Author: Jim Williams

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introduction to TFI charts

The easiest and quickest way to explaining what the TFICharts are and how we got here will be with a question and answer format.

Q: Why another charting program?

A: There are many charting programs ranging from the free browser based charts up to be more expensive and “professional” desktop platforms. There is just one thing that all of these charting programs do not have, and that is the proprietary TimeFrameInvestor algorithms.

Q: So what are the TimeFrameInvestor algorithms?

A: The best way to answer this question is to back up and start with a little bit of history. I first started using a browser based chart that allowed you to change some minor settings and came equipped with most of the standard indicators. But I quickly found that the delayed data was not the best approach to use. I’ve been moved up to a mid-level desktop charting application which also had a programming interface to the data feed.
I used my programming background to create some markets scans that were primarily based on standard indicators. As I did this I started to examine how and why the different indicators worked, and the impact of the different settings on the indicators. This sparked an interest in being able to create my own formulas and indicators. I then purchased another charting program that could use the existing data feed that I was using and had an interface where I could enter my own formulas and show my own indicators on the chart.

Q: Did all of the formulas work?

A: No. There were many that did not bring anything new to the table and some that just flat out did not work. When you consider how many existing indicators there are, along with a ball of the variations that you can get with the different settings, there are literally thousands, if not millions, of possible results from the regular indicators. One benchmark that I set for myself was that my formula had to return a result that was different from a standard indicator, and it had to be useful.
I do have one funny story about this. Early on I had this great idea for a way to signal when a short-term, daytrading, move was going to begin. The idea appeared to have sound logic behind it, and when I looked at this new indicator on a chart it past the “eyeball” test. The next step was to paper trade this new indicator to see just how well they could actually work. When the results were dismal, actually worse than dismal and it was a complete disaster. So I put this indicator aside and moved on to other ideas that I had. It was a few years later that I was talking with someone about the philosophy behind selling premium. During this discussion it dawned on me that what we were talking about matched up perfectly with the results of that day trading indicator. I dug that formula backup, dusted it off and made a couple of small modifications to it and it became the basis to the monthly ranges that have been in use since February 2005.

I wound up with a collection of new formulas that were showing a lot of promise but it was not until I did a good deed that it all came together. And one of the clubs that I belong to a young lady asked the club membership for some help in completing a project so she could get her collage degree. What she needed help with was something that was right up my alley. As she explained in detail what she was trying to do I realized that I could take the same philosophy and apply it to my different formulas to bring everything together and present a clear result. This is what led to the simple color scheme that I use on the candles and on the “ribbon” below the price to show the strength or weakness in the trend.

Q: What is your goal with this new charting program?

A: My first major goal was to be able to show the TimeFrameInvestor indicators on a chart where the members of TimeFrameInvestor could use that chart to look it any symbol at any time on their own computer. This will accomplish quite a few things. When I take a vacation the members will have the charts on their own computer that they can look at and they won’t have to wait for me to get back and send out a nightly report. Also, they can look at the markets during the day, and will have the ability to look at any index or stock that they are interested in.

As I began developing the charting program I have been adding more goals along the way. Such as having the same workspace (the layout of multiple charts on the screen) that I use in the nightly Market Analysis Reports and in the chat room.
To reach this first goal I did it on a “snapshot” basis. The next step is to show the charts on a “real time” data stream as the prices change throughout the day. I also have more features that I want to add to the program such as a watch list and market scanning routine, along with adding features to save program and chart settings. As I was developing the program I realized that if I waited until I had arranged every goal and had every feature included in the program it would take years before the TimeFrameInvestor members would ever have the opportunity to use the program. So I decided once I had reached the main goal of showing the TimeFrameInvestor indicators on a single chart and also on the analysis workspace that I would go ahead and release the first version of this program.

Q: So what do you think about the TFI Charts program?

A:    I am excited and nervous at the same time.  I am excited because this presents a whole new benefit to the members of TimeFrameInvestor, and I feel that it moves the service up to a new level as it puts the power of the TimeFrameInvestor indicators in the hands of the members!
I am nervous because it has been nearly a decade since I created a computer program to be used by other people.  It is much easier when you create a program for your own use because you know the intricacies of how it works so you know what to do, and also what not to do.  When you create a program for other people, they do not know these fine points, and they are bound to try to do things with the program that you never intended to be done.  So my nervousness is that I hope that there will not be too many “bugs” and that the members will find the program easy to use.

I would like to add that this is a first version and as it goes forward and “grows up” it will only get better.

Q: What is required to use the TFI Charts program?

A: The charting program is available to the TimeFrameInvestor members, so the first thing is to have a subscription. The program only runs on a Window’s PC, and I have found that it is best to have a newer pc with dual processors, especially for the real time feature.
The charting program is part of the TimeFrameInvestor subscription, the only additional cost is that it requires a separate subscription to DDF/Barchart for the data feed.

Q: Why does a person need the data feed?

A:    Consider the analogy of a car and gas. You have to keep gas in the gas tank to be able to go anywhere in the car. And the gas is not part of the car, it is separate. The data feed is the “gas” that powers the charting program.  Without current data, any chart would be worthless.

The download and installation instructions are located in the Members Area.

TFI Charts: Getting Started

The first time you run the program you have to enter the TimeFrameInvestor user information, the Program Registration Number, and the user information for the data feed. Each time the subscription is renewed you will be sent a new Program Registration Number to enter. From the main menu you select Registration, Program Reg #, and then enter the new code.

When you first open the program the main window will fill most of your screen, I just “shrunk” it to save space in this user guide.

The top of the window will let you know the version number, and below that is the menu bar, and below that is the tool bar.

The only menu and tool bar features you should use when there are not any charts showing are the ones to open up a single chart, or one of the workspaces. You can use the “File” menu, or click on one of the tool bar buttons.

Single is for a single chart.
Analysis is for the 4 chart group that is used in the Market Analysis Report that shows the monthly, weekly, daily and hourly time frames that are useful in analyzing the longer and shorter term outlooks on a symbol.
D/T is for the “day trading” or chat room workspace that focuses on the daily and 4 intraday time frames, along with 1 market “internal”.

All of the other menu and tool bar options (except “Registration” and “Help”) are designed to only be used when you have a chart showing!

The bottom of the program window shows 2 status boxes, and the data feed server date and time.

Because of how the TimeFrameInvestor indicators work, the way to select a symbol and time frame is done a little differently in the TFI Charts program than what other programs use.  Instead of showing the symbol and interval on the main form and changing it there, when you open or change a chart or workspace a dialog box comes up where you select how the chart is to be formatted.

We will begin with the selections for a Single chart.

There are 3 parts to this dialog. On the left we have the symbol selection, in the middle the interval, and on the right the activation of the real time steam, the use of the TFI indicators and also the TFI ranges.

There are some symbols that are “pre-loaded” in the drop down symbol box.  They are grouped by “Indexes”, Futures, Internals or all/combined.

The future symbols will automatically show the current contract.  You can select one of the symbols from this list, or you can enter a symbol into the box.
Because we are using the DDF/Barchart data feed, you can use the barchart.com Symbol Lookup page to find the correct symbol to use.  There are links on that page for Indices, sectors and futures.

In a future release I intend to allow for customization of the symbol groups.  My goal for this first release was to get the ones most used listed where they would be easy to find.

The interval is just the amount of time that each bar/candle on the chart displays. I grouped the ones used in the Analysis and Chat Room workspaces at the top, and included some common intraday intervals in the bottom group.

This is the most crucial part of the chart selections dialog, and the part that will have the biggest impact on the chart that is displayed.

With a single chart the real time data feed can be activated.  NOTE:  At this time it has not been thoroughly tested, so the real time feature is still in a “beta” stage.  I have found that when you use a “traditional” chart (without the TFI indicators) the real time data stream does not place a load on the processor.

