drawn by consecutive ascending minimums.
In January 2005, the price managed to break the triangle at the top and not
only continued the previous upward trend, but also became stronger, clearly
increasing the slope of the average.

.3.1.3. Descending triangle

Here there is support at the bottom and a bearish trend drawn by the
decreasing highs at the top. In this case, the selling interest is greater, since
the highs are falling, but buyers are only willing to buy at the level marked by
support.
 The figure can also break on both sides, although it is more likely to break
from the bottom, due to the greater selling force.

In this daily chart of Abertis you can see a descending triangle figure, since
we can draw a bearish guideline for the consecutive descending highs and
horizontal support for the lows.
Here the triangle also breaks at the top and continues with the previous
uptrend.
2.3.2. Flags and pennants
Like triangles, they are figures that occur quite a lot in the markets, and
the breakout can occur both upwards and downwards, so we will talk in each
case about bullish and bearish flags and pennants.
These are trend continuation figures, and are formed as follows:
In the middle of a trend, a very abrupt price movement occurs, in a single
candle, a movement that often coincides with news, and with high volume.
Since the movement is so abrupt, operators do not dare to follow the
movement and a period of consolidation begins and the volume drops greatly.
The candle with the sudden movement forms what is called the flagpole
and the rest of the candles with little movement and low volume form the flag
rag .

When this consolidation period ends and the price breaks in the direction
that the candle that forms the mast did and with strong volume, the previous
movement continues.
The minimum objective is given by the size of the mast, once the break
has occurred.
A pennant is a particular case of flag, where the cloth has the shape of a
symmetrical triangle. Its operation is exactly the same
than that of the flag.

In the following Azkoyen graph you can see the formation of a flag, and
how it breaks in the direction of the previous trend. You can also see the huge
volume growth on the mast candle and the breakout candle.
2.3.3. Diamond
It is quite difficult to identify, but if it forms it usually leads to large falls.
A diamond is made up of two symmetrical triangles opposite at their base.
 2.4. Fibonacci tools
In my first stage as an independent trader, despite using technical analysis
as the foundation of my entire investment system, I fled from all those
analyzes that in some way referred to a certain Fibonacci, not because I
believed that it could not be not be useful, but rather because at first it seemed
complicated, difficult to interpret and, of course, impossible to put into
practice.
With the passage of time, one matures and loses the initial fear. I can tell
you that it is another technical analysis tool that offers really good results. In
fact, we will see that on many occasions, together with other indicators, they
will allow us to distinguish a cut from a trend change, perhaps one of the most
complicated aspects of trading.
We must start from the basis that the Fibonacci application does not have
the slightest real basis, but the same thing happens as always, as everyone
knows it, everyone uses it, so it ends up working. It is the same example as
technical analysis itself: if everyone manages supports and resistances, they
end up being respected. This is why these tools are so useful in the world of
trading.
2.4.1. Who was Fibonacci?
His real name was Leonardo of Pisa, although everyone knew him by
Fibonacci. He was a mathematician who was born in 1175. Yes, you read
correctly, in 1175, but since then the Ibex, the Dow Jones, did not exist...
Fibonacci created what is known as a numerical series, specifically the
following: 0.1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144...
What is special about these numbers?
If we look closely we will see that each number is the sum of the two that
precede it. So what?, we may ask. The most curious thing is that if each
number is divided by the previous one, it gives a ratio of 1.618 (more or less,
and the larger the numbers, the greater the approximation of the result to
1.618).
Even with everything, we still haven't found any application. What is
special about this ratio of 1.618? The answer to this question is the key to
everything.
At the end of the 15th century, Luca Pacioli called the Fibonacci ratio
“The divine proportion”, and it was called that because it has been shown that
it is a proportion that is widely followed in nature, in geometry, in
construction, Astronomy, etc
For example, as an anecdote, the ratio that predominates in the
construction of the pyramid of Gizeh in Egypt or many others in Mexico, is
1.618. Other examples are:
• The relationship between the number of male bees and female bees in a
honeycomb.
• The arrangement of flower petals.
• The distribution of leaves on a stem.
• The relationship between the thickness of a tree's main branches and its
trunk.
• Many other examples that we can find in art, culture, construction, etc.
 Since it seemed that this “divine proportion” occurred so much in all
aspects of life, one day it occurred to someone that it could also work in the
financial markets and, little by little, people began to use it, until Over time it
became, like technical analysis, a dogma of faith.
The theory on which it was surely based was that the market moves in a
rhythmic way, and that the Fibonacci sequence is present in this rhythm. We
see this rhythm in the market in the form of wave cycles.
Don't try to look for some scientific explanation as to why it works in the
world of investment because there isn't one, it works because of mass theory,
no more, no less, but believe me, it works.
2.4.2. Fibonacci retracements
As a tool within technical analysis, Fibonacci retracements mean that there
is a possibility that the price of a security will recede a considerable
percentage within the original movement that precedes it, and thus find
support or resistance levels indicated by the Fibonacci numbers.
We will see that these levels are constructed by drawing a trend line
between two extreme points of the movement that we are analyzing, and
applying the Fibonacci percentages to the vertical distance between both
points, that is, to the price axis.
What are Fibonacci percentages or retracements?
Although there are more, the main retracement levels are: 38.2%, 50%,
61.8% and 100%
Do they all have the same importance?
No, and later we will see which ones are more important and why.
How are Fibonacci levels used? •
They are commonly used to identify long-term levels. I, for example, use
weekly charts a lot in my trading, because they give me a temporal view that I
don't get from a daily chart, and at the same time I avoid market noises. In
these weekly charts, Fibonacci levels are very useful for forecasting trend
reversals, bounces off support levels, etc.
In the following graph we have outlined the 61.8% Fibonacci retracement
with an orange line, and you can see how Arcelor Mittal uses it as a support, a
point where we could enter long (green arrow), and how it subsequently
breaks the line marking us a opportunity to position ourselves short,
producing a clear change in trend, with the value reaching the starting price
on the rise, as is usually the case once this Fibonacci level is broken.
 There are also people who use them to identify supports and resistances at
an intraday level, taking the daily, weekly or monthly maximum and
minimum as reference points to build Fibonacci levels.
I have never particularly used them intraday, because for me I lose sight of
the real situation of the trend.
Answering the question of which level or levels are most important, the
answer is the 61.8% retracement level, and if this level is exceeded we should
expect the price to make a 100% correction of the movement. Take Figure 1
as an example.
In the following Enagás graph you can see another example of how
important the 61.8% decline is. You can see how the 61.8% retracement acts
as support on two occasions and fails to penetrate it (at the candle close, since
what matters to us is the weekly close). Consequently, it has acted as a double
bottom, and finally you can see how the price has gone up accordingly,
recovering all the advance of the price movement, even surpassing it.
 For example, if we are in an uptrend and we draw Fibonacci retracement
levels, these will be likely support zones where a downward correction move
would end. The first support is 38.2%, and if the price does not stop here and
continues to correct, this level will become resistance and the next support
level would become the 50% Fibonacci retracement, and so on.
The stronger the market movement has been, the better results we will
obtain from the application of Fibonacci retracement levels.
We all know that when there has been a strong movement in price,
whether bullish or bearish, the market tends to retract. The levels at which this
retracement ends or stops very often correspond to Fibonacci retracement
levels. You can see an example of this behavior in the following Ferrovial
graph, where the value, after a rise from €2.14 to 5.48% (an increase of more
than 100%), buyers and sellers balance the balance, and the price remained
between the maximum of €5.48 and €4.20, which correspond perfectly with
the first important Fibonacci retracement, 38.20%, and the value remained in
a completely sideways trend for a year and a half, for the last week of
December 2003 to break strongly upwards.
2.4.3. The Fibonacci fan

