Trader Cheat Sheet #4 – Murrey Math Lines
Trader Cheat Sheet #3 – Harmonic Patterns
Harmonic Patterns In The Markets
Harmonic trading combines patterns and math into a trading method that is precise and based on the premise that patterns repeat themselves. At the root of the methodology is the primary ratio, or some derivative of it (0.618 or 1.618). Complementing ratios include: 0.382, 0.50, 1.41, 2.0, 2.24, 2.618, 3.14 and 3.618. The primary ratio is found in almost all natural and environmental structures and events; it is also found in man-made structures. Since the pattern repeats throughout nature and within society, the ratio is also seen in the financial markets, which are affected by the environments and societies in which they trade. (Don’t make these common errors when working with Fibonacci numbers – check out Top 4 Fibonacci Retracement Mistakes To Avoid.)
Issues with Harmonics
Harmonic price patterns are extremely precise, requiring the pattern to show movements of a particular magnitude in order for the unfolding of the pattern to provide an accurate reversal point. A trader may often see a pattern that looks like a harmonic pattern, but the Fibonacci levels will not align in the pattern, thus rendering the pattern unreliable in terms of the Harmonic approach. This can be an advantage, as it requires the trader to be patient and wait for ideal set-ups.
Harmonic patterns can gauge how long current moves will last, but they can also be used to isolate reversal points. The danger occurs when a trader takes a position in the reversal area and the pattern fails. When this happens, the trader can be caught in a trade where the trend rapidly extends against them. Therefore, as with all trading strategies, risk must be controlled.
It is important to note that patterns may exist within other patterns, and it is also possible that non-harmonic patterns may (and likely will) exist within the context of harmonic patterns. These can be used to aid in the effectiveness of the harmonic pattern and enhance entry and exit performance. Several price waves may also exist within a single harmonic wave (for instance a CD wave or AB wave). Prices are constantly gyrating; therefore, it is important to focus on the bigger picture of the time frame being traded. The fractal nature of the markets allows the theory to be applied from the smallest to largest time frames.
Trader Definition – “Death” & “Golden” Cross
Definition of ‘Death Cross’
A crossover resulting from a security’s long-term moving average breaking above its short-term moving average or support level.
Investopedia explains ‘Death Cross’
As long-term indicators carry more weight, this trend indicates a bear market on the horizon and is reinforced by high trading volumes. Additionally, the long-term moving average becomes the new resistance level in the rising market.
Definition of ‘Golden Cross’
A crossover involving a security’s short-term moving average (such as 15-day moving average) breaking above its long-term moving average (such as 50-day moving average) or resistance level.
Investopedia explains ‘Golden Cross’
As long-term indicators carry more weight, the Golden Cross indicates a bull market on the horizon and is reinforced by high trading volumes. Additionally, the long-term moving average becomes the new support level in the rising market.
Technicians might see this cross as a sign that the market has turned in favor of the stock.
Free Trader Tools – Online Test “Type of Trader U R”
You get a simplified and full report! Great stuff….
My Personal Results
I am a SPONTANEOUS TRADER:
One of Your Trading Strengths – You can trade a new system easily and comfortably using real money and small position sizing.
One of Your Trading Challenges – Because you get excited about new things, and like to share often, you can get distracted from that which already works.
What is your result? What type of trader are you? I would like to know!
What the Tharp Trader Test™ Is and Is Not
Dr. Van K Tharp, armed with a Ph.D. in psychology and several losing experiences in the market, realized that perhaps the poor results that he’d been getting in the markets had more to do with him than the markets themselves. So in 1982 the quest began for how he could become a better trader. He conducted in-depth research to determine the qualities that great traders and investors had, and his research uncovered ten distinct areas that were important to investment/trading success.
These studies led to the creation of a 176 question test called the Investment Psychology Inventory Profile based around these ten areas, and after testing thousands of traders over many years, it has proven to be a great indicator of success in the markets.
The Tharp Trader Test is a mini version of this extensive test that is designed to provide a snapshot of the various types of traders that Dr. Tharp has identified. Each of the types has its own temperament, personality, perception and interpretation that ultimately affect how the market is approached and traded. Some have a distinct set of core qualities that are great for trading, whereas others may find trading more of a challenge. There is no right or wrong trader type; it is merely an identifier of possible patterns that could enhance or block success in your trading, relationships and all areas of your life.
This is not a test to determine what type of trading you should be doing, or what time frame or markets you should be trading. Nor does it discuss the methods, techniques or systems that suit your trader type. All of these things are an individual choice based on your own objectives and lifestyles, which may differ greatly based on your age, location and circumstances. The test will, however, address how you most likely gather, store, comprehend and act on information about the markets. It will also provide you with details of commonly observed strengths and challenges of each type and subsequent solutions.
With only 35 questions, the Tharp Trader Test is not an exact science and some people may find that their answers place them on a borderline between two different types of traders. Because this is the mini-test, if you become really stuck, go back and re-do the test with the opposite answer and see if your trader type changes at all. If so, then read the solutions for both trader types and determine which traits resonate with you the most. This will enable you to deal with the strengths and challenges that most adequately represent your situation. Then you can work toward becoming the best trader or investor that you can be.
The Tharp Trader test only takes about 4 minutes to take, and you’ll learn a great deal about yourself when you receive your trader type. So why not begin right now?
Money Management – Martingale Probability Theory (Anti-Martingale) & Video
Martingale Probability Theory
Martingale probability began as a popular betting theory in 18th century France. The basic premise of the theory was simple enough: In a game of coin flips that pays 2:1 if the coin comes up heads, but takes the bet money if the coin comes up tails, you should bet double on every loss so that you would automatically win back any losses.
Problems with the Initial Model
Clearly, the game assumes that the player has no limit on financial resources or time. In a practical setting, this game does not work, because as the player bets on each subsequent iteration, he exponentially reach poverty. Although the game does break even over a long enough time line, there is no way to be certain that this will happen quickly enough for the player to adequately recover his losses. However, the idea led to several other theories.
Proof Against Betting Theories
Paul Peiree Levy did much of the work toward proving that successful betting theories were impossible to create. The idea was to illustrate that betting games, in general, are fools’ games. There is no way to create a theory that will allow the player to win a majority of the time. Before his work in fields like Martingale Probability, it was not commonly accepted that gambling was essentially stacked against the player.
Exponential Nature of Losses
- The main interest that mathematicians still have in Martingale Probability is the exponential rate of loss. The idea that can be inferred from the equations that define a Martingale set is that the expected value of the next number in a set of observations can be assumed to be equal to the last observation in the set. In other words, in a fair game, a gambler can assume his losses will be roughly between plus or minus the square root of the number of steps.
Polya’s Urn Model
- George Polya came up with an example to explain this concept using a jar (or urn) containing red and blue marbles. The urn randomly and unbiasedly expels a marble of a given color. That marble is put back into the jar with another marble of the same color, which essentially has the same mathematical model as doubling down the gambler’s bet on any given game. The problem is that it has the false illusion of affecting the outcome.