When the TFI Indicators are selected, there is a lot that happens “behind the scenes” and it does take longer for the chart to load.  I have observed that when the TFI indicators are used with the real time feed, more of a load is placed on the processor.  The more modern pc’s with dual processors are able to handle this load much easier, but you can activate too many charts with the real time feed and TFI indicators to where your processor will be running constantly and 100%, which is something you want to avoid.

The TFI ranges is most used on Monthly charts.  But if you want to define ranges on other time frames you can turn this feature on and it will display the current and next range on the chart.

Here is a daily chart for AAPL where all 3 of the features are turned off (unchecked).  This is a “standard” chart that shows the price and volume.

In the File menu there is an option to “Load New Symbol”.  That will bring up the chart selections dialog and re-load the selected chart with the new selections you make on that dialog.

To use the menu and tool bar features, you first want to click on the chart.  This will be important especially when you have multiple charts or workspaces open, as the click on the chart will identify that chart is the one to be the used with the menu and tool commands.

The View, Drawing, Color, Styles and Data menu options are relatively basic, and you can “play” with them to customize a chart.  These are items that came with the charting “tool” that I used in this program to display the chart information on the screen.

On the tool bar the “+” & “-” buttons are used to zoom in and out.  The “Zoom” button activates a zoom tool where you can define the part of the chart that you want to have displayed.
Reset returns the screen to the size and position it was in when it was first loaded.
The “<<” & “>>” buttons move the chart left or right by a screen at a time.
The “<” & “>” buttons move the chart left or right by one candle at a time.
NOTE:  IF you have a mouse with a “wheel” on it, you can click on the chart and turn the wheel to scroll the chart left or right.

The “Ind’s” button is to activate the Indicator dialog.

You select the indicator you want to use from the drop down list.  You can use the Help menu and click on TA Indicators to see a list of all of the traditional indicators that are built into the charting tool, and what the indicators are for.

On this dialog, there are some indicators that are better when they are applied to the price part of the chart, and other indicators that need to be shown in a new “frame” where they are separated from the price.  When you choose an indicator the program will select which would be best, but if you need to you can over ride where to add the indicator before you click on the “Add Indicator” button.

When you click on the Add Indicator button, another dialog will appear where you set the specific parameters for the chosen indicator.

Here is a chart for AAPL with some of the drawing tools and indicators added to the chart.

You can right click on a line or an indicator and then click the “Delete Object” or “Delete Series” from the pop up menu.


When you select the Analysis or D/T workspaces the Chart Selects box will be slightly different to accommodate the needs of the work space.  Such as for the Analysis workspace the “Intervals” are pre-set, so you only select the symbol and the features.  At this time because the real time feature has not been thoroughly tested, it is not enabled for the Analysis workspace.

The D/T workspace was not completed in time to be part of the first release.

TFI Indicators

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TFI indicators

In the “Getting Started” section, we looked at creating a “standard” chart, just the regular price and volume, and with adding a few “traditional” indicators to the chart. In this section we will begin to examine the TFI Indicators, what they mean and how they work.

Let us begin with a comparison of the “standard” chart to one that shows the same period with the TFI Indicators.

On the “Traditional Chart” a red candle just means that the price closed below the open, and a green candle means the price closed above the open. There is no other significance to the colors. The blue line is a 20 day moving average. In early April the price touched that moving average and then started a new move up.

On the chart with the TFI Indicators we have a lot more information. There are more “warnings” that we had before the price started to move up, and many warnings as the price is in the 180-187.50 area that this upward move is likely to end. As we examine the different components that make up the TimeFrameInvestor Indicators we will see how much more information is presented on this chart, and also how to use this along with other time frames to get a clearer picture of what to expect.


When I refer to the color of a candle, I am speaking about the color of the “body”. The charting “tool” only creates a solid body, and when the TFI color scheme is applied, the entire body is colored based on the result of the strength or weakness. To determine if the candle closed above the open, the outside of the body will have a green border. If the price closed below the open, the outside border will be red.

When a candle is “green” it is showing that there is buying pressure “under the hood” and that there is a strong potential for the price to move higher. I also refer to a green candle as “strength”.

These are “blue” candles, the first with the green border where the price closed above the open, and the second with the red border where the price closed below the open.
A “blue” candle is showing some buying pressure, but there is not a lot of strength associated with it, so it only represents a “weak” upward potential.

The “yellow” candles also have the same borders. The “yellow” candle shows some selling pressure, but the selling pressure is not over powering, so there is a “weak” downward potential.

The “red” candles also have the same borders. The “red” candle shows that there is significant selling pressure, and there is a strong potential for the price to move lower. I also refer to this as “weakness” in the price.


Between the price and volume is a “bar” that I refer to as the “trend”. There are 3 colors used in it. Green to represent strength/uptrend, black for neutral, and red for weakness/downtrend.
The charting tool puts a border around the green and red trend marks. This border is meaningless and should be ignored.


The up and down arrows do not represent a “buy” or “sell” signal. What they show is that the “internals” are changing to present either a strong potential for an upward or downward move to develop.

The dashed line that runs thru the chart is the “oscillator”. By itself it does not generate a “buy” or “sell” signal. This is a “momentum” type indicator, it shows the momentum of the price, and when it crosses thru the price it is showing that the price is falling behind the momentum that generated the move.
The oscillator can even be used to help in timing issues to show if a move is immanent or if a few candles are likely to appear before a move will develop.

There is a lot of information that is shown with the TimeFrameInvestor indicators. Buying/Selling pressure, trend, momentum, internals, along with indications for momentum and overbought/oversold conditions.

There are many ways to trade, and many time frames that can be used. Ranging from a very short term directional “day trade” to a long term “non directional” option trade. It is when we let the indicators “paint a picture” or “tell a story”, and we look at the relationship of multiple time frames that we can put the odds in our favor. Instead of taking a “scatter gun” approach where we shoot at anything that moves, we can instead sit back and find the opportunities that present the best potential to make each shot count.

In the next installment we will start to look at different specific situations and how to read the story that is being told by the indicators.

TFI Indicator Basics

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TFI Interactive Stock Chart

There are the various parts of the TFI Indicators, the color of the candle, the color of the trend, the oscillator, the arrows, and the overbought/oversold dots and diamonds.

None of these indicators are meant to be used as a “stand alone” indicator to generate a signal. For a low risk signal you need to see multiple indicators “come together”, AND it is best to have multiple time frames showing the same type of basis.

We need to examine each one individually and then we can bring start to bring them together. Also, one thing I recommend for new members that are not familiar with the TFI Charts, is that it is a good exercise to start by watching just the 8min chart in real time for a few days. Do not trade on it, do not watch the news or other charts, just this one time frame as it cycles up and down and pay attention to how the strength and weakness ebbs and flows. Also observe the interactions as the oscillator crosses thru the price and the dots/diamonds and arrows appear on the chart.

The reason I recommend watching this intraday time frame, is that even for those that do not day trade, this chart will make many up and down cycles which gives you the opportunity to quickly become familiar with how the TFI Charts work.

First we will look at is the colors of the candles and how the colors change as the price goes thru the different up and down cycles.

On the left side of the chart, notice how the candles change from red to the first green one. The second green candle shows the price opening and closing just above the close of the first green candle. This is a “confirmation” in the color as it is showing that the strength is starting to move the price higher. From this “base” an upward move develops, and continues until we start to see some yellow candles.

In this example, we can see how the candles “lost” their strength as they turned from green to yellow, and then even though the price set a new high, the candle was only blue. This was followed by 2 yellow candles and then a strong decline in the price with the red candles.

The 3rd example shows how the candles were blue, dropped to a new low, but only on a yellow candle. From this low the candles turned back to blue, and this gave way to green as the upward move developed.

These examples illustrate how the green and red candles develop and show the potential for a move in the price. The yellow and blue candles are lacking in strength or weakness, and quite often will show when a move is coming to an end.