Also known as Fibonacci Fan , it is an analysis method that consists of

drawing divergent trend lines from a common point (point A), forming a kind
of fan, according to the Fibonacci ratios.
The reference points that we must take to draw the fan are the same as in
the case of Fibonacci retracement levels, that is, the start (point A) and end
(Point B) points of the movement we want to analyze. The vertical line drawn
between the second point perpendicular to the horizontal line marked by the
first point is divided into sections that meet the Fibonacci ratios, and the rays
drawn from the first point will pass through these divisions.
There is no need to be scared by this, since practically any technical
analysis software has these types of tools and already does everything; You
simply have to give it the start and end points.
Each of the rays will be a potential support or resistance line in the future
of the movement, similar to horizontal lines.
The interpretation, therefore, is the same as with horizontal lines: if the
price crosses a line, this will function as a potential support line or
resistance, depending on whether the movement is up or down, and the price
will head towards the next ray, and so on.
In the following graph we have an example of the application of the
Fibonacci fan on the BBVA weekly chart. We have selected points A and B
as ends of a movement of great force and amplitude, and with the Visual
Chart the Fan tool was selected between points A and B. In the graph we have
indicated as points 1, 2 and 3 those areas where the price supported the rays
corresponding to the Fibonacci retracements, and finally, at point 4 the ray
corresponding to the 61.8% retracement penetrates downwards. and once this
ray is lost it acts as a strong resistance, making the value unable to recover
values and finally plummeting to the €2.8 area.
It is another example of the potential that Fibonacci retracements have, in all
their variants.
2.4.4. Fibonacci arcs
The use of the Fibonacci fan with Fibonacci arcs is quite common, so that
the crossings of both mark points that are considered strong supports and/or
resistances.
They are curved lines drawn between the maximum and minimum of a
market movement marked at the distances marked by Fibonacci retracements
and mark support and resistance zones.
To draw them, the maximum and minimum points of the movement under
study are joined, and the line formed represents the radius of a circle, that is,
one of the ends will be the center of the circle and the value 0% will be given,
giving the other end of the line the value of 100%. From this center,
concentric arcs of circumference will be drawn that intersect with the line that
has been drawn and that are drawn at the distances marked by the Fibonacci
levels.
The upper end of the line will be taken as 0% if we are facing an upward
movement and the lower point in the case of a downward movement.
It should be noted that since they are arcs of circumference, these will vary
depending on the scale used in the graph, that is, they will not be the same if
we are using a decimal scale than if we are using a logarithmic scale.
Therefore, tests should be carried out to determine which scale works best for
a given graph, based on historical data.
 This is an example of the Visual Chart application of Fibonacci arcs,
where you can see the huge drop that took place in BBVA from the highs of
early 2007, and how it was so strong and pronounced, that it did not even
come close the price to the first retracement level. On the other hand, we can
see how the 0% arc worked as resistance, being tested up to 3 times without
success, the stock falling, until in the second quarter of 2009 it broke the arc
and from there it rose more than 50%.
Therefore, this arc has worked in a similar way to a conventional
resistance, and in what way.
2.4.5. Fibonacci extensions
Like retracements, they are used to establish support and resistance, with
the difference that extensions will be possible profit-taking targets, while
retracements are frequently used as possible entry points.
Fibonacci extensions are also normally included in technical analysis
software and their insertion method is the same as with retracements. Some
platforms even draw pullbacks and extensions at the same time.
It should be noted that to draw the extensions, two points will not be
enough, as in the setbacks, but we will need one more. This third point is the
minimum or maximum reached by the pullback that occurs after a trend
movement.
To understand it better, let's take the example of a bullish movement.
During this movement, we will reach a maximum point, a pullback will occur
and the bullish movement will resume. Well, the minimum level reached in
this pullback will be the third point that we need to draw the extensions.
2.4.6. The Fibonacci spiral
It is an analysis tool that, using Fibonacci ratios, draws a spiral on the
price and time chart of an asset and predicts support and resistance zones.
Fibonacci spirals connect price and time so that each point on the spiral
represents areas where corrections and trend changes occur.
It is constructed by drawing concentric arcs whose radii correspond to the
Fibonacci sequence. To choose the center of the spiral, we must draw spirals
until we find what best adapts to the turning points of the market in the past.
Unlike the other Fibonacci analysis methods, the exact methods for
drawing Fibonacci spirals used by professionals is kept as something of a
secret.
2.4.7. Fibonacci time zones
It is also known as the Fibonacci Time Projections, and they are a series of
vertical lines spaced in time according to the Fibonacci sequence, and it is
expected that in the vicinity of each of these lines a significant change in price
behavior.
To obtain these lines, a time interval is first chosen on the price chart.
Although we could take any interval, the most advisable and logical thing is
to choose an interval that includes two significant maximums or minimums.
This will be the base interval from which the Fibonacci time zone series is
constructed.
To calculate the second interval, multiply the temporal length of the first
interval by the golden ratio (1.618). The following time zones are calculated
in the same way by multiplying the length of the previous interval by the
golden ratio.
It is obvious that the first lines will be closer, and the following ones will
become more and more separated. Therefore it seems logical to discard the
first five lines.
Theoretically, the end of the hunt time zone represents a time when there
can be a major change in price, either a trend reversal or a large move in favor
of the preceding trend.
2.4.8. Common mistakes to avoid when applying
Fibonacci retracements
1. DO N'T MIX THE REFERENCE POINTS : When drawing Fibonacci
retracements, as happens when we draw supports and resistances, we
can consider the maximums, minimums, closings or openings as a
reference, the most common being the maximums and minimums.
Well, whatever reference we use, it must always be the same, and we
must not mix them, that is, we cannot use the minimum of the first
point and the close of the second to draw the Fibonacci retracements;
Either we take the minimum of one and the maximum of the other or
we take the closures of both.
2. DO N'T FORGET TO TAKE INTO ACCOUNT THE MAIN LONG- TERM TREND : It is a
very common mistake to apply Fibonacci retracements in short-term
movements without keeping in mind the vision that the long term gives
us, so we will be left with an incomplete vision. of what the market is
doing. If we take into account the main trend we will be right with the
Fibonacci levels and it will indicate operations in the right direction.
In the following two graphs you can see the price of Sacyr
Vallehermoso on two different time scales, one on a daily basis and
another on a weekly basis, and you can perfectly see how on a daily chart,
with the Fibonacci drawn, we could enter long as soon as it supported the
Fibonacci retracement of 38.2%, and we see that the operation would have
gone wrong, because the value has immediately turned around.
Could we have avoided this failed operation? Perfectly, studying the
weekly chart, where we would see that the predominant trend was bearish,
so we should not have made the countertrend operation, or at least we
would take it into account a priori, knowing that we are making a high-risk
operation, well let's go. in the same direction as the trend. In fact, the drop
in value is impressive, so it would have made us at least think a little more
about whether it was worth the risk; presumably not.
3. DO N'T HAVE BLIND FAITH IN F IBONACCI : Fibonacci is a very useful tool
in trading to mark areas of potential support and resistance, as well as
to mark entry or exit points, but as with the rest of the indicators or
 tools, They do not work correctly on their own, and they must serve us
to combine with the conclusions given to us by the other tools that we
have in our trading system, so that the combination of all of them will
give us the opportunity to carry out an operation with a greater
probability of success. .
If Fibonacci is already powerful in itself, imagine if we combine it, for
example, with the divergence signals of a Macd or a stochastic: the
results can be truly spectacular. (We will see these indicators later)
4. DO N'T USE F IBONACCI IN SHORT PERIODS : This point is in line with not
forgetting the main trend. Furthermore, we must take into account
which market and financial product we are operating in, because the
volatility of each is not the same. For example, if we operate in futures,
it is not the same to operate in the future of the mini-S&P as in the
EUR/DOLLAR, since the second is much more volatile than the first.
This is extremely important, because as a general rule, the more
volatile a market or product is, the less importance the supports and
resistances take, because they are usually very little respected. Also as
a general rule, as we lower the timeframe, volatility increases: there are
many more swings on an intraday chart than on a weekly or monthly
chart. Therefore, by going down to short periods, we increase volatility
and lose track of the general trend.
This is the reason why I told you previously that I do not use this tool in
intraday.
 2.5. Indicators
2.5.1. What is a momentum indicator
When we talked about the trend, we said that we had to stick with the
phrase that “the trend is our friend”, and it is totally true, but we must ask
ourselves a question:
What happens when the trend comes to an end?
When the trend begins to run out, the trend is no longer our friend, and we
must think about closing positions or preparing for a change in it, and we
must not continue operating in its direction.
This is where to enter momentum indicators , to try to detect a loss of
strength in the trend, an exhaustion, and from that moment on operate
according to the new situation.
The big problem that the indicators are going to pose for us is that on
many occasions they are going to give us contradictory signals. For this
reason, it will be necessary to know how to distinguish the applications that
each one of them has, because not all of them are suitable for everything;
Some indicators will be useful to detect price exhaustion and consequently an
imminent change in trend, while others will help us follow trends.
Therefore, we will see at the end of the course, when we develop our
trading system, that we must use indicators that do not coincide in their
functions.
We must remember that technical analysis is a set of tools with which we
will have to be able to detect the beginning of a trend, get on it, get off when
it is ending and enter the next one, and so on, always jumping in the direction
and appropriate time.
When we talk about momentum we are referring to the strength of the
movement, the speed of price change.
Some examples of momentum indicators are the popular MACD, RSI or
Stochastic, among others. All of them give us information about the trend,
whether it is bullish or bearish, whether it is accelerating or slowing down,
that is, the speed of the price change.
I imagine you have heard that in technical analysis there are indicators and
oscillators. Actually, we will refer to one and the other interchangeably,
because the only difference that exists between them is that the oscillators are
called that because they vary between a maximum value and a minimum
value, that is, they are bounded.
2.5.2. Types of indicators
There are many ways to classify indicators, based on a lot of variables,
functions, applications, etc., but personally I am left with one of the most
widespread and simplest, which is the following:

MACD TRIX Directional

Movement On Balance
TREND FOLLOWERS Volume (OBV)

RSI
Stochastic
OSCILLATORS Momentum
ICC

Trend followers
These indicators lag behind the price movement, which is why their turn
occurs after the turn in price has occurred. For this reason, they are not useful
for us to detect a future change in trend.
On the contrary, if the trend is strong, these indicators will guarantee us
that we will always be in the right direction and for longer, that is, they will
allow us to let the benefits run.
 Within this group we find one of the two best-known indicators, the
MACD, and others such as the TRIX, the Directional Movement, the
OBV and many others.
Oscillators
These indicators often advance or coincide with the change in price, which
will allow us to better identify turning points in the markets.
By going ahead, they can produce a greater number of false signals.
Therefore they should only be taken into account when the trend is weak.
In this group of indicators we find the other well-known one, the RSI, the
stochastic, the CCI, the Momentum and many others.
Like all Technical Analysis tools, indicators work well on any time frame,
from intraday to monthly charts. Even so, the longer the time frame, the more
likely it is that the signal given by the indicators will be more reliable,
because we would be talking about changes in the main trend of the value or
index.
Of course, if we combine the signals that the indicators will offer us with
all the figures and patterns of trend changes or continuation of the same, the
probabilities of success will increase greatly.
It should be clear that if a momentum indicator changes direction it will
not necessarily mean that the price will also do so. The turn of the indicator is
just a signal that will put us on alert to see the return of the price. In my
beginnings I have been hit hard for this error of interpretation.
Therefore, the buy or sell signal must be triggered by the reversal of the
price trend, but not by the reversal of the trend of the momentum indicator.
2.5.3. Overbought and oversold
Some of the indicators, such as the RSI or the Stochastic, have maximum
and minimum values, so said indicator is limited between these two values.
These borderline values are usually 0 and 100, although this is not always the
case.
In these cases, an upper band is usually defined, typically from 70 80 to
100 and another lower one from 0 to 20-30. When an indicator is at its highest
point, the market is said to be overbought or overbought , and when it is at its
lowest point, the market is said to be oversold or oversold .
Here we present an example of the RSI oscillator, and how the overbought
and oversold zones are perfectly distinguished, once the indicator enters the
red and green bands respectively.

