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blankseplocked Experiment #01: RL finance analysis applied to EvE
 
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Chevalleis
The Legendary Conquest
Posted - 2011.07.01 13:45:00 - [301]
 

I gotta find time to read this thread through...

Vaerah Vahrokha
Minmatar
Vahrokh Consulting
Posted - 2011.07.01 13:46:00 - [302]
 

Edited by: Vaerah Vahrokha on 01/07/2011 13:47:04
More updated daily graph

Here is what happened the next day:

Full resolution graph


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As you may easily see, price quickly rose up (as predicted) and went to the next BRN, 2700.

At this point I pulled out, because steep rises usually don't bear lots of liquidity and tend to crash.

I still netted 276M in one day (4% - broker fee for bad trading alt).

4% in one day is not too shabby considering how nowadays bonds on MD yield similar amounts in a month.


Now I suppose I made clear what I intend for "trading" as opposed to "buy and hold" (and wait for 15 days or one month).

Vaerah Vahrokha
Minmatar
Vahrokh Consulting
Posted - 2011.07.01 13:57:00 - [303]
 

Latest graph

Here is what happened since then

Full resolution graph


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I have plotted BRN 2700 just to show why I closed my trade at the last but two candle.

Price touched BRN 2700 (candle shadow) at the time but it closed BELOW (candle body).
Hitting a BRN or a resistance line often means there's a bounce back, in fact look at the last but one candle: deep red.
But if you were left in that trade, don't despair!
The candle tail is huge and shows there are lots of buyers sitting at 2580. Which is not suprising since it's also the same level where priced stopped at April (see left of graph).
The last day (last candle) price kicked up again with a candle called "marabozu" (strong, decided candle with no shadow nor tail).
Price closed *above* BRN 2700 which is just another telltale information for those who followed these analyses so far.

Vaerah Vahrokha
Minmatar
Vahrokh Consulting
Posted - 2011.07.20 15:24:00 - [304]
 

A more in depth study of a market: Mexallon

This and the next article will focus on something different than graphs and that ultimately is what the charts "talk about": the market structure.

Price is subject to many, often random pressures, exactly like we may talk and say many different words. What's less random, is the fact we use a language to talk those words. Markets are not different, they are made by us and for us and they are expressed with their own dictionary.

Markets exhibit a structure that may be read. Trading becomes like a guess game, where a guy begins a sentence and we have to finish it in the future for him. Sometimes it's really easy and even obvious, other times it's hard or even impossible. In the first case we will trade, in the latter we don't accept to trade and switch to another market.

Let's start with Mexallon, a didactical market that soon-ish will give many opportunities to make a lot of ISK.

I posted in game data about such market right today on another thread. Please read that thread to learn how to use the provided file and basically get yourself to show on your screen the graphs I am showing next. You can, I have given you everything: the free software, the free data, the teaching.
Maybe one day I might even see if there's interest in free webinars about how to trade.


So, let's expand and install the provided ZIP file and fire up the Multicharts software. Following the above link instructions, get candle bars showing and select the Monthly time frame.

At this point you shall see a graph like this:


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Yours will have more blank space after the graph, I edited mine in order to fit in this forum layout.


Now look at this thing. Does it say anything to you? No?

The green (candlestick) bars are when price went up, the red ones are when price went down. Easy enough, isn't it?

You'll probably notice the bars have two "barbs": one coming out from the top and the other from the bottom. Here's how to read every candle bar:

The top of the thick body bar is the "open", the bottom is the "close", the upper "barb" is called shadow and represents the "high", the lower "barb" is called tail and represents the "low". Each bar is also considered in the "OHLC" bar category, because they provide those four informations.

Each day / week / month is a session (depending on the time scale you selected) and they represent the RL exchange sessions of the same duration.

Each new day, a security gets an "open" price value when the exchange opens, then the price bounces up and down within a minimum (tail) and maximum (shadow). At the end of the exchange day, the last price is the "close".

Each of those four information are very important: the open and close are the horsepower that fuels our wallets, the high and low tell us how many buyers and sellers were / are in the market today. A long tail pushes the candle (and thus the price) upwards, we say there are a lot of buyers. A long shadow over the candle pushes the price down, we say there are a lot of sellers.

In order to profitably trade we must go with the flow. We must trade in the direction of the trend. We must buy on green candles (if they are in an ascending trend) and sell on red candles (if they are in a descending trend)

Moreover, price articulates his words with some simple patterns I listed in earlier articles: pin bars (PB), BEOB, BUOB, DBHLC, DBLHC (and IB aka Inside Bars, but they are too advanced for the average EvE player).