On these two charts we can see how the candles changed colors as the up and down moves developed. We can also see occasions where the candles started to change color, but then resumed the move. This is why the color of the candle is just one part of the overall system and not a stand alone indicator.


The candles are not the only indicator that shows strength or weakness. We also have the “trend” bar that is shown below the price. For this next chart I set the chart to hide the colors of the candles just to show how the trend can show strength when it is green, and weakness when it turns red.

It is when we have the candles and the trend both showing strength or weakness that we begin to see better prospects for the price to move in a particular direction.


The arrows represent the POTENTIAL for a new move to develop. Many times they will appear as the price is changing from one direction to another as shown on this chart.
However, there are times when the price will not live up to that potential. This is why the arrows are used in conjunction with the other TFI Indicators.


The next item we want to examine is the Oscillator.  Once again I have “hidden” the candle colors just to show how the price reacts when the Oscillator crosses up or down thru it.  

The Oscillator is best used as a “warning” indicator.  When the Oscillator crosses through the price it is a warning that the current directional move could come to an end very soon.

There are some occasions where a strong move will develop and the price will “chase” after the oscillator. This is why the oscillator is not a stand alone signal, but instead a “warning”.


The dots represent overbought & oversold conditions, with the diamonds showing that those conditions have reached extreme level.

Many times these conditions will appear at the end of a move and are a “warning” that a change is coming in the near future.  However, there are times when the price will continue with the move and remain overbought or oversold, so like the oscillator this is a “warning” type of indicator.


From years of study, research and experimentation I found that there is not any one indicator that can be used as a system by itself.  This is why I developed these indicators, to boil technical analysis down to as few indicators as possible.

These indicators show when there is strength or weakness in the price, and also whether there is strength or weakness in the trend.  This helps us to determine if there is accumulation or distribution taking place, and when a directional move is developing or is underway.

I developed the arrows to highlight key points when there is a potential for a new move to develop.  To help get ready for that move if the other indicators begin to align in that direction.

The oscillator and the overbought/oversold indicators help to give us warnings when a move is becoming over extended.  This gives us clues and warnings that the prospects are increasing for the move to end, and possibly for a reversal to develop.

There are times when a move is coming to an end that we can use that information to sell option premium.  There are other times when a move is just starting to develop that we can enter a directional trade, whether it is an intraday day trade, or a multi-day swing trade.

The lessons learned from one chart can be applied to all of the other time frames, which is why watching the intraday chart move thru the up and down cycles allows you to see the different ways that these indicators interact.

In the next article we will look at some of the intraday time frames, and how multiple time frames can be used to identify a low risk trading opportunity.

Directional Trade with multiple Time Frames

I was recently asked a question in the chat room about directional trading with the TFI charts. Below is an edited copy of the comments I made to answer the question. The edits are to make the response more readable from the chat room format, and I have added a few additional comments with more information.

Directional trading is a lot harder than non-directional because you have to be ready for a move, but many times that move does not materialize. This results is a lot of entries that just “sputter out”. So one of the first things you have to do is get into the mindset of setting a firm stop and HONORING IT! Another difficult thing to do mentally is being able to re-enter the same position after being stopped out if the price turns back to show your original perspective was correct. This is generally referred to as a whipsaw or shake out.

One of the biggest mistakes that people make about directional trading is that they are “late to the party” and they wind up chasing after the price. By the time they finally catch it, many times the move is ending.

A few years ago I did a study on some simple strategies using a moving average as the signal for a directional trade. I used many different averages ranging from a 7 period ema up to a 50 period ema. One thing that stood out is that by the time the price crossed thru the moving average, most of the directional move had already taken place. There were a few occasions when a strong move would develop, and the price would continue to “run”, but this was more than offset by the many more occasions when using that strategy of the price crossing thru the moving average resulted in “buying high” and “selling low”.

One strategy that I like is with options and involves selling premium. I like to look for when a move comes to an end and then sell premium. When an upward move ends, it is an opportunity to sell a call spread, and when a downward move ends it is an opportunity to sell a put spread.

Identifying when a move comes to an end is the first step of a directional trade. When one move ends, it is very likely a new move in the opposite directions will develop, so you want to catch that new move when it is in the early stages of development, but not too early, otherwise you wind up with “dead money” if the price just enters a sideways consolidation.

Primary Time Frame

The first step is to determine the Primary Time Frame. For this article we are going to use the 8min chart, where each candle represents 8 minutes of time. This is the basis for a trade.

One thing that I recommend is that a person take a few days to watch the 8 minute chart as it goes through up and down cycles to become acquainted with how the time frame charts work. Pay close attention to how the oscillator crosses through the price, how the colors change in the candles and the trend, and what happens where there are the warnings of the overbought/oversold dots and diamonds. Start writing down when you think a move is ending, and also when a new move is starting to develop, and track what happens. This is an exercise to learn how the charts work and to become familiar with them.

Once you are familiar with this one time frame you are ready to add in a second time frame. I suggest going to the next larger time frame, which in this case is the TFI ½ hour time frame. The reason you look at the larger time frame is to see if it is showing reasons for your perspective on the Primary Time Frame. If your Primary Time Frame is showing potential for a move, but the larger time frame is conflicting and showing a different outlook, then the prospects are not very good for a sustainable move, and it does not present a low risk situation.

When you have the larger time frame agreeing as to why a move should take place, then the odds of success are much better for you, and you have a better chance of getting a decent and sustainable move.

Using the 2 charts with the Primary 8min time frame and the larger TFI ½ hour time frame, write down when you think a move is going to take place and track what happens.

One very important thing to remember is that you do NOT have to be in the market all of the time. You can and should pass up moves that do not look good. You want to cherry pick the good opportunities. Not only does it help to build your confidence when you pick the best opportunities, but when the odds are stacked in your favor, you have a much better prospect at turning a profit.

It is still vitally important to set the initial stop and to honor it to keep the losses small and manageable, because there WILL BE times when the move does not materialize!

Once you get proficient with the 2 time frames you are ready to add in the next smaller time frame to improve the timing. Since our Primary Time Frame is the 8min chart the next smaller one is the 2min chart. We will look for when a top or bottom forms on the 2 min chart and when the price starts to move down from a top, or up from a bottom to set a higher high or a lower low, it would be showing that momentum is developing, and that is the signal that the Primary Time Frame is starting a new directional move.


Later that day a good set did start to appear. I will show the charts and walk through the process as it develops.

The TFI ½ hour chart is the single one above the 8min chart that is on the left and the 2min chart on the right. The picture of the ½ hour chart was taken just after the one of the 8&2 min charts, which is why there is a slight price difference between these 2 screen shots.

On the Primary 8min Time frame the upward move had stalled. The oscillator crossed above the price, and we started seeing the price and trend weaken along with the appearance of a down arrow. This is warning a downward move could develop. On the TFI ½ hour chart the oscillator had crossed above the price, there was extremely overbought conditions, and a down arrow was appearing. These warnings suggested that we wanted to be ready for a downward move to develop, to pullback from the bounce. We do not have a top on the 8 min chart, so this is not low risk conditions, it would be a moderate risk situation.

So with our Primary and larger time frames both showing the prospects for a downward move, we go to the 2 min chart. The price formed a lower high shorter and at 12:19 it was starting to set a lower low. There was a brief fight as the price tried to “save itself”, but then it started to head lower and was setting a new low. This clearly showed a downward momentum on the 2 min chart. This momentum is showing that a downward move is starting on our Primary Time Frame.


The price made a downward move, the 8min chart became overbought and then bounced back. I did not get a snap shot of the 1/2 hour chart, but was weakening, to add to the prospects for the lower high on the 8 min chart.

On this bounce the 8 min chart was becoming overbought. What is interesting is that on the 2 min chart this was occurring at the lows from 12:19, so the price was testing a broken support level as resistance. So we have a potential lower high on the 8 min chart, and a double top forming on the 2 min chart. This suggests that a new downward move is likely to develop, to present a second opportunity, but more importantly a lower risk opportunity as this would create a top on the 8 min chart.