In other indicators, such as the MACD, we do not have these limits, so to

consider overbought and oversold we use historical data.
According to theory, an overbought or oversold level represents a situation
in which the probability of a reversal increases, but this does not mean that we
should act now, but rather check whether an exhaustion figure is forming on
the price chart. , or some divergence is occurring (we will see divergences in
a future chapter, given their importance). If this is the case, we must close the
position or at least part of it.
When an overbought situation occurs, we will see how the media will
publish good news headlines, news that will make people willing to buy. We
must not fall into this error and stay on the sidelines, because a ceiling will be
close.
When an oversold situation occurs, just the opposite will happen,
catastrophic news will come out, so people will sell their securities for
whatever may happen; a floor will be nearby.
When an oscillator moves in the direction of the trend, it usually stays
longer in the extreme zones than when it moves in the opposite direction.

In this chart you can perfectly see what I just told you: on the left side of the
chart the trend is bullish, and throughout that stretch the RSI oscillator moves
in the overbought zone or at least in the near zone. In fact, it has only fallen
below 50 on one occasion, which would be the balance point of the oscillator.
This point already corresponds to an area of the
chart where the price has entered a sideways trend (orange arrow). The price
then breaks the support marked with the green line, turning around and
starting the downtrend. Throughout this period the RSI oscillator has been in
the oversold zone or in the area between 50 and the oversold zone, exactly the
opposite of what happened in the other section.
 When the curve of an oscillator is in one of the bands, or in an area close
to it, and suddenly breaks the border of the band on the opposite side and
remains in the area, it usually indicates a change in the trend.
In the Gamesa example that we have just analyzed, you can see how the
RSI had been falling since the price entered the lateral range, and when the
price broke the support (green line) you can perfectly see how the RSI
abruptly enters the oversold, confirming the return figure and the change in
the trend.
On the contrary, this criterion will be very useful to detect the end of a
downtrend and be able to jump into the new trend at the right time.
2.5.4. Divergences
This is one of the safest tools when it comes to anticipating a change in the
trend, especially on weekly and monthly charts, although it also works quite
well on a daily basis.
If you have read any of the analyzes that we publish daily on our blog, you
will have observed that we use divergences a lot to anticipate changes in
trends.
But what are the divergences?
A divergence between the price and an indicator is when both move in
opposite directions, that is, if the price is rising the indicator is falling and
vice versa.
For an upward trend to be healthy, the price must make increasingly
higher highs and lows, while the movement of the indicator must accompany
the price. Likewise, in a downtrend, we have lower and lower lows and higher
highs in price, and the indicator is supposed to do the same.
When this situation does not occur, we will have a divergence before us.
We understand bearish divergence between the price and an indicator when we
have the price in an upward trend, and yet, if we see the maximums of the
indicator that correspond to the increasing maximums of the price, they do not
rise, but rather fall or remain the same. In these cases we can expect a change
from bullish to bearish or at least lateral trend.
This is the outline of a bearish divergence:
 A bullish divergence occurs when we have the price falling, and seeing the
decreasing minimums, if we look for the corresponding minimums in the
indicator, they are not falling, but rather they are rising or are maintained.
With this situation we can expect a change from the bearish trend to a bullish
one or at least a lateral range.
The outline of a bullish divergence would be as follows:
 The concept of divergence is perfectly applicable to any momentum
indicator.
It should be noted that the divergence in itself is not a signal to buy or sell,
but rather it is the alarm to study if a turn in price occurs, by piercing a
support or resistance, for example.
In the following example we have a weekly Gamesa chart in which we can
perfectly see a bearish divergence that made the price turn around definitively
at the end of 2008, and between 2010 and 2012 a bullish divergence that
makes us think that it should be The end of the brutal fall that the value has
suffered is near.
2.5.5. Degree of reliability of a divergence
To assess the degree of reliability of the formation of a divergence we
must consider three criteria:
1. Time spent in training: The longer the training time, the greater the
reliability of the divergence.
2. Number of maximums or minimums that form it: The larger the
number, the more reliable the divergence is.
2.5.6. Divergence failure
In the event that after a highly reliable divergence occurs it does not
produce the expected movement, we must prepare ourselves, because the
most normal thing is for the opposite movement to occur and with great force.
In the following Inditex graph we have the example of this that we have
just discussed. There has been a clear bearish divergence between the price
and the indicator between September 2004 and May 2005, but it was not
fulfilled and the price broke upwards, continuing with the previous trend.
Then, at the beginning of 2006 it began to draw another bearish
divergence and again, after a timid cut, the value broke upwards again,
practically doubling the price in one year.
 2.6. MACD
2.6.1. What is the MACD and how is it drawn?
The MACD (Moving Average Convergence-Divergence) is a momentum
indicator that measures the convergence or divergence between an
exponential average with respect to another average with a longer period.
The parameters of the MACD are the variables exponential moving
average of “Z” days of the blue curve. (These are the default colors in
Prorealtime, and have been taken as a reference so that you can see in the
example graphs how the indicator is drawn).
The variables X, Y, Z usually take the values 12, 26 and 9 respectively.
The blue curve is the fastest curve, and with the parameters we just defined, it
would be the difference between an exponential moving average of 12 periods
and another of 26 periods. The red curve would be the slow curve, and would
be represented by a 9-period exponential moving average.
The MACD histogram is obtained by subtracting the red line from the
blue line.
You can see more clearly what each thing is and how it is calculated in the
following MACD graph.
 In the case of Prorealtime, by default, whenever the MACD (blue curve) is
greater than the signal (red curve), the area between both curves is colored
green and the histogram bars the same, representing that said difference is
greater than zero. When the difference is negative, that is, when the MACD is
less than the signal, the area between the curves is colored red, as are the bars
of the histogram.
Note that the value of each bar of the histogram is precisely the value of
this difference.
The MACD curves move above and below the zero line, and do not have
an upper and lower limit, as is the case with other indicators such as the RSI.
When the MACD (blue line) exceeds the zero level it is considered a sign
of the start of an uptrend, and when it loses it a sign of the start of a
downtrend. This works much better on weekly and monthly charts than on
shorter time frame charts, such as days.
 In this weekly chart of BBVA it can be seen that coming from a great
bullish trend, the MACD remains above the zero line at all times, and when it
crosses downwards the great fall that took place starting in September 2007
begins. From here the MACD remained below the zero line, until it again
pierced it upwards in May 2009, which brought about a change to an uptrend.
However, we will see that the indicator alone will not be enough to decide
the entry and/or exit moment, but that we will need more conditions, but for
the moment we are going to see how we can speculate with the MACD.
2.6.2. Traditional way of trading with the MACD
The most traditional way to operate with the MACD is using the
intersections of the two curves, the fast one and the short one, as follows:
• When the fast curve (MACD) exceeds the slow curve (signal) we
will have a buy signal
• When the fast curve (MACD) cuts the slow curve (signal)
downwards, we will have a sell signal.
In any case, from my point of view it is not advisable to use this way of
operating with average crossovers, at least as the only criterion. For this to
work well, the main trend must be perfectly marked and it must also be
strong.
In particular, the crossover method works very well on monthly charts, as
we can see in the following BBVA monthly chart.

Notice how the signals that the MACD has given us would have allowed us to
catch the trends from the beginning, with profits greater than 100%.
Does the distance from the zero line of the
cutoff point of the MACD curves?
The answer is yes, and the shorter the distance, that is, the closer the cut
occurs to the zero line, the more reliable the signal will be.
2.6.3. Interpreting the signals that the MACD shows
us
I want us to see an example where there are several crossovers between the
MACD curves, to explain how we should interpret them when operating.

The first thing we should observe in the graph is that it comes from an
upward trend, which is gradually weakening. We can observe this because the
30-week moving average becomes increasingly flatter, and the price makes a
lateral range, and so we arrive until July 2007 when the MACD cuts the zero
line downwards, marking the beginning of a trend. bass guitarist.
From this moment on, already in full bearish trend (bearish moving
average of 30), we have marked points 1, 2, 3 and 4 to indicate the moments
in which the fast curve (MACD) cuts upward to the slow curve (signal) ,
which initially would mark our entry points. We are going to analyze them
one by one so that you can see that this would imply going against the trend,
and it is exactly what we should not do.
At cut point 1, it simply involved a momentary stop in the fall to get into a
small lateral range, which we have highlighted with a yellow rectangle.
Therefore, if we had bought, we would have been stuck for almost four
months in which the price has barely moved, so that in the end the price
continues with the main, bearish trend.
How should we have interpreted this MACD signal?
What we should have done is not enter the bullish cut of the MACD
curves and wait for the bearish cut to occur (first red arrow indicated on the
MACD), to enter short and in favor of the trend, taking the movement that
started at the end of the lateral range that we have marked with the yellow
rectangle.
At the next bullish cut point, point 2, the price has simply made a technical
cut slightly above the moving average, and then continues with the previous
movement, making an inverted “V”, which we have marked in orange.
The good way to act would be the same as in point 1: enter shorts in the
bearish cut of the MACD curves after point 2 (indicated with the second red
arrow).
With points 3 and 4 you would do exactly the same.
If you notice, after point 4 and the last red arrow there is a bullish cut in
the MACD curves which was good, but the confirmation did not take place
until in May 2009 when the MACD cut bullishly the zero line, but The time
that had to pass to have this confirmation was three months. Therefore, we
should ignore this signal until the confirmation signal. This occurred because
the cut occurred at a great distance from the zero line, which is why the signal
was not viable as soon as it occurred.
Therefore we must stay with the fact that we have to operate in favor of
the trend, as long as it is perfectly defined and strong.
2.6.4. Combining a weekly chart with a
monthly chart
Another good strategy is to use a combination of a weekly and a monthly
chart, so that if a cut occurs in the MACD curves on the monthly chart at the
same time that the MACD cuts through the zero line on the weekly chart, we
will have a very reliable return signal, as shown in this BBVA example.
The MACD is an excellent trend indicator.
2.6.5. Divergences with the MACD
If, in addition to the signals that the MACD can give us, we add the
presence of a divergence between the price and the indicator itself, the
reliability of the analysis increases considerably.
We have already told you what a divergence is and the importance it has
when performing a technical analysis when we talk about momentum
indicators. We did it before starting with the indicators because its operation
is generalized to all indicators, regardless of whether it works better in some
than in others.
Therefore, it will be enough for us to see some examples so that you will be
able to detect and interpret them.

