I’m starting this thread to discuss the use of predictive indicators in trading. For the longest time I thought that there were only two schools of thought. Fundamental Analysis and Technical Analysis but neither of these alone seemed to work for me. With technical analysis you are taught not to predict markets, but to react and follow them. So trend treading and break out trading are the main methodologies for technical analysis, neither of which I think is terribly effective.
For years technical indicators like MACD, stochastics, RSI etc…have been the main stays for technicians, but lately I’ve seen more and more people getting back to basics and talking just about “Price action” using support and resistance, trend lines, and simple candlestick patterns. The main problem I see with these methods is that they are using Price to Predict Price. Since something has to happen with price before you get a signal using Price, whether through price action or technical indicators is by definition Lagging. I’m not knocking technical analysis as I think it’s necessary to use to confirm predictive indicators, but price based analysis isn’t all there is. These are some of the ideas that I will explore on this thread and that I talk about on my blog.
-Volume Spread Analysis (Richard Wycoff)
-Time Based Analysis
-Cycle Analysis
-Seasonal Analysis
-Market Astrophysics (yes the moon, sun and movement of planetary bodies can affect markets, this has been well-documented)
-Bank Manipulation
-Support/Resistance Confluence Levels
Let’s start with something commonly known about Seasonal Analysis
The analysis of forex seasonal patterns, in my opinion, is one of the most overlooked methods for analyzing markets. It has obvious applications for commodity futures such as wheat, corn and soy beans, because these are harvested at regular times. However these same cycles exist for stocks and forex as well. But instead of being based on weather they are based on business cycles.
Take the Euro/US Dollar pair for example. Between 2000 and 2009 the Euro fell against the dollar 7 out of 10 times during the month of January. This is due in large part because foreign countries begin sending money abroad to invest at the beginning of the year. Since the US has the most liquid markets in the world it has a tendency to buoy the currency.
The Yen has tendency to rise during the first half of October as Japanese corporations repatriate funds back to the country to boost their balance sheets for the middle of the fiscal year.
While these tendencies don’t always occur every year they occur enough of the time that it’s worthwhile to pay attention to. So how can you analyze seasonal tendencies? I use two tools. The first is by venerable trader Larry Williams called the Williams True Seasonal Index (the Blue Line at the Bottom of the Chart). As you can see in the screen capture below the indicator warned of the impending drop and subsequent rise in the Euro/Australian Dollar in March and April of 2014. The indicator called the top on March 7th, and the actual top came on the 12th, so it was a few days off, but bear in mind that you had this information months in advance. The real value of the True Seasonal Index is that it gives you a trend direction for the overall market. You can then match it with your technical analysis to see if the seasonal pattern is coming to fruition or not.
This way you are planning your trades and not just reacting to price. I’ll post more later, let me know your thoughts and questions