On the 2min chart there was a little “whip saw” and the price tried to shake people out with a very brief move up to 1297, but that fell apart very quickly and the price started to move below the 1295 level to confirm another downward move was developing, and also confirmed that the 8 min chart was forming a lower high.  This became a move that took the price back towards the previous lows on the 8 min chart.

And with the weakness on that 8 min chart, we had some pretty good prospects for a breakdown.


And here are the screen shots of the 3 time frames following the breakdown of the previous lows on the 8 min chart.

Notice how the 1/2 hour chart is making a downward move, BUT is showing a few warnings as the price is nearing the overnight highs in the 1290 area.  This is telling us to watch this area closely as it could act as support.

On the 8 min chart we have a downtrend with a lower low following a lower high. But we also have some warnings as the oscillator crossed below the price, extremely oversold pressure developed, along with an up arrow appearing on the next candle. These are warnings that tell us we might want to use a very tight trailing stop as the price is testing a potential support level, and that it might not be too bad of an idea to be ready to lock in the gains.


Initially we began with a moderate amount of risk that a downward move would develop. We can see why it was a moderate risk situation as the price bounced right back up to where an entry would have been made at, and even “peeked” above this level. But as that whipsaw fell apart, it created a lower high on our primary time frame, and we had a second downward move that presented a much lower risk, and also a fairly sustainable move.

Because of the time frames involved, the move was a relatively small one. But when you deal with directional moves, you will learn that many times, even when “cherry picking” the better and low risk opportunities, some moves just do not cover much ground. But you have to be ready, as there is the chance that a move can develop momentum and turn into a larger move. In this example I showed how the TFI Charts can be used to present a moderate risk opportunity for those that are willing to take on more risk, and also a lower risk opportunity for those that are more conservative. The hardest thing to learn is how to have the discipline to be patient and allow the opportunity to develop and not try to “force” a trade when the charts are showing high risk conditions.

What is a good trader?

This is a good question that we should ask ourselves. Think about the first thing that comes to mind when you ask this question.

Is it being able to read a financial statement and come up with a good “Fundamental Analysis”?
Is being a good trader being a “chart wizard”?
Or does it mean having terrific “gut instincts”?

Those 3 examples are not the answer to the question. They are just different means that a person could use to base their trades on. They are just methods and not the definition of a good trader.

The answer is actually quite simple. A good trader is a person that makes money.

At the end of the day, week, month or year what it comes down to is whether a trader made a profit. If they didn’t then they will not last long as a trader. The sad reality is that most people are not good traders, and that many people lose money instead of making it.


A mother tells her young toddler to be careful because that pot on the stove is hot. But this child does not know what “hot” means. Yes, the mothers voice causes the child some concern, and for a while may prevent the child from touching that pot, but before too long the sounds of crying are heard in the house.

There are many things that can harm a trader, and like this young child we need to learn what “hot” means, and learn how to avoid the things that can harm us. This evening I want to talk about EXCITEMENT!

There is no denying the fact that it can get very exciting during the day.

Many people watch a lot of different symbols during the day so they “don’t miss out” on anything.
Many charting and trading programs / websites have a “quote” section that you can enter many symbols into and it will show the bid/ask, last trade, price change, and even other columns of data. Many of these will show different colors if the price is higher or lower than the last price or the previous day.

Add to the flashing lights, many of these programs have alert features that can sound a bell or alarm.

It is common to see a traders desk that has multiple monitors and even multiple computers. There will be a multitude of charts covering many of the screens. 10, 20 or more small charts on each screen, each showing a moving price and also the indicators that are placed on each chart.

Many people have a television running near their trading station, and it can be quite exciting to watch and listen to a segment where there are 3 or maybe 8 “guests” that are yelling and shouting to be heard as they try to state their opinion on the current topic at hand, not to mention the back and forth banter as they make their various points and try to discredit the other guests.

And quite honestly, it can be very exhilarating to have a large position that is going your way, where you are seeing $$ flashing in your eyes as your account balance increases tick by tick.

Sadly, this is providing an atmosphere that is more like a casino than a business. The flashing lights, the ringing bells/alarms, the noise of the crowd, and the thrill of winning a hand or seeing the right number come up on a pair of dice.

This is the type of environment that distracts people from making sound decisions. When a person is feeling emotions they have a hard time making good choices, and it is much easier for them to take more risks than they would normally take, and to have “hope” that riches are right around the corner just waiting for them. And this excitement can be addicting. People “feel” good each time they win. They want to feel good about themselves by being a winner. This is what makes them place bet after bet, each one with the “hope” that it will provide those good feelings again, all the while ignoring the risks that they take and the losses that mount higher and higher.

Sometimes, even without being aware of it, people become addicted to the excitement of trading. They want to feel that thrill and good feelings of having a winning position. They become addicted to all of the noise and activity as it provides then with a “rush” that they get as they try to take in all that they can to get the “edge” where they can get into the next winning trade.

Trading for excitement and to get a good feeling is not the way to make money at trading. It is gambling and one way to get burned.


In the previous segment I spoke about excitement and listed a few things that distract us, which is the focus of this next part of the discussion.

People like to think that they are good at “multi tasking”.  But studies have shown that performance suffers the more people try to do.  These studies range from the one in 2001 that was done by the University of Michigan and published by the American Psychological Association  (  http://www.apa.org/releases/multitasking.html ) up to the studies that are mentioned in a New York Times article.  http://www.nytimes.com/2008/10/25/business/yourmoney/25shortcuts.html )

Many people feel that they need to keep up with the latest news, so they have a television on near their trading station.  But consider what happens when the person starts to pay attention to the TV.  Perhaps our trader’s attention was caught by the multiple guests that are shouting to be heard.  Perhaps one of the guests is saying something that re-enforces a thought or belief that our trader has.  While this is taking place the trader is looking at the tv, and thinking about what is being said, and potentially feeling good about himself because someone on tv is saying the same things this trader believe in.  During this time, the price of the stock or index that the trader has been following is beginning a new move, but our trader is not catching this because he is distracted.

Some people use a news ticker instead of a TV.  But on this news ticker there are headlines flashing by, one after another.  It takes a lot of attention just to read the headlines, judge whether it is something that could effect the markets or a particular stock, and then even more time to jump to the full story to see what is behind the headline.  Once again, this is distracts the trader from paying attention to the index or stock that he is trading.

Another distraction is having multiple monitors filled with quote tables and a multitude of different charts.  It takes time to focus on each quote and chart and digest what information it is providing.

Other common distractions we face are the phone, email, and other people coming into our working space to talk to us.

Each time we are distracted we have to take time to “catch up” on what is happening.  We are not doing 2 or more things at the same time, we are constantly switching between the different task.  Each time we are distracted we have to re-evaluate what the charts are showing.  These distractions can make us miss an opportunity, and when we are too distracted they can lead to a wrong decision being made.

I know that we can not eliminate every distraction, but we need to evaluate our trading environment and remove as many distractions as possible and focus on the task of trading.


A good trader is a person that makes money.  In these segments I have been examining different factors and conditions that interfere with a trader making money.  Perhaps the trader is focused on excitement rather than focusing on a good trade, or perhaps the trader is just too distracted and misses the best opportunities.  One of the most common things that I have seen that prevents a trader from making money is Forcing A Trade.

There are 3 main reasons why people force a trade.  They may be bored and say to themselves “Nothing is happening today, the price just has to breakout out of this congestion.”  The trader may be impatient and be thinking “We have a lot of warnings that a bottom should form, and the price is beginning to hold up, so this must be the bottom”.
These first 2 reasons are closely related to someone that seeks excitement, and a person that is being distracted by what they want to see happen rather than what is actually happening.