(Continues...)

Vaerah Vahrokha
Minmatar
Vahrokh Consulting
Posted - 2011.07.20 15:44:00 - [305]
 

Example: look at the third candle. The huuuuge shadow presses the price down. For that whole candle period (1 month) there has been mad selling.

Look at the penultimate candle instead: similar shadow and tail. The traders did not know what to do, the result is basically a draw. Notice that those candles (aka spinning tops or doji in case their body is almost nil) with a draw are NOT "inactive" candles. Quite the opposite, the most bloody fight happen in those close ranges (accumulation, go Google these terms) and tend later to explode (distribution) either up or down. The job of the trader is to read the market and understand if price is about to go up or down.

In fact, everyone on this forum will always tell you: "buy low, sell high" but never how to know when low was really a low and when the high was really an high.

With this method you can know that, and you can decide on YOUR own terms when you are OK with the current low or current high and therefore decide to buy or sell.


Swings

Now let's stare at the graph again. Look at the sequence of the candles. In every liquid market in the world, price moves in a zig zag, serpentine motion, a sequence of ups and downs that often form "ladders". These motions are called "swings", swings may go from an higher low to a lower high, from a lower low to a lower high and many other combinations.

The general direction of this zig zag ladder is called "trend". You must trade in trend, because the trend gives an hugely powerful boost at your probabilities to enter a good trade. If you get in wrong, it will hugely hinder you instead.

In the graph above we clearly see a steep rise, then a long fall. ATM we are in the fall or downtrend. Every decision must take it into account.

Trends take a while to reverse and many times price decides just to... not decide. When it goes neither up or down, it's called "range market" (RM).

My current expectation with Mexallon is to let it finish falling, then retrace (aka bounce up) and start trending up again. I will let the other traders break their bones from my sniper position. One day, price will tell it reached the bottom and wants to rise up, this usually happens with a mechanism called "retracement": price will hit the bottom, then rise a bit, then fall again (scared economy media call this "double dip") then start rising fast, forming a "W" shape.

Let's see these swings in action:

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Each white arrow shows one swing, up or down. Some swings are small / less important and may be safely not drawn (see the first 2011 quarter).

What are those purple horizontal lines?

They are called price levels and are fundamental. They always sit at a swing tip, many times they sit at round numbers (because these are easy to type and remember!). These price levels act as support and resistance to the price, cohercing it into a less than random motion.

Monthly (purple) price levels are VERY powerful and dominate the price levels found at lower timeframes: the cyan ones (weekly) and the orange ones (daily).

Usually it's safe to trade between price levels of the same importance, while it's very dangerous to i.e. start a trade at a weekly level and try to drill thru the nearby monthly. Price will usually bounce hard against it.

Vaerah Vahrokha
Minmatar
Vahrokh Consulting
Posted - 2011.07.20 15:58:00 - [306]
 

Edited by: Vaerah Vahrokha on 20/07/2011 15:59:33
The last graph for today's lesson shows how price levels act on price.

Even when zooming at lower chart time frames it will be easy to see how price will violently react when hitting those levels. Many times it is rejected and bounces back.
The mechanism at the base of the so called retracements is caused exactly by these bounces. Price gets rejected and has to dip a lot and gain momentum, a LOT of momentum to try again and drill into the resistance / support provided by the relevant price level.

Traders can see these dips in preparation of attacks (in RL see the attempt to attack the 1.400 EUR vs USD support price level, price got punted away) and can prepare to trade accordingly.

In the chart below you may see many arrows showing where price will hit "the wall". You may easily see how in order to drill thru some lines, the price had really to go run-up before smashing hard enough to break them.

Example: in April 2011 price wanted to fall (see the long shadow) but just could not. In May 2011, price went up to 29.25 in order to smash down thru 28.00.


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And do you see what happened when price fell and touched 26.50? The body got punted up, all we see recorded is that only the low touched the support, then price got pushed up so much that it closed about at 27.00 instead of sitting at 26.50. Only the next candle (penultimate) the sellers finally managed to pull the price close to 26.50. But look, the sellers still failed to close below 26.50. Buyers took control and the last candle is showing they are reacting and keeping the price above such ultra-strong support, despite the huge shadow showing imponent sellers pressure.

This is a typical sign of when buyers start prevailing and the downtrend starts steering towards upwards. All we have to do now is to keep an eye on the next candles, if the current swing closes upwards, then we will go in the weekly and then daily graphs to find buying opportunities.


The next article will show more about market structure, it will be posted in the next days.



I will gladly accept constructive feedback and questions, I am aware this whole stuff may look like daunting, expecially to a gamer.


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