In this weekly chart of Repsol YPF you can see how increasing highs in
the price are not followed by increasing highs in the MACD, but rather these
are becoming lower and lower.
As soon as the bearish divergence is confirmed, the price plummets (red
arrow).
In this other example from Santander you have the opposite situation, a
bullish divergence between price and MACD. Note the great rise that took
place after the divergence was marked, which indicated the end of the bearish
trend.

We want to emphasize again, and we will not tire of repeating it, that a
divergence is an alarm signal, and does not in itself imply a signal for us to
operate in the market. Following the divergence we will have to see a return
figure, whatever it may be. We would need a crossover of averages, a break
of an important support or resistance, etc.
There is a somewhat special type of divergence, which occurs under the
following circumstances:
For a bullish divergence:
1. For quite some time the price has been falling and the two MACD
curves have also remained for quite some time below the zero line,
without cutting each other.
2. A new low occurs and then a rebound, strong enough to make the
MACD curve cut upwards to the signal curve.
3. The price falls again, generating a new minimum, lower than the
 4. above, turning the MACD curve downwards, approaching the
signal curve but without cutting it.
5. The MACD curve turns upward after approaching the signal curve.
In this case the bullish divergence is much more reliable than a conventional
divergence, and as with all divergences, it will be more reliable the longer its
duration.

This Telefónica graphic explains in detail each of the four steps that we have
just explained. After the confirmation of the movement, Telefónica practically
multiplied its value by two.
For a bearish divergence:
1. The price has been rising for quite some time and both MACD
curves have also remained above the zero line for quite some time,
without intersecting.
2. A new high occurs and then a cut, strong enough to make the
MACD curve cut downwards to the signal curve.
3. The price rises again, generating a new maximum, higher than the
 above, turning the MACD curve upwards, approaching the signal curve
but without cutting it.
4. The MACD curve turns downward after approaching the signal
curve.

A very interesting time to be aware of the formation of divergences is

when the indicator is in an overbought or oversold zone, but as we mentioned
before, the MACD is not limited by up and down like the oscillators, so to
find out If the MACD is overbought or oversold we must see the history and
deduce it.
The previous chart would serve us perfectly as an example to understand
the implications of a divergence when the MACD is in an overbought zone, in
this case.
2.6.6. Warning signs on the MACD
When we are immersed in a trend, and the MACD curves are more or less
separated by a certain distance, if the fast curve (MACD) suddenly
approaches the signal curve and then separates again, as long as the curves
have not intersected We can consider this signal as a warning that the end of
the trend may be coming.
If this alert situation occurs, we will have to be aware of when the fast
curve heads back towards the signal curve, because that will be the moment to
take into account, along with other technical aspects contemplated in our
trading system, to close positions, adjust stops or other conservative
measures, because the end of the movement may be near.

In this IAG chart, the stock was coming from an uptrend, and a warning
signal occurs when the MACD curve (blue curve) approaches the MACD
signal curve (red curve), but does not intersect it. Then the MACD curve
(blue curve) resumes its rise, but as soon as it turns, we can see how it shortly
cuts the downward signal curve, producing the MACD confirmation signal
for a more than possible change of trend.
As good traders, we wait for some other technical signal to confirm the
MACD diagnosis, and we have that signal when the price breaks the support
(green line) of €3.5 corresponding to the first significant minimum below the
weighted moving average. of 30 sessions, and this average has already turned
around.
Therefore, the moment to enter shorts would be indicated by the red arrow,
the first candle with a weekly close below the support that we just mentioned.
You can perfectly see how the price fell from €3.5 to less than €1.5 in less
than a year, that is, a loss of approximately 60%.
The following example is a weekly chart of Repsol YPF, a value that had
been falling from €24 to €11 in a strong downward trend, a fall during which
the two MACD curves fell below the zero line. At the end of September 2008,
the warning signal occurs when the MACD curve (blue curve) abruptly
approaches the signal curve (red curve). The price continued to fall, while we
waited for the MACD curves to cut to give us confirmation. This occurred in
December 2008. However, the price continued to fall for two more months,
which shows that a MACD signal does not imply confirmation to enter.
In March 2009, a second confirmation occurred in the MACD, as the fast
curve (blue curve) approached the slow signal curve (red curve).
We had technical confirmation in May when the price broke upwards the
resistance marked with the orange line, for the first representative maximum
above the 30-session average.
In this way we have stopped earning about €3 compared to the case of
having made the entry in the second confirmation of the MACD, but in this
way we are much safer. Even so, the price rose to €18.
The question that arises now is that these approaches between the two MACD
curves occur very often, so we would need some way to filter these warning
signals.
One way to filter these signals is to ask for the condition that the two
MACD curves have been for a given number of periods without crossing. A
widely used value is to consider a minimum of 14 periods. However, this
number does not guarantee anything, and it is best to try different numbers
and check the results to optimize the system.
In order for an alarm or alert signal to be given, it is important that the
curves do not intersect when the first approach occurs.
2.6.7. Detecting lateral ranges with the MACD
During a trend, periods usually occur where the price momentarily enters a
lateral range, and after that period, the price returns to the previous trend.
If we were able to detect these changes we could have good opportunities
to enter the market, jumping on the trend just at the moment when the price
decides to continue with it.
One way to detect these movements is to use the MACD in the following
way:
If we are in an uptrend and suddenly the price enters a lateral range, we
should observe the following behavior:
1. The fast curve of the MACD cuts the slow curve (signal)
downwards, both being above the zero line.
2. The two curves begin to fall but remain above the zero line at all
times, while the price makes the lateral range.
3. When the fast curve of the MACD cuts upwards the slow curve, it
should predict quite reliably the moment in which the price resumes
its rise. To confirm it we must wait for the price to break the
resistance of the lateral range.
 This weekly Gamesa chart shows perfectly the three steps that have to be
taken to have guarantees that the lateral range will be broken above and the
price will continue with the previous upward trend.
Note that the MACD curves have not touched the zero line at any time
since the cut began that put the value in a period of lateral range, marked in
the price chart in yellow.
If, on the other hand, we were in a downward trend and the price entered a
small lateral range, the behavior we would have to look for would be the
following:
1. The fast curve of the MACD cuts the slow curve (signal) upwards,
both being below the zero line.
2. The two curves begin to rise but remain below the zero line at all
times, while the price makes a lateral range.
3. When the fast curve of the MACD cuts downwards to the slow
curve, it should predict quite reliably the moment in which the price
resumes its declines. To confirm it we must wait for the price to
break the support of the lateral range.
This Prim chart is an example of how the MACD tells us the moment from
which we can enter to engage in the previously initiated downward trend,
after the stop of the lateral range indicated in yellow.
We have the signal to enter shorts in October 2008 (red arrow), when the
price pierces the support indicated with the orange line, and after confirmation
of the MACD (point number 3 on the chart).
 2.7. Stochastic
2.7.1. What is stochastic and how to draw it
It is an oscillator, so it will have maximum and minimum tangos, and its
main use is to work with lateral movements and to give us indications of
when the end of a trend may come. It is not good for marking the beginning
of a trend.
Its operation is based on the principle that when a value is in an uptrend,
the candle closes will tend to be closer to the highs than the lows of the
candles of the selected period, and when the trend is bearish, the closes of the
candles will tend to be closer to the highs than the lows of the candles of the
selected period. the candles of the period considered should be closer to the
lows than the highs.
When this stops happening, that is when we begin to have signs that a
trend may be coming to an end, and we will see that this usually occurs in
overbought and oversold areas.
The stochastic oscillator is represented by two curves, %K and %D, with
%K being the fast curve and therefore more sensitive and %D being the
slower. The %D curve is usually represented with a dashed line, but that
depends on the configuration we want to give to the graph.
The formula for the %K curve is as follows:
i MINIMUM PERIOD
CURRENT CLOSING
% K n —7---------z--------z----------z— . •1OC
MAXIMUM PERIOD • MINIMUM _ PERIOD
The %D curve is the average of the previous 3-period curve, and is
typically an exponential average.
Therefore, to configure the stochastic oscillator we need 3 parameters and
the type of average. We recommend the following:
 PERIOD:14
%K=6
%D=3
M EDA: Exhibit in cat
The %D is strange to change, while the %K is usually changed. In the end,
like everything, it's about testing to see the parameters that work best for us.
Here you can see what the stochastic indicator looks like on an Apple weekly
chart:

As you can see in the stochastic chart, the K and D curves range between 0
and 100, and we choose 70-80 as the upper limit to indicate the overbought
zone and 20-30 as the lower limit to indicate the oversold zone. Choosing
some and valuing others depends on how conservative you want to be; If we
choose 20 and 80 we will be more conservative than if we choose 30 and 70,
since
that the oscillator will spend less time in the overbought and oversold zone. I
particularly prefer 30 and 70 as oversold and overbought limits respectively.
As will happen with all indicators, just because the stochastic is in an
overbought or oversold zone does not necessarily mean that the price will turn
around; In fact, just the opposite can happen, as can be seen in the following
example.
In fact, it usually happens that when the stochastic is in an overbought or
oversold zone, that is when the trend is stronger.
You can see this perfectly in the Apple graph that we just showed you;
Stochastic has been in an overbought zone since April 2009 and yet Apple's
price has more than doubled in that period.
When will it be useful to know that the stochastic is in an overbought or
oversold zone?
When we have signals from other indicators, divergences and other tools,
they are telling us that the trend is losing strength. An example of these
auxiliary tools would be the MACD itself that we have just seen; If the
MACD tells us that the trend may be ending and we have the stochastic in
extreme areas, then it can be useful to us.
Here is an example of how the MACD trend end signals coincide with the
stochastic in an oversold zone, and the entry signal was textbook.
2.7.2. Trading with the stochastic
• If the two curves have surpassed the 70 level that marks overbought
and then cut downwards, we will consider it as a sell signal, a signal
that will be confirmed when both curves cross the 70 line again
downwards. It is necessary to wait for confirmation.
• If the two curves have surpassed the oversold 30 level downwards
and then cross upwards, we will consider it as a buy signal, a signal
that will be confirmed when both curves cross the 30 line upwards
again.
These rules work well whenever the market is sideways or lurching, and
not so well when the market is trending, where we will have more false
signals.
There are people who use a third rule to operate with stochastics, and it is
the crossing of the curves in the intermediate zone, that is, outside the
extreme zones of overbought and oversold. I personally don't like it, because
it generates a lot of false signals.
2.7.3. Divergences
Regarding the search for divergences, it is not one of the indicators that
generates completely reliable divergences with the price, because as soon as it
is in an overbought or oversold zone it immediately generates them, and
many of them are false.
In any case, if we used it to look for divergences, we would take into
account the “D” curve to look for them.
2.7.4. Stochastic Warning Signs
They are the same as those that we have explained in the MACD. In an
uptrend, with the stochastic curves rising, there is suddenly a sharp drop
causing the “K” curve to turn sharply and approach the “D” curve without
actually cutting it, and then the price rises again. and the “K” curve rises
again. An alarm or alert has been formed, and we must intuit that in the next
approach of curve “K” to curve “D” a ceiling will be close.
Similarly, in a bearish trend, with the stochastic curves going down, there
is suddenly a sudden rise in price, causing the “K” curve to turn quickly and
approach the “D” curve without actually cutting it, and then the price falls
again, just like the “K” curve. We have a bullish alert or alarm, and when the
“K” curve approaches the “D” curve again we may be close to the formation
of a bottom.
As we saw in the MACD, there is a specific type of divergence that works
quite well to detect the proximity of market bottoms and tops. Its operation is
as follows:
For a bullish divergence:
1. For quite some time the price has been falling.
2. A new low occurs and then a rebound, strong enough to make the
“K” curve of the stochastic cut upwards to the “D” curve.
3. The price falls again, generating a new minimum, lower than the
previous one, turning the “K” curve of the stochastic downwards,
approaching the “D” curve but without cutting it.
4. The “K” curve of the stochastic turns upward after the approach to
the “D” curve.
In this case the bullish divergence is much more reliable than a
conventional divergence, and as with all divergences, it will be more reliable
the longer its duration.
For a bearish divergence:
1. For quite some time the price has been rising.
2. A new high is produced and then a cut, strong enough to make the
“K” curve of the stochastic cut downwards to the “D” curve.
3. The price rises again, generating a new maximum, higher than the
previous one, turning the “K” curve of the stochastic upwards,
 approaching the “D” curve but without cutting it.
4. The “K” curve of the stochastic turns downwards after the approach
to the “D” curve.
2.7.5. Combining Stochastic with MACD
Let's look at the following monthly graph of Sacyr Vallehermoso, where
we have incorporated the MACD and the Stochastic as indicators.

As can be seen, since 2002 the value has been bullish, the two MACD
curves above the zero line, but at the beginning of 2004 the price makes a cut
to the 30-session average, and remains stationary for a year on one side.
Be careful because to appreciate the side we would have to lower the time
frame to weekly or daily, but in any case it seemed perfectly that for a year
the price was stopped in that area.
Just in that period, the MACD curves became very horizontal, even
slightly tilted downwards.
And what did Stochastic do?
When the retracement to a lateral range began at the beginning of 2004,
the stochastic curves cut downwards, both being above the overbought line,
which gave us the signal that the value wanted to take a break, within its
upward trajectory, and so it was.
At the end of 2004 or beginning of 2005, the stochastic curves cut again,
this time upwards, and also with two appreciations: on the one hand, the two
oscillator curves did not reach the oversold zone, the first sign that the The
trend was going to continue, and the second aspect is that before the crossover
occurs, the fast curve approaches the slow curve without cutting it, which we
know enhances the signal.
The price broke the lateral range and very strongly continued the
preceding uptrend exactly when the stochastic curves cut upwards to the
overbought line.
This is the way to read the information that the stochastic can give us if we
combine it with the trend signals that the MACD gives us. In this way, people
who had not yet entered Sacyr had a very good opportunity to get hooked on
the trend when the combined MACD and stochastic signal occurred, and for
those people who were already inside, but who got rid of part of his portfolio
to consolidate profits, he had this second opportunity to buy more securities.
 2.8. RSI
2.8.1. What is RSI and how is it drawn?
The RSI (Relative Strength Indicator) is perhaps the most popular and
well-known oscillator, and measures the strength of the movement based on
the differences between closing prices.
Its formula is the following:
RS100P10Rs
[ 100
RS is the average of all upward closes in “n” periods divided by the
average of all downward closes in those “n” periods.
Example
Over the last 14 days, there have been 10 days where the stock has closed
with profits, that is, the closing price of the candle has been higher than the
closing price of the previous candle, and for the remaining 4 days the price of
closing has been lower than the closing of the previous day, recording losses.
If the average gain during the 10 profit days has been 2.3% and the
average loss during the remaining 4 days was 0.7%, to calculate the RSI we
will first calculate the RS factor:
RS = 2.3/0.4 = 5.75
Now we can calculate the RSI:
RSI = 100 – (100/(1+5.75)) = 100 – 100/6.75 = 85.18
Therefore, in this case the RSI would clearly be in the overbought zone,
since it exceeds the limit of 70-80 that we have marked to delimit the
overbought zone.
Like the Stochastic, it ranges between 0 and 100, and we can consider the
same levels to evaluate overbought and oversold conditions, i.e. 20-30 for the
oversold limit and 70-80 for the overbought limit. Particularly, as with
Stochastic, we use the limits of 30 and 70.
The RSI can be considered a leading indicator, or at least coincident with
the trend, unlike, for example, the MACD which is a lagging indicator, as we
already saw.
As it is a leading indicator, it will be very useful in those cases where we
know the main trend, and during it, price declines occur, allowing us to join
the trend when said decline ends.
The most typical value for the number of periods is usually 14, which was
popularized by its creator J. Welles Wilder. I have never needed to change it.
2.8.2. Divergences
The divergences that the RSI provides with the price are the most reliable
signal that this oscillator gives us.
If these divergences also occur in an overbought or oversold area, they
will be even more reliable.
Therefore, we will have a bullish divergence when, having the RSI below
the line of 30, the price having made decreasing minimums, the RSI has made
them increasing or at the same level.
If we wanted the signal to be even more reliable, the ideal would be for the
second minimum that forms the divergence to have occurred above the 30
line, with the first minimum below the 30 line, it is understood.

In this weekly chart of Ferrovial, a large bullish divergence has formed

between the price and the RSI from the beginning of 2008 to April 2009, that
is, a divergence for more than a year, and if you notice, the fourth minimum
corresponds to a minimum in the RSI already above the oversold line, giving
greater reliability to the divergence.
We would have technical confirmation once the weekly closing is passed.
 the orange resistance, indicated by the green arrow, and from here, after
pulling back to the 30-session average, the price rose to €8 at the end of 2009.
A bearish divergence will be when, having the RSI above the 70 line, the
price having made increasing highs, the RSI has made them decreasing or at
the same level.
Likewise, so that we have more reliability, it would be ideal if the first
maximum that makes up the divergence was above the 70 line, the second
maximum was below said line.