The most vicious and damaging way I have seen people force trades is when unrealistic goals are set and the person feels that they must place a trade to meet those goals. Such as “to make $100,000 this year I MUST make $400 per day”. When it is put this way it sounds so very simple and easy.  But what happens is that on a quiet day where the price is just stagnate this trader will enter a trade hoping that the price will break out of that congestion. Or the trader will feel that they have to make the very best entry and they will “jump the gun” before a bottom or top has formed. And there are times when a good set up just does not work out and a loss is the result.
By forcing the trades and just a normal loss, the result is that the trader does not meet their goal for that day. Let’s say that the trader only makes $250 for the day. What this leads to is that for the next day they are “behind” and instead of just $400 they now have to make say $550 for the day to meet their goals. This means that they have to trade a larger position and be more aggressive. This increases the risk, and the situation quickly escalates until they have done some serious damage to their trading account.

The problem with forcing a trade is that  the trade is entered just to be in a trade, instead of selecting a trade that presents a low risk and nice reward.  A forced trade is one where the trader is looking to “force” the price on the stock or index to do what they say it “should” do, instead of focusing on what the charts say the price is actually doing. This creates a much higher risk, the risk that the price will not do what the trader thinks it “should” do.

When we prepare to place a trade we need to ask ourselves why we are considering making this trade. The TFI Charts are designed to show what the price is currently doing, and to give us clues as to when a change could come about. When we are looking to enter a new trade we want to ask ourselves if the charts are showing a valid reason to be in the trade we are considering, and if not, what conditions need to develop to present a low risk opportunity. We then look for those conditions to develop and be ready to act on them when they show up. And if those conditions do not develop, then it is telling us that we do not want to place that trade.


In the last segment I spoke about how forcing a trade can lead to entering a bad trade because the trade is entered without good justification for it.  This leads us into this segment of things that prevent us from being a good trader. When a trade is forced it quite often leads to a bad trade that loses money. There are times that even when we have the odds in our favor with low risk conditions that the price just will not go the “right” way and it turns into a loss.

One of the biggest things that people do that prevent them from being a good trader is that they do not set, or they do not honor a stop. They see the position becoming a loss and they just “HOPE” that it will turn back around in their favor. And what usually happens is that their hopes are dashed on the rocks as the price continues to move against them and the loss becomes even larger.

This is one of the most destructive things a trader can do to themselves. It causes major damage to both the trading account and the persons emotional well being.

Another factor that prevents people from becoming a good trader is that they want to “go with their gut” and “fly by the seat of their pants”. This is the person that does not have a plan in place, they are jumping from one trade to the next doing what ever comes to mind at that time. There is truth in the old adage of “Fail to plan, plan to fail”.


There are many things that interfere with being a good trader. One of the most insidious is self deception.

It is natural that we want to feel good about ourselves and be proud of what we do. But sometimes this leads us to view ourselves with “rose colored glasses” as we tend to overlook short comings and view accomplishments better than what they actually were.

For any given task picture a standard bell curve. There is a small group that does exceptionally well, and at the other extreme a small group that does very poorly. The majority of the people make up the middle group. Each one of us would like to thing that in a given task that we would be if not in the exceptionally well area of performance, at least closer to it than to the middle, and we certainly do not want to think of ourselves as being part of the segment that does very poorly in the task.

Each one of us has a “gift” or talent where we would be part of the exceptional group for that specific area. Some people can sing quite well.  Some people think they can sing but other people don’t want to be around when they do. What makes self deception so insidious is that we fool ourselves into thinking that we are better at something than we really are.  “Hey this me we are talking about,,,, I don’t have a problem with distractions, I am pretty smart and can multi task with ease,,,,, I don’t have a problem with honoring a stop,,,,,” But in reality, we just do not realize how easily we can be distracted by the TV and miss when a good opportunity appeared during the day. We think we can multi task, keep up with a multitude of charts, quote screens, level II feeds, news feeds, a web browser, email and the TV. But we do not realize how much time is lost in focusing on finding a good opportunity while we shift focus from one task to another.

We like to think that we make good decisions when it comes to placing a trade. But we do not realize that when it goes against us we do not want to acknowledge that we were wrong, or that the trade is just one of those that is not working out.  Because we came to a conclusion we do not want to accept that the facts have changed, and that our bias is no longer valid.  We are afraid that to do so would mean that it would hurt our self esteem and show we are not as good as we thought we were.

I want to challenge you to perform a self evaluation.  The goal is not to tear down your self esteem, but rather to honestly identify what is interfering with being the best trader possible.  Evaluate your trading environment, and yourself.  Are you a good trader?  Are you the best trader you can be? 
Take a look at your trading account, does it provide the proof to support your answer?

Do you seek excitement?  Do you feel you have to be in a trade all of the time, or can you stand aside and not place a trade if you feel the risk is too high for your comfort?  Do you have the discipline to wait for lower risk conditions to enter a new trade?  Do you have problems with forcing a trade, whether it is from boredom or from having unrealistic goals?  Do you have a trading plan?  Do you set a stop and honor it?  Are you dealing with too many distractions?  Are you really the best trader that you can be?

This evaluation is not meant to be easy.  It can be very hard to be honest with ourselves. But you will find that once you are honest in acknowledging a weakness, that you can then begin to work on correcting the problem and improve the situation. One thing that helped me was the thought that by finding my weaknesses I would become a stronger person where I would know what areas I am weak in and know to pay close attention to those areas, and to work on improving them.  Trading is not easy.  If it were, each one of us would be a good trader, and we would all be making a lot of money.

A while back I was watching the movie “Renaissance Man” starring Danny DeVeto.  In that movie he was instructing a group of “misfits” and he made the following statement:  “The choices we make dictate the life we lead”.

Each one of us has to make a choice.  We can choose to identify our weaknesses and work on improving them, or we can choose to ignore our weaknesses and continue to struggle and not be the best trader that we could be.

This month I have spoken about things that prevent us from being good traders.  In April I will be focusing on how to be a good trader.


In hindsight it is easy to look back at a chart and “see” all of the moves that are made and think that each one would have been perfect for a trade.  One of the hardest things to learn is that not every little wiggle on a chart is a tradable opportunity.  And what is even harder to learn is that there are even some moves that occur that due to how they develop a decent tradable opportunity is not presented.

There are two types of risk, the risk of how much money a position could lose, and then there is the risk that the price of a stock or index will not do what is expected and a position that is based on those expectations would turn into a losing position.  This second definition is the one that I use when I am evaluating the charts, I am looking at the prospects that the charts will live up to the “expectations”.

One thing I learned in the years of development of the TFI Indicators is that there are times when a chart will act in a predictable manner, and these are the occasions that present the best (lowest risk) conditions for a new position.  And there are times when there are conflicts and the charts are showing uncertainty, or the charts will be showing conditions that are not normally sustainable.  This is when we have a higher risk that a position based on these conditions could turn into a bad position.

One interesting thing I have learned is that sometimes it is more important to identify what type of a position we do not want to be in.  Whether or not the charts are showing a low risk situation for a new position, the facts of what the price is doing at the time can tell us that if we are in a certain type of position it is clearly “wrong”.  Such as with a breakdown, whether or not the breakdown is showing prospects of being a low risk situation, the new low tells us that a “long” position is losing money and we do not want to be in one.

I am sure everyone is familiar with the game of Black Jack, which is also referred to as “21”.  At a casino to play this game you have to place a bet, then you see your cards, and you can make choices as to getting more cards to try to reach 21.  If you go over 21 you have lost.  Then after all of the players have their turn the dealer shows his/her cards and then it can be determined if you beat the dealer or not.  The gamble is that you have to place your bet before you see the cards and you might get a good hand, you might not.  And even if you get a good hand, there is the chance the dealer could have a better hand.

You have to be careful in how you play your hand, especially when you ask for additional cards.  If your hand totals 18, you know that it is going to be almost impossible to ask for one card and for it to be a 3 or lower.  Anything higher would cause you to “bust” and lose the hand.  So to hit on 18 it would be a very high risk situation as you are almost assured that you will lose.  This is an example of knowing what you DON’T want to do.

Consider this for a minute.  You go to a casino and see a “new” Black Jack table, and what makes this a new table is that the rule of when you bet has been changed.  Instead of having to place a bet before the cards are dealt, you can now see the cards in your hand, you can even “hit”, and then decide if and how much you want to bet.  You still have to bet before you see the dealers hand, so there is still the chance the dealer could tie or beat your hand.
I can say that for myself I would play on this “new” table in a heartbeat without a second thought.  It has been years since I have even gone into a casino, but if they introduced this type of a table I would be one of the first ones there.  Because with these new rules I could sit out all of the bad hands, the ones where you know that it would take a “miracle” for you to win.  Sure, there would be some hands that I sit out that the dealer would “bust” or have a very bad hand and I could have won that hand.  But when you take a look at the averages and the results over an extended period of time, by choosing the best hands to play and sitting out the bad hands, your odds of leaving the table a “winner” have risen astronomically.

Trading offers us the advantage I described concerning the “new” game of Black Jack.  By using the TFI Charts we can identify when the chart is acting in a predictable manner and is showing a “good hand” that present a low risk.  These are the occasions we want to take advantage of.  There is still some risk that the “dealer” could turn up a better hand, so we still must use good money management practices of position sizing and set a stop and honor it.

What is so hard to do is to pass up the “bad” hands.  There are times when we will sit out for a considerable period of time because one bad hand follows another.  And there will be times when one of those bad hands turns out to be a “winner”.  This can be hard to sit out the next bad hand, but if you track what happens every time a bad hand occurs, you will see that over the long run the bad hand that turns into a “winner” is the exception, not the rule.  It just takes a lot of discipline and patience to wait for the good hand to appear.  This is even harder to do for the person that craves excitement, is bored, or has set “goals” that makes them feel they “have to” be in a trade.

Long term trading

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the longterm trading basic principles

There are 3 directions the price can move in. This article looks at an upwards move.

Every position that is entered is based on expectations of where the price will be at some point in the future. This future could be mere minutes away for a day trader all the way up to many months away for a very long term investor. The time frame of the trade will be covered in a future article. Today I want to explore some of the risks and rewards that are associated with different types of trade.

From today there are 3 things the price could do.  It could move up #1, it could just move sideways #2, or it could fall #3.  As long as the stock continues to trade, it will move in one of those 3 directions!  This is something that recurs each and every day.  From where ever the price is currently at, you can draw these 3 lines on the chart and say it will do one of the 3.

Whether you use fundamental analysis, technical analysis, or just flip a coin, when you enter a position you are entering one expecting the price to move in one of these 3 directions.

For scenario #1 we would be expecting the price to move up. To take advantage of this move we could buy stock. The advantage of this is you don’t have to worry about time and can take advantage of the entire move, especially if it becomes a very strong move. The disadvantage is that you tie up a lot of capital to enter the position, and you have the risk of a move against you, or a sideways move that leaves you with “dead” money where it is not making or losing anything. The bad thing about dead money though, is that it would be earning interest if just left in an interest bearing account, and it is pretty bad when a bank account out performs a trading account.

Another way we could take advantage of this move would be to buy calls. There are 2 main advantages of buying calls, the first is that it takes less capital, and the second is that the % of gains can be much greater than what you get from buying stock. Example, if you buy 100 shares of qqq at 37 and it moves to 39 you gain 2 points, or 5%. If you buy a 37 call at $0.50 and the price goes to 39, you can sell that call for at least $2.00, maybe more depending on time. This is at least a 300% profit. So instead of using $3,700 to make $200 profit you can use $50 to make $150 profit. This leverage is a key advantage of using options. The second advantage is that when you buy a call your risk is limited to the amount paid for the call. If you spend $3,700 to buy 100 shares of the stock, and the price falls to $35, you have lost $200. If you spend $50 to buy that one contract of 37 calls and the price falls to 35, you have lost $50. If the price falls to 30 you would lose $700 in the stocks value, but the calls remain at a $50 loss, the amount you paid for them.

Buying calls gets to be a bit more complicated because there are so many “options” to choose from. The first issue with buying calls is what strike to buy. Will you buy ITM (In The Money) where it will have a higher delta? By doing this the option gains more as the price moves up. An ATM (At the money) or OTM (Out of the Money) strike will have a lower delta, and will result in less of a gain until they become ITM. But the ATM and OTM calls are cheaper to enter. The second issue is what expiration month to use. When you buy calls you not only have direction to worry about, there is also the matter that the move MUST take place before the calls expire. This leads to the reason that so many people lose money with options. They wind up buying lottery tickets because they are so cheap, not realizing that the very short time left until expiration does not give the stock a chance to make the needed move to bring the price up to the Out of The Money strike price that they bought. So their lottery ticket expires worthless!

There is also another way to use options to help control risk. If you buy stock you can purchase “insurance” on that position.

This is simply done by buying 1 put for every 100 shares of stock. Example, if you bought the q’s at 37, you spend $3700 to enter that position. Lets then assume you are planning on holding this position for more than just a few days, so you will want some options that will give you time to let this position play out. You then determine how much of a move you are willing to accept as your risk. For sake of this argument let us use 1 point. You would then look at the next expiration month, and you could buy the 36 puts for $0.75, or $75 per contract. Your overall cost of the position is now $3,775. Should the price move up like expected, then that is fine, this expense for insurance is just like the expense you make on your house and car where you pay for the protection but don’t use it. But if the price moves against you, and falls below 36, then the puts will “kick in” like an insurance policy and stop your loss in the $100 area. The important thing to remember here, is that this insurance is for a limited amount of time, and because of this, the time frame of the trade will have to be taken into consideration.

Lastly, there is one other way calls can be used to take advantage of the expected move up. That is with spreads. There are 2 main types of spreads, the simple vertical spread such as if you were to buy the 37 call and sell the 38 or 39 call. The advantage with this is that your cost to enter the position is decreased, but you reward is also limited to the strike that you sell. The other main spread that can be used is a calendar spread, where you buy the 37 call in a future month, and would sell the current month 38 or 39 strike. This is a longer term type of position, where you are buying a call that you want to gain value over the course of time, and you sell the near month calls to collect premium to pay for that call that you bought. This is a more challenging position to maintain, as timing of when to enter and adjust it becomes very important.

Sideways & Down

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up down sideways

In this article we take a look at the risks and rewards of sideways and downwards moves.

In the previous article we discussed some of the risks and rewards of looking for an upwards move.  Today we are going to very briefly take a look at looking for a downwards move, and also begin to take a look at the risks and rewards of a sideways move.

Every position that is entered is based on expectations of where the price will be at some point in the future. This future could be mere minutes away for a day trader all the way up to many months away for a very long term investor.

From where ever the price is currently at, you can draw these 3 lines on the chart and say it will do one of the 3.

Whether you use fundamental analysis, technical analysis, or just flip a coin, when you enter a position you are entering one expecting the price to move in one of these 3 directions.

For Scenario # 3 we would be expecting for the price to fall, to begin a downwards move.  This is basically the same thing as we saw in the first scenario, but instead of buying stock to go long, you would sell SHORT stock.  And instead of buying calls, you would look at buying puts.  When you short stock, it must be done in in a margin account, and for individual stocks you also have the uptick rule to contend with.  There is also the added risk with a short position, is that the price can go up infinitely.  When you buy stock, the risk is that it goes to 0, but with a short, there is no ceiling, so you can have unlimited risk.  The risks and rewards of buying puts are the same as buying calls, if the price does not move down, then you have the risk of losing time value in a sideways move, and you have the risk of the price moving up.  Because this is so similar to the “long” article I will not go into further detail and bore you by saying the same thing but swapping calls for puts, short for long, and down for up.