In the Grifols chart we see 3 consecutive increasing highs in the price,

corresponding to each descending high in the RSI, the last of them below the
overbought line.
We therefore have a bearish divergence, which was confirmed when the
price broke the orange support downwards, indicated on the chart with the red
arrow. From this breakout point the price pulled back to support, which acted
as resistance after being pierced, and the price fell from €15.90 to €8 in a year
and a half.
As with other oscillators, if the trend is strong, it is normal for the RSI to
quickly enter the overbought or oversold zone, without this meaning that the
price cannot continue with said trend.
Therefore, if we close positions because the RSI has reached overbought
or oversold levels, it will cause premature exits and make us lose a large part
of the movement in which we were rightly involved.
In the following example of Ferrovial, if we had been bought during the
upward trend in which the value was immersed, from May to October 2005
the RSI was clearly in the overbought zone, even reaching values of 90,
which indicated a lot of overbought. If we had closed positions due to this
indication, we would have stopped earning a lot of money, since during that
entire period, the price rose from €8.2 to €14, a real animal.
This shows that if there is a strong trend, an RSI in an overbought or
oversold zone indicates strength, not that we have to exit because the market
is going to turn around, unless we have some technical signal that there is a
possibility of a turn around. .
2.8.3. Combination of the RSI with the MACD
We are going to see a way of operating by combining the RSI with the
MACD that will allow us to join a trend that is already in progress, as long as
we know the direction of the main trend.
Bullish trend
If the trend on the weekly chart was bullish, a fact that the MACD has to
confirm when it is rising and above the zero line, we would see the RSI on the
daily chart and we would look for the condition that having fallen below the
zero line oversold, turns upward and is placed above it. If this entire sequence
occurs we would have a good buy signal.
For cases in which the bullish trend is very strong, it is quite difficult for
us to see the RSI in the oversold zone, so if we want to risk a little, we could
raise the oversold level to 40.
Below you can see an example of ACS, where looking at the weekly chart
you can perfectly see how a consolidated bullish trend has been developing,
the MACD is above the zero line, and on the daily chart the RSI reaches the
oversold level in October 2003, even having the oversold level at 30, and not
at 40 as we explained.
This gave us a clear signal to join the trend as soon as the RSI rose again,
leaving the oversold zone.
We have marked the entry signal with a green arrow at the point where the
lateral range is broken at the top, to confirm the movement, after having seen
the RSI signal simultaneous with that of the MACD.
From this point, the value rose from €10 to €25 in two and a half years,
that is, a revaluation of 150%, and it had already been rising for a long time.
That is why it is so important to get on the trend, even if we have not caught it
from the beginning.
 Bearish trend
We would have the same explanation in the case of a downward trend.
If the MACD on the weekly chart is falling and below the zero line, we
would look at the RSI on the daily chart and look for it, having risen above
the overbought line, to turn downward and be below it. . If this chain of
events occurs we would have a good sell signal.
If the bearish trend is very strong, it is unlikely that we will see the daily
RSI in the overbought zone, so it is common to lower the overbought level to
60.
In the following example from Abengoa we have exactly this situation, a
value with a clearly downward trend, and at the moment it enters a lateral
range, we study the RSI on the daily chart and wait for it to enter the
overbought zone.
This occurred in May 2008, with the MACD curves below the zero line,
indicating a high probability of continuing the downtrend.
We give the signal with the red arrow at the moment in which the support
of the lateral channel is pierced, and the price falls more than 50% from that
moment in less than a year.
 2.9. More indicators
2.9.1. The ICC
.9.1.1. What is the CCI
The CCI, Commodity Channel Index, is an oscillator created by Donald
Lambert in 1980, and its name refers to the fact that in its origins it was
applied exclusively to commodity futures markets, especially those that
presented a cyclical behavior, with the intention to detect the moment at
which the beginning or end of one of the cycles occurred.
As time went by, the CCI began to be successfully applied in all types of
markets and time spaces, which is why it became one of the oscillators most
followed by the trading community.
The CCI calculates the difference between the last “typical” price and the
average of the “typical” prices recorded during a given period of time, all
referred to 1.5% of the standard deviation, that is,
EcrpMDM
50015D
Where M is the average of the maximum, minimum and close of a given
day, that is,
M•(H •L[C)/3
Being H the maximum, L the minimum and C the close.
MM is the moving average of M for “n” days, and D is the standard
deviation with respect to the mean.
The parameter that we have to define in our platform when incorporating a
CCI into our graph is the value of “n”. Typically a widely used value would
be n=14, but you can look for the one that gives you the best results.
Like most oscillators, there are levels for the indicator that mark
overbought and oversold zones. Typical values are +100 and -100 to mark the
overbought and oversold zone. When the CCI is above +100 it indicates an
overbought zone and when it is below -100 it indicates an oversold zone.
.9.1.2. How to operate with the CCI
The traditional way of operating with the CCI is as follows:
When the CCI is in an oversold zone, that is, it is below -100, and turns
upward, when it exceeds the zero level it is signaling a buy signal, and when
the CCI is in an overbought zone, it is That is, above +100, and the indicator
turns downward and reaches the zero line, it would be signaling a sell signal.
As we saw with the rest of the indicators, to enter the market we will only
take into account the CCI signals that coincide with the direction of the main
trend, and we will ignore the rest, since in most cases they will be simple cuts
within the predominant trend.

This graph of the Ibex 35 shows two signals that the CCI gave to position
itself long (the first two green arrows), the first of them on June 2005, with an
exit marked by the CCI at the end of the same year, with a rise in Ibex 35 in
that interval close to 1500 points, a second entry in July 2006 with exit around
March 2007, having
The selective raised close to 3000 points in that period.
Once the Ibex 35 softens its moving average, we mark the September
2007 lows as a reference, which will mark the reference support (orange line),
since the perforation of said support, with the price below the average and the
average falling, it would give us a clear indication that a bearish cycle would
begin.
This bearish cycle was confirmed to us by the CCI in May 2008 (red
arrow), giving us an opportunity to position ourselves short, undoing positions
at the end of the same year when the CCI cut the zero reference line, coming
from an oversold zone.
The benefits would have been spectacular, since in that period the Ibex
was close to 5000 points.
.9.1.3. The ICC's divergences
As we have explained with the indicators that we have seen so far, one of
the main potentialities that the CCI offers us is the detection of divergences
between the oscillator and the price.
Here you can see a weekly chart of Banco Popular, and how a clear
bearish divergence was drawn at the 2007 highs, which we have marked as
the yellow zone. At these highs, the corresponding CCI highs have fallen,
instead of accompanying the price, a sign of an imminent change in the trend,
a change that was confirmed in May 2007 when Banco Popular began its
impressive fall, which led it to fall from the €11 area to the area close to €4 in
record time.
In this other example you have a bullish divergence, where you can see the
consequences it had on the price.
Since the divergence was drawn, Grifols ended its fall, and rose from the €8
area in July 2010 to doubling its price in March 2012.
2.9.2. Directional Movement .9.2.1. Introduction
So far we have explained how to find out if a value is trending and what
type, but assessing whether the trend is strong or not was relatively subjective;
We help ourselves with overbought and oversold zones, the slope of the
moving average, etc.
Now we are going to see a tool that will allow us to have a more exact
criterion when evaluating the strength of the trend. This is known as
Directional Movement.
In addition, we have seen that we have trend indicators and oscillators,
some are good for trend markets and others for more lateral markets. If we
have a tool that allows us to assess the strength of the trend, it will help us
when deciding what type of indicator we have to use at all times.
For example, if we are able to find out if a market is in a strong trend, we
could use the mean crossover method, for example, which we saw works very
well in markets in a strong trend.

.9.2.2. What is Directional Movement

Directional Movement is designated by DM (Directional Movement), and
is a fairly complex study created by Wilder, which consists of two lines called
+DI and –DI, where +DI measures upward price movements and the –DI
curve measures downward movements.
Normally +DI is called positive directional movement and –DI negative
directional movement. The first is calculated considering the range
differences due to bullish excess between the current candle and the previous
one, that is, the maximum of the current candle minus the maximum of the
previous candle. When this difference is positive it is considered for the +DI,
and otherwise it is considered zero.
Similarly, the negative directional movement is calculated from the
bearish excess range differences between the current candle and the previous
candle, that is, the difference between the low of the current candle and the
low
from the previous candle. If this difference is positive, the value for –DI is
considered and otherwise it is considered zero.

The case may also occur in which simultaneously the high of the current
candle is higher than the high of the previous day and the low is lower than
the low of the previous day. In this case, the maximum is taken to calculate
the DM, assigning +DI if the difference between the maximums is greater and
–DI if the difference is greater between the minimums.
The True Range
The author of the indicator called the highest of the following ranges the
true range:
• The distance between the maximum and minimum of the current day.
• The distance between the current day's high and the previous day's
close.
• The distance between the close of the previous day and the low of the
current day.
To do this, the formulas are as follows:

where
TR=max[abs(Max-Min);abs(Max-CloseEve);abs(Min-
ClosingEve)]
+DM=max[0;Max-MaxEve]
 -DM=max[0;MinEv-Min]
Both values, +DI and –DI are averaged separately using a moving average
over a period that we will choose and which is usually 14 periods.
Thus we will have:

being +DM(14) the sum of the bullish directional movements of the last
14 periods, -DM(14) the sum of the bearish directional movements of the last
14 periods and TR(14) the sum of the true ranges of the last 14 periods.
The final result is multiplied by 100 to have the value of the indicator as a
percentage, since the directional movement is limited between 0 and 100%.
Don't worry about the calculations because the directional movement
indicator is already incorporated into the vast majority of existing technical
analysis software, and you will only need to choose the number of periods to
apply the moving average.
.9.2.3. Interpretation of the +DI and -DI crossings
Wilder gives great importance to the moment in which the crossing
occurs, as he considers that the maximum or minimum reached by the price at
that moment will not be pierced in the following days, so it is common to use
it as the first stop at the time. to join the market.
According to the author's own definition, we will have a buy signal when
the +DI exceeds the –DI, and a sell signal when the –DI exceeds the +DI.
To be clear about both curves, it is very common, and I recommend it, to
use a green curve for the +DI and a red curve for the –DI.
Continuing with the author's definition, once we have entered long
(bought) we will undo the position when the –DI crosses the +DI, and in the
case of being short (sold) we will undo the position when the +DI crosses the
– GAVE.
In this Apple graphic we show you an example of what directional movement
looks and works like.
The red curve represents the –DI, the green curve represents the +DI, and
the histogram represents the difference between the two. You can see
perfectly how when the –DI is above the +DI the histogram is negative and
appears in red, and how when the +DI is above the –DI the histogram is
positive and is represented in green. Obviously, the crossings of the +DI and –
DI curves appear in the histogram with a value of zero, that is, the crossing of
the zero axis, since at that moment the difference is worth zero.
A black curve also appears, which we will see later, and which will
correspond to another complementary indicator, which will be the ADX, and
which will be very useful to us.
The inputs and outputs that the system that we have just explained would
have given us from the cuts of the +DI and –DI curves have been indicated,
and the conclusion is that the two purchase operations and the two sale
operations have been very good, providing us large capital gains, because
throughout that period the trend was clear.
However, notice how when Apple turns sideways, the directional
movement gives a lot of crossovers between both curves, causing a lot of false
signals.
 It is precisely the lateral behavior that is not doing well for this indicator,
and is going to give us a large number of erroneous signals.
In fact, the author himself warned that for the signals given by the
intersections of the two curves to be reliable, the market would have to be in a
strong trend, obtaining a large number of false signals if this trend condition
did not exist.
How can I solve this problem?
To solve the problem, Welder created another indicator, called ADX
(Average Directional Movement Index), which incorporated the directional
movement to create a combination of conditions when giving buy and sell
signals.
.9.2.4. The ADX
Starting from +DI(14) and –DI(14), Wilder calculated their difference and
divided the result in absolute value by the sum of both, that is,
ab) DI) (DI(4) E
TO •/
u
•DI) (14))
The higher this ratio is, the stronger the direction movement will be and
consequently the trend as well.
Note that in the formulas we have already put n=14, because it is usually
the most common, but you can choose the number of periods that you deem
appropriate.
As was done before, this quotient is multiplied by 100 to obtain it as a
percentage.
Once we know what the ADX is, say that when we want to incorporate
directional movement into our technical analysis, it is quite common for it to
automatically draw the +DI and –DI curves, the DM as a histogram, and the
ADX superimposed as a curve black. In Prorealtime it is as I just described. If
you use software that considers simply +DI, -DI and DM as directional
movement, you must manually superimpose the ADX to have an idea of the
strength of the trend.
The Apple chart we just saw shows the ADX curve superimposed on the
directional movement, as we had anticipated.
.9.2.5. Operating with directional movement
First of all, we must emphasize that we should not be confused with the
ADX curve, in the sense that it does not at any time indicate the direction of
the trend, but rather it indicates its strength. To find out the trend you just
have to look at the price chart.
There is no mathematical rule that works perfectly, but it is common to
consider an ADX above 40 as an indication that there is a strong trend, and an
ADX below 20 as a sign that the movement has little trend or is a a lateral
movement.
We can also obtain a reading of the ADX slope. If the slope is clearly
positive it indicates that the trend is strengthening, and if it becomes negative
it will indicate that the current trend is weakening.
We are going to take the same Apple graph that we saw before again to see
the conclusions that the ADX gives us.

We had commented that when the price goes sideways, the directional
movement will give us a large number of erroneous signals. We have marked
this area on the graph with a yellow box, where
appreciate the multiple crossovers that take place between the +DI and –DI.
If we look at the ADX curve (black curve), we can see how when it went
above 30 it confirmed the strength of the bullish movement, and how when it
went below 20 in May 2011 it coincided exactly with the section in which
The value behaved sideways.
 Therefore, the ADX will help us filter out the false signals that the
directional movement gives us when the price is going to turn sideways.
Therefore, we can affirm that one of the most reliable ways when
operating with directional movement is when the following sequence occurs:
1. ADX falls below +DI and –DI
2. The ADX remains below 20 for some time.
3. The ADX turns upward, taking a positive slope.
4. The ADX exceeds the +DI or –DI.
1. If it exceeds the –DI and the +DI has a positive slope, it will
indicate a buy signal.
2. If it exceeds the +DI and the –DI has a positive slope, it will
indicate a sell signal.
As seems logical, the lower the ADX and the longer it is at levels below
20, the greater the movement will have from the moment the ADX begins to
rise and the sequence we just explained is fulfilled.
 In this weekly Telefónica chart you have an example of a buy signal
marked by the directional, perfectly fulfilling the sequence that we have just
explained: until the moment the signal is given, the ADX remains below 20
all the time and below the +DI and –DI curves. Next, the ADX turns and
takes a positive slope, cutting the –DI curve, at which time the slope of the
+DI curve is positive. Therefore, a clear buy signal.
The direct system would give us an exit in May 2004, having obtained
profits of 21% in just 6 months.
Note that the ADX remained below 20 almost all of 2003, and hence the
force with which the price subsequently rose. In fact, the SDX reached values
above 40 in March 2004.
Here you have a graph from Sacyr Vallehermoso in which the directional
signals a signal to position itself short, since the ADX cut occurs with the +DI
curve.
 In this case we would have obtained a profit of 21% in just four months.
The exit is marked by the intersection of +DI and –DI.
When the ADX has a positive slope and is above 40, the trend following
indicators will give us very good results, obviously, since there will be a
strong trend.
In the event that this circumstance occurs in a bullish value, we could buy
in the support areas where the price is supported during the cuts that occur,
adjusting a stoploss slightly below the support level that we use for entry.
In fact, it is quite common, under these trend circumstances, to operate on
price declines up to the moving average, entering as soon as the rebound
occurs.
In this Inditex example, we have marked the period of time during which the
ADX has remained above 40, indicating a strong trend. During that period we
could take advantage of all the cuts to the moving average to buy cheaper and
ride the upward trend of the value.
If, on the other hand, the ADX meets the conditions that we have just
discussed but the value is in a downward trend, we can enter short in the
resistance zones where the price rebounds from its bullish cuts during the
downtrend, with a stoploss slightly above the level corresponding resistance.
Depending on the market, it is very common to take a value of 30 as a
reference value for the ADX, instead of 40, to consider the trend as very
strong. It all depends on the degree of conservatism that we adopt in our
operations.
When the ADX and the directional movement give us notice that the trend
is strong, we can safely use any of the trend following methods that we have
seen, such as crosses of two averages, as the signals should be quite reliable. .
It is also quite common, under these trend circumstances, to operate on
price declines up to the moving average, entering as soon as the rebound
occurs.
It is important not to use trend following systems when the ADX is below
the +DI and –DI.
 On the other hand, it is quite common that when the ADX, after having
been at values above 30, turns around and takes a negative slope, the price
usually approaches the moving average, and once it is reached, the main
movement continues.
Based on what we have discussed so far, we have concluded that when the
ADX turns downward and falls below 20 and the +DI and –DI, the price will
most likely display a lateral movement.
When the price is in a lateral range, we do not know if it will break above
or below, but when it does, it is very likely that it will do so violently, often
coinciding with the publication of some relevant news or data. . This happens
a lot in the futures market, especially on intraday charts.
Therefore, whenever we have the ADX below the +DI and –DI we must
monitor the value in question, to try to find the moment to hook into the new
movement.

In this Abengoa chart, we have a sideways range from April 2004 to

January 2005, a period in which the ADX has remained below 20. When the
ADX breaks the 30 line, the first weekly close occurs above the lateral
channel resistance. The price then pulled back to the channel resistance,
breaking it sharply just as the ADX again made the upward cut to the 30 line.
From this moment you can see the sudden movement that the value
developed, multiplying its price by more than 3 in a year and a half.
The strength of the movement is evident with the high maximums that the
ADX showed, close to 80, when a value of 30 already indicates a strong trend.
2.9.3. Accumulation-Distribution
.9.3.1. Introduction
The Accumulation-Distribution oscillator is one of the few oscillators that
works with volume, and as we have already seen, volume is of vital
importance, in combination with price, when trying to make a forecast of how
things will go. to carry a value in the future.

.9.3.2. What is the Accumulation Distribution oscillator

It is an oscillator that tries to obtain a relationship between price
movements and its volume.
The oscillator formula is as follows:
i l umen (Close/inO(MaxgClose
AND Max^Min |
Once the value shown by the formula for a given day has been calculated,
the following is done:
If the closing price is closer to the maximum of the day than the minimum,
the result of the formula is added to the accumulated value of the previous
day.
If the closing price is closer to the minimum of the day than the maximum,
the result of the formula is subtracted from the accumulated value of the
previous day.
If it turns out that the closing price is the same distance from the
maximum as from the minimum of the day, nothing is added or subtracted
from the accumulated price, so it does not vary with respect to the previous
day.
When the value is rising, it is said that accumulation is occurring, and
when it is falling, distribution is occurring.
What clue does this last paragraph give us?
It gives us the clue that, a priori, the accumulation-distribution indicator
should follow the price curve, and when it does not, the divergence between
the indicator and the price occurs.
This indicator is based on the fact that when you want to buy a high
percentage of capital of a company in the market, it is not possible to do it in
one day, not even in a few days, and that is why it must be done over a period
of time. several weeks or even months. The accumulation-distribution
oscillator tries to detect these purchases or sales of high percentages of a
company's capital by strong hands.
We have already explained several units ago how the accumulation and
distribution phases work, as well as the importance of detecting these phases.
Due to the experience acquired during these years, we have reached the
same conclusion as many other traders, and that is that the accumulation-
distribution oscillator works well only on daily charts and in markets with a
lot of trading volume, that is, it will not work for us. excessively well in
Medium Cap and Small Cap securities, but yes in Ibex 35 securities, for
example.

.9.3.3. Interpreting the Accumulation Oscillator

Distribution
If the value increases in price or remains stable but the oscillator falls, we
will be facing a strong distribution process. It is therefore a divergence, and in
this case the price increase is very unreliable and does not usually prosper.
If the value falls or maintains its price but the oscillator rises, that is, a
bullish divergence occurs, we will be facing a process of strong accumulation,
and it is often a fairly long process that ends up breaking upwards.
If, on the other hand, we have no evidence of any divergence between the
oscillator and the price, that is, the oscillator and price move in the same
direction, the only thing we have is a confirmation of the trend, which is no
small feat.
Below you have an example of the accumulation-distribution oscillator in
the same direction as the upward movement of the price.
The greatest potential that this oscillator offers is when it presents divergence
with the price, as it gives us the signal that a change in the trend is very likely.
In the following BBVA chart we have a clear bullish divergence between
the oscillator and the price, which implied a change in the price trend, from
bearish to bullish.
2.9.4. Momentum oscillator
This is perhaps the most basic oscillator that exists, and we wanted to
include it in the course because it is very well known, but personally it has
never given me much. In any case, we are going to briefly explain what it is
and how it works, because many other more interesting indicators are based
on it.
Momentum measures the speed with which the price varies compared to
itself, that is:
Moment=Current Closing-Closing “n” periods ago
where “n” is the number of periods to study and we can choose the value
we want, although a fairly common one is 12 periods.
The main use of Momentum is the existence of divergences with the price,
since it is an indicator ahead of the price, so when a signal of divergence
occurs between the indicator and the price it can give us a clear signal that the
trend could end soon.
Below you have an example in BBVA of the application of the
divergences between momentum and price.
At the end of March 2003 the price completely changed direction,
confirming the effect of the previously marked bullish divergence between
momentum and price.
2.9.5. TRIX
This is a
momentum indicator
that represents the
percentage rate of
change of a flattened
exponential moving
average, and is
designed to find out
what the correct trend
is and when changes in
the trend may occur.
The TRIX is
calculated as follows:
1. An
exponential
average is
calculated
with the
closing
prices.
Common
values are
usually 9 and
12.
2. An
exponential
 average of
the previous
value is
calculated,
maintaining
the same
period.
3. An
exponential
average of
that obtained
in the
previous
phase is
calculated,
also with the
same period.
4. The
percentage
change of the
third mean in
a period is
calculated,
and the result
is the TRIX.
The TRIX is an
indicator that combines
the best of momentum
indicators and
averages, in the sense
that momentum
indicators have the
problem that when the
trend is strong their
failure rate is quite
high and it also takes
us out of the loop.
market ahead of time,
and on the other hand
the averages have the
opposite problem, that
is, they follow the
trend well, but in
lateral movements they
give a lot of erroneous
signals.
The interpretation
when using the TRIX
could be summarized
as follows:
If the curve crosses
the neutral zero line
upwards, the trend is
bullish, and if it
crosses downwards, it
is bearish.
 In this BBVA
graph we see how the
TRIX works. When the
TRIX cuts the neutral
line upwards (green
arrow) it indicates that
the trend is bullish, and
in fact there is
evidence in the price
chart and the moving
average that this is
indeed the case, and
when it cuts the neutral
line downwards in
2007 marks the
beginning of a
downward trend, and
this indeed happened
afterwards.
2.9.6. ATR (Average True Range)
This indicator is based on the fact that volatility is directly related to the
range of the candles, with range understood as the distance from the minimum
to the maximum.
When a value is very volatile, it can be seen perfectly on the price chart,
because the size of the candles increases considerably, that is, there is a lot of
variation in the price over the course of the day.
In the following BBVA example, the ATR volatility indicator has been
included, and we have highlighted the period where the financial crisis began,
because it is clearly seen how volatility had been increasing progressively. In
fact, this effect can be observed in the size of the candles during that period,
as it is much larger than in the previous period.