This leaves us with scenario #2, where we would be expecting the price to move sideways, to remain in a trading range. This can better be characterized by saying the expectations for this scenario is for the price to NOT move up, and for it to NOT move down!

The sideways move is the bane to a stock trader. The price is not moving up to where a long position can profit, nor is it moving down where a short position is making money. This represents “dead” money, where a simple bank account out performs the trading account. The way to profit from a sideways move is with the selling of time value in options. The first aspect of a sideways move that will have to be considered is time. When you are dealing with options, time is one of the most important factors, and for a sideways move you are taking advantage of the erosion in the time value of the options that you sell, with the intent of the contract expiring worthless so you can keep all of the premium that you sold.

There are different types of sideways moves that we need to take a look at.

First we have a sideways trading range. On this chart the price is oscillating up and down between these 2 white lines.

One options strategy that could be used would be to sell call spreads. The first would be to sell the call vertical spread that corresponds to the level of the top white line. To do this you sell the lower strike call and buy the strike just above this level. And at the bottom line you could sell the put vertical spread where you sell the put at the strike where the bottom line is at, while buying the put at the next lower strike.

This would effectively create an iron condor, where both sides of it would profit should the price remain within these 2 white lines until the options expire.

This chart is showing a sideways move at the top of the preceding upwards move. On this chart the sideways move is in a very tight range, where it is up one candle and down the next.

If you believe that this represents that a top is forming, that would mean that the price is not going to move to new highs. The strategy here would be to sell a call vertical spread. You would sell the call at the strike at the top white line and buy the call one strike above it. This way while the price remains at or below that top white line you would keep the premium that you sold. The only way you lose on this position would be for the price to move up above that top white line and remain above it when the contract expires.

If you felt that the sideways move was at a bottom, then you could sell the put vertical spread, and you are looking for the price to remain at or above the strike price of the put you sold.

The advantage to selling premium is that you have 2 ways for the position to make money. The price can move sideways, or move in your favor. The only way to lose money on the position is for the price of the stock to move against you and remain beyond the strike you sold at expiration.

The reason you sell a vertical is that the strike you buy is the “stop loss”, the protection of the position. Your risk will be the difference of the strike you sold to the strike you bought.

In these articles we have discussed some of the risks and rewards of different positions that can be taken, from buying or shorting shares of stock, to buying and selling options and vertical spreads. I have not gone into detail on the options, as the purpose of these first few articles is to introduce the ideas of how these different positions work. It will be in future articles where we will start to get into more detail on how and when you would want to consider using the different strategies.

The next article will be on how we can get the expectation of what the price will do from a given point. Yes you can draw those 3 lines (up, sideways & down) from any given point, but it helps when you can make the determination as to which one is most likely to happen, so what we need to review is how to determine which direction is showing the best potential.

fundamental analysis vs technical analysis

A brief discussion on Fundamental vs Technical Analysis

We know that from where the price is at right now it can go up, down, or sideways. You could roll a dice, or flip a coin, but that does not give you much confidence in how a determination is made as to what the price will do. There are 2 main types of analysis that is used in helping to make this determination, FUNDAMENTAL ANALYSIS and TECHNICAL ANALYSIS.

Fundamental Analysis is where you look at the “nuts and bolts” of a company, along with general economic conditions. This involves studying the financial reports of the company, examining what they do to make money, and what their prospects are for future earnings. And also using this information to place a value on what the stock is worth. An example of some economic fundamental analysis would be the consumer confidence report, inventory levels, interest rate, price of oil and gold, and the jobs reports. These are but a few of the different factors that can point to the health or underlying weakness that can effect the overall economy.

The problem with Fundamental Analysis is that it does not account for “crowd mentality” of fear and greed, and is subject to “surprises”. A good example of this is each earnings season you will see the professional analysis publish their expectations for what a companies earnings will be. And it is not very uncommon for the company to “surprise” the analysis, sometimes it is a good surprise with higher than expected earnings, and sometimes it is a bad surprise as the company does not live up to the analyst expectations. Unless you are an insider, it is very hard to get a completely accurate grasp on all of the fundamental information for a company. And when you are dealing with the overall economy, there are times when the markets do not respond as the “should” to economy news. There are times when good news will cause selling, and times when bad news will be bought.

In Dec. 2019 there was a particular company that had a drug going thru FDA trials. This stock and some people associated with it are still making headlines. At that time the price of this stock was above $70 as people were expecting for the drug to be approved and for the price of the stock to climb even higher on the good news. On Dec. 12th I looked at the charts of ImClone and pointed out that a move below the 70 area would signify that the price was starting a downwards move.

This observation was made based on using Technical Analysis, from viewing the charts on the stock. It was after the price fell to the $60 area where a well know celebrity sold based on “insider information”. This was well after the charts had already shown a decline was starting. This is but just one example of how Technical Analysis told a story and allowed for a plan of action to be developed before a move actually began. And is one of the reasons I am a believer in using Technical Analysis to develop a trading plan, one that has expectations of what is “most likely” to happen, along with contingencies for the “just in case” situations.

Here is a brief summary of the stocks that have been highlighted on TimeFrameInvestor between July 13th to the 29th. where I used Technical Analysis to develop the following expectations.

July 13th.  KLAC  “a move below 44.50 and 44 would show that the price is breaking down from this range, which would increase the prospects of continuing the very long term downwards move, which is still showing the downwards potential.”
KLAC gapped down the next day and then continued the move down to below 38 before it bounced back up just to be stopped by the daily 20ema and the open from that gap down..

July 14th  SNDK  “The long term and medium term time frames are giving us a pretty strong hint that the support of 20 is holding, and that a bounce is likely to develop.  And with that bottom retracement line on the very long term chart, this is an encouraging indication that we have a key support level here….There is history at 22.50 and 25 that can act as resistance, so these levels will have to be watched closely “

On SNDK we did have a strong indication that support was holding. In the analysis 2 resistance levels was mentioned, it gap up above that first resistance, and has been stopped by the second.

July 19th SYMC  “While the price remains below 40.50 it is showing the prospects for a daily chart breakdown of the support at 40, which would continue the longer term downwards move that we have on the weekly and monthly chart.  The price would need to move above 42 to show a double bottom has formed, and then above the resistance at the 43-44 area to show a bounce would be turning into a longer term one.  But until it could break back above 45, we would have the prospects that the price would be forming a weekly chart lower high or sideways move, and set up for another downwards move.”
On this stock it did not live up to the breakdown expectations.  BUT, the report did list 42 as a level that tells a story, one that is a bullish story.  This is what the price did wind up doing, moved above 42, and then shot up to the 43/44 resistance level, and then another move to take it above 45.  The move above 42 canceled the bearish expectations and turned it bullish.

July 21st CTSH   “24 is very key on these time frames.  It is showing a high potential to break thru this level and show a downwards move is underway.  To cancel this perspective the price would need to move up thru the 24.60 area and that would turn this perspective around to one of strength instead of weakness.”
This stock did move down to 23, but then gapped up to open above the 24.60 level.  On the initial downwards move, a directional position for the downwards move, and even selling a 25 strike call spread would have turned into a loss when it gapped up and then made the bullish run up.

July 23rd APOL  “The daily chart is giving us a sell the bounce signal, and also shows a lower high, this is the strongest indication that a downwards move is beginning, with the prospects of taking the price down to the previous lows.”
Not only did the price move down to the previous lows around 84 from 90, it then gapped down to hit the low 70’s.

July 23rd DISH  “This is a warning that the downwards move could be stalling, and that we might even see a shorter term bounce….We do need to see the price move above this 29-29.25 area to confirm upwards potential and show a bounce is starting.”
The price did not move above 29, it slid back to 27.50 and formed a higher low, and has moved back to test 29 once again.