In this sense, the ATR is an indicator to measure the volatility existing in a

market or in a certain security, and has nothing to do with trends at all.
To calculate the ATR, the arithmetic mean of the highest value of
the following three:
• Difference between the maximum and minimum of the day.
• Difference between the close of the previous day and the maximum of
 the current day.
• Difference between the close of the previous day and the minimum of
the current day.
This should sound familiar to you, because we have seen it when we
calculated the ADX.
Then an average of “n” periods is applied, where n usually takes the value
14.
As it is an indicator that measures volatility, it will not indicate any signal
to identify trends or entries and exits.
A high ATR means that there is a lot of activity and volatility in the
security, and consequently the candles increase in size considerably. The most
common thing is that the value does not remain with these high volatility
values for long, so the ATR highs can indicate changes in the trend, normally
to get into a lateral range for a while.
We have a fairly clear example in the following Zeltia graph, where during
the years 2000 and 2001 extremely high ATR values were reached; An ATR
of 3 was even reached when its trading price was €20, which implied a
volatility of 15% (since when the value of the share was €20 its variation in a
candle was €3)
What did these ATR readings imply?
Extreme volatility, and in fact you can see a candle with a drop of 35%,
which is not common in the markets, unless the volatility is very pronounced.
If the ATR is very low, just the opposite happens, the value will be very
boring, with very short movements, few variations, and we will take
advantage of the lows of the indicator to try to predict the end of a lateral
range and its breakout, either on the bullish, good for the bearish.
Using the ATR to define the Stoploss
Precisely because it is a measurement of volatility, the ATR is widely used
to calculate stoploss.
Normally there are many people who use the maximum percentage of risk
they are willing to assume as a stoploss, and this is a serious mistake, because
the market does not care what you are willing to lose at most, and for this
reason the market makes I skipped the stoploss at the first opportunity.
One way to solve this problem is to incorporate the contribution of the
ATR into our stoploss management, which will give us a measure of the
volatility in the security in which we are going to invest.
All you have to do is subtract a multiple of the ATR from our entry price,
in the case of a purchase operation, or add a multiple of the ATR to our price,
in the case of a short operation. For example, if our entry price is €20 and the
ATR is 1.15, using a multiple of 2 for the ATR the stoploss would be 20-
(1.15x2)=€17.70.
 In this way, the stop is adapted to the volatility existing at the time we
carry out the operation, and the probabilities of our stoploss jumping
prematurely decrease considerably.
Depending on the timeframe that we use in our operation, the multiple that
we will use for the ATR will change considerably. Thus, for example, for
intraday operations we usually subtract or add (depending on whether we
position ourselves long or short) 0.5 times the ATR, while in daily charts we
will start from the ATR once. A widely used multiple for weekly charts,
which are the ones we are going to use the most, is usually twice the ATR.
Thus, if we want to buy Telefónica shares, whose trading price is €16, and
has an ATR of €1, if we want to operate on the weekly chart we would use a
stoploss of €14 (€16-2xATR), on the daily chart we would put a stoploss
between €14.5 and €15 (in the first case we use 1.5 times the ATR and in the
second we use 1 as a multiple of the ATR). If we want to operate intraday,
which I do not advise in any way, at least in stocks, we would use a stoploss
of €15.5, that is, we use 0.5 times the ATR to subtract from the quote price.
If we want to position ourselves short in the same Telefónica stock, with
the same quote price and ATR as in the previous example, in the case of a
weekly chart operation we would use a stoploss of €18 (€16 +2xATR); On a
daily chart we would place a stoploss between €17 and €17.5 (the first taking
once the ATR and in the second 1.5 times the ATR). In an intraday operation
we would place a stoploss at €16.5, 0.5 times the ATR.
These values that we have just given are totally representative, that is, they
are not a mathematical rule that shows us which combination works best.
These values are the result of experience in the markets, based on testing
systems and checking which values they respond best with.
The objective we seek with the multiple by which we multiply the ATR is
to achieve a stoploss level that is as balanced as possible, that is, one that does
not jump out at the first change but that is not too large, so that the amount of
money that risk in the operation is not too high.
When we get to the Capital Management module, we will see that we will
have a system that will tell us the maximum amount of money that we will
have for each operation. Once we know this maximum amount of money to
risk in the next operation, we will have to compare it with what we get based
on the ATR.
Let's explain it with an example:
 Suppose our Capital Management tells us that the most we can risk on the
next trade is €1,000. We want to buy Inditex shares, whose trading price is
€80, and its ATR is €4. We want to enter the stock with a capital of €50,000
and we are going to carry out an operation based on a weekly chart. Can we
take on this operation?
The first thing we have to do is calculate the stoploss based on the ATR
value. If we apply 2 as a multiple of the ATR, a value that, as we mentioned
before, is quite common for weekly charts:
2xATR=2X4€=8€
As this is a buy order, to calculate the stoploss we will subtract from the
quote price the €8 that we have just obtained as a result of applying 2 as a
multiple of the ATR.
If Inditex's trading price was €80, we will need to place a stoploss at €72
(€80-€8=€72).
What percentage of our capital would we risk with this stoploss?
If we divide the difference between the entry price and the stoploss price
by the entry price and multiply by 100, we will obtain the percentage of our
capital that we are going to risk in the operation:
% Risk PEntrad
^ 1000 866072 n 1000 10
^ p
sto P ia

PEntrance 8
That is, the risked capital will be 10% of our initial capital, that is,
10% (50.000€) = 5.000€
As we can see, the risked capital using the stoploss that we have defined is
€5,000, much higher than the €1,000 that our Capital Management limits us.
Therefore, what do we do?
We have several options to choose from:
1. Buy fewer securities: If with €50,000 we were going to buy 625 shares
(the result of dividing the €50,000 by the trading price of Inditex, €80),
since the risked capital is five times the maximum capital that we can
risk according to our management system of capital, we can buy shares
worth €10,000. In this case we could buy 62 shares, and the risk of the
operation would be 5 times lower, perfectly compatible with the
maximum risk we can assume.
2. Use a multiplier for the smallest ATR, so that the stoploss is also
smaller. This option could be viable if it involved dropping from 2
 times the ATR to 1.5 times the ATR, but in the example we have in
hand the multiple we would need would be the result of dividing 2 by 5,
a value that is too small. Therefore, in this example this option is
rejected.
3. Use another system to choose the stoploss other than using the ATR.
This option is perfectly valid, since perhaps we will find a support or an
average that acts as such that can be used perfectly as a criterion for
choosing the stoploss.
4. Directly reject the operation because we only want to enter into it if we
can invest the €50,000.
It must be clear to us that the option chosen should be any of the four
proposed and no other, with the second option being the one I like the least,
because in the end, if the multiple is small, the chances of the stoploss being
skipped due to a shock in the value becomes higher.
Usually the most recommended option is the first, as long as the cost in
commissions compensates us for the operation. It is clear that in the example
we have given it will be profitable and the commissions will have little
weight, but if for example our capital were €5,000 and when doing the
calculations we obtained that the maximum we can invest is €1000, there
would already be We have to look carefully at the commissions if they
interest us, and not only the commissions, but also the profit.
2.9.7. Parabolic SAR
This is an indicator that is used a lot to mark the moment in which we have
to undo positions, that is, the Parabolic SAR is not going to mark the
entrances to the market, but once we are bought or sold it will mark the right
moment for us to close our positions.
We have already seen that finding the moment to enter is vital and it is not
at all easy to achieve, but it is even more difficult to figure out when we
should exit, because when we start to see benefits it seems that we feel the
desire to exit at the first opportunity and tie up what we have achieved so far.
However, we had already mentioned when we talked about trends that it is
very important to get on the trends, and not leave until we have indications to
do so.
This is precisely where the Parabolic SAR.
SAR stands for “Stop And Reversal”. We are not going to go into the
explanation of the calculation formulas, since they are quite complex, and we
are only interested in knowing how to incorporate it into our graph and
interpret it, and any technical software package includes it within its battery
of indicators and oscillators, so that we will have no problems having it in our
graphics.
This indicator is placed superimposed on the price graph, in the same way
as we did with the Bollinger Bands. This is because the Parabolic SAR is
drawn superimposed on the price, so that we can see when the price touches
it, at which time we must close the position. Obviously it will be our decision
if we take into account only the closing of the candle or if it is simply the tail
of a candle that marks the exit.
 In this weekly BBVA chart we have included the Parabolic SAR, which as
we mentioned is superimposed on the price chart. If we assume that our
speculation system gave us a buy signal when the price crossed the resistance
marked in red in the area close to €8, we see that when the first candle occurs
with a close or minimum below the line of green points on the Parabolic SAR
we marked the exit signal, which made us exit slightly below €10, with
around 18% profit, and saved us from the fall that came a month later.
In the event that we had positioned ourselves short, the exit signal would
be given by the price cut to the red dotted curve, which is the one above the
price chart.