July 27th EBAY  “This daily chart did become oversold, and this is for the prospects of a relief bounce.  This is likely to be a shorter term bounce…..Overall on EBAY we are seeing a daily chart bounce trying to begin.  This bounce would be a relief bounce to let off some of the oversold pressure, and could take us back to 85.  That would create a lower high on the weekly chart, and would start showing a top is forming on the very long term chart, which would set up for the next downwards move.”
We did get a bounce to 80, where the relief bounce faltered and has started turning back down.

July 28th ALTR  “This is an easy chart to summarize.  The price must break above and stay above 20 to show upwards potential.  This would show a daily and weekly chart bounce.  At this time that does not look to be the most likely outcome, as we are seeing 20 act as resistance.  Should it happen then we know what it means, but while the price remains below 20 it is confirming a weekly chart breakdown, and a move below the 19.20 level would confirm that the resistance at 20 has stopped the price and a downwards move is underway.”
The price did not move below the 19.20 level to confirm a downwards move was starting, and instead did move above 20, to show a bounce was beginning.  Now to see if it can follow thru on the bounce.

July 29th HDI  “Overall these time frames are showing an upwards move that has become exhausted and overbought, and we are seeing a lot of indications that suggest a pullback, a downwards move is trying to develop.  We do need to see the price move below the 59.50-60 area to confirm that a downwards move is starting, otherwise the weekly chart sideways move at the highs would be continuing.”
It did take a few days, but HDI is finally moving down thru the 60 and 59.50 areas to show a pullback from the upwards move is beginning.

One thing that can be illustrated by these Stocks To Watch is that by using the key information that is presented to develop a plan, a plan that not only has expectations, but also identifies the “what if” or “just in case” scenario. Out of these stocks that have been highlighted, most have lived up to the expectations. 2 of the stocks did not live up to the expectations, BUT they did fall into the “just in case” scenario and still presented a good opportunity to take advantage of a move that developed. Only 1 of these stocks made a very erratic move that would have flat out generated a loss. This erratic move did put it into a bullish scenario though. And we have 1 that remains stuck in a sideways move, with this being the second time it is trying to break above a resistance level.

We have looked at some of the philosophical basics, that the price can move in one of three directions. We looked at some of the risks and rewards of a trade placed in each direction, and we have now conducted a quick review, and presented some information to demonstrate the results of using Technical Analysis.

In the next article I will start to discuss different aspects of a chart, what some of the different indicators mean, and lead up to how to develop a trading plan using the story that the price is telling by what it has done and is currently doing.

technical analysis introduction

We have previous covered some philosophical issues, that there are 3 directions the price can take, and then we very briefly touched on the risks and rewards of different types of positions that can be entered to take advantage of these 3 directions. We then briefly looked at Fundamental analysis and compared it to some results of using Technical Analysis.

So just what is Technical Analysis?  This is the study of charts, where the history of the stock and different patterns are examined.  A chart is nothing more than a graphic representation of price and time for a stock or index.  I am going to refer you to the “Charting Basics” section of the Time Frame Investor web site to cover some of the basics.

ebay chart1

A few things I have learned is that you can very easily put too many indicators on a chart and wind up with “analysis paralysis”. You can clutter the screen with moving averages, different types of channels & bands, macd’s, stochastics, RSI, CCI, Money Flow, trend lines, support and resistance lines, Fibonacci levels, and even Elliot Wave counts.

For traditional charts, what I found works best is to find just a few indicators that work in most situations, and stick with them. And to occasionally augment these “core” indicators with some of the other indicators. There will be times that support or resistance lines will be handy, and after a long trend, a set of Fibonacci retracement lines would show levels that the price could move back to as it takes back a measured amount of the gains from the trend.

What is important is that you experiment with the different indicators and settings until you find the ones that YOU are most comfortable with.

The chart shown here is part of the Time Frame Analysis charts that I use. I am using some complex algorithms to interpret the strength or weakness of a time frame, and to display it in a very simple format.

The one thing that leads most people into trouble is that they only evaluate the daily chart. This is like driving your car while wearing a set of blinders on your face so you can only see what is right in front of you. This leads us to one of the most important aspects of Technical Analysis, TIME FRAMES!

A time frame is based on the interval of the chart. An intraday chart, say where each candle represents 15 minutes of trading does not tell you what to expect for a long term trade. That 15 minute chart can not be used to tell you what the price is likely to be doing a week from now. And likewise, a weekly chart, where each candle represents a week does not help you determine when it would be a good time to place a day trade.

This does not mean that these different time frames can not be used together. The best trades will be found when you have different time frames pointing to the same expectations. The price does not always go straight up, there are ebbs and flows to each and every time frame. You can have a longer term weekly chart moving up, but have a daily chart pullback to create a dip to set up for a continuation of the weekly chart move.

A good way to use the different time frames would be to determine on the longer term charts what the most likely move would be, and for this discussion lets just say that on the longer term charts we are seeing indications that the price is likely to move up. We then look at the shorter term charts, and they are also showing potential to move up. If we were looking to place a day trade, this information would tell us that the strongest moves are most likely going to be upwards moves, and that pullbacks are going to be opportunities to get positioned for an upwards move. If you are looking to enter a longer term position, this same set up would be applicable. You would want to have the upwards expectations on the longer term charts to show that the trade can last for more than a few minutes or a few days. And then you can use the short term charts to refine your entry point, to wait for some intraday weakness to let up and then enter for the expected longer term move.

And the different time frames can be used to help determine if a move has reached become over extended and is getting ready to reverse. This can be used to know it is time to take or lock in profits, depending on the type of trade that you have.

The purpose of using Technical Analysis is to develop expectations for what the price is likely to do. You will want to use these expectations to develop a trading plan, one that will give you a plan of action, and also identify what to look for to know that you were “wrong’. And there will be times when you ARE “wrong”. The trading plan along with money management is the cornerstone to a successful trader. Whether it is a short term directionally biased trader, or a longer term “non-direction” trader. If you do not have a plan, and if you are not using money management practices, you are not going to be around very long.

The answers to the following questions will give you a trading plan that you can confidently use.

Short or long term?  This will help you determine the time frames on the chart to pay the closest attention to, and it will help you to determine the best type of position to enter.  Such as a butterfly would not make for a trade you would want to enter with expectations of exiting it within a few days.

What are the expectations of the stock or index?  This goes along with the time frame, for the duration of your trade, is the stock or index showing potential to move up, down or sideways?  This will help to determine what type of position to enter.  An example of this would be if the stock has formed a top and is starting to move down, or is in a strong downtrend, you might not want to sell puts because of the risk of the price falling below the strike sold.

Buy premium or sell it?  This will depend on the expectations of the stock and the duration of the trade for an options position.

Simple or complex position, and is there potential to change the position as it develops?  An example of this would be a calendar spread.  This type of position is where you buy an option that has many months of time, and each month during the duration of this trade you want to sell a near month option, so this position does require a change each month.  Or if you enter a spread or multiple spreads, would there be potential to roll part or all of the position to another strike or another month?   You need to examine this issue before entering the trade so you will not try to “fly by the seat of your pants”.

What are your expectations for the trade?  This is where you start to look at profit objectives, and an exit strategy.  Is there a defined time or profit level that will signal an exit for the trade, or will you use a “trailing stop” type of philosophy to try to stay in the trade as long as possible?

Probably the most important question, what will tell you that you are “wrong”?  You need to know what your stop will be.  This will either be the price of the stock or index moving beyond a certain level, it could be if an indicator gives a specific signal, or it could be when a certain amount of money is lost in the position.  You do need to know how much money would be lost should the stop be hit.

And finally, the position size.  How big or small of a position will you get?  I feel that you must know how much you can afford to lose, and based on your stop, size the position accordingly to control your risk.

In the next article we will start to look at some common types of simple positions in greater detail to learn what the characteristics are of the different types of positions that can be used.  After that we will start to examine some charts to show how expectations can be developed, and how to tie these expectations into a trade selection.