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Question 1 of 10
1. Question
Which of the following statements is/are true for Japanese candlestick charts?
I. Candlestick charts use rows of candles with wicks on either end.
II. The body of each candle is the distance between the opening and closing prices.
III. If the closing price is lower than the open, the body is left empty or white (or it could be one color, like blue).
IV. If the closing price is higher than the open, the body is filled in with black (or another color, like red). The upper wick represents the high, and the lower wick represents the low.
Correct
Japanese candlestick charts
Candlestick charts are the third major charting method available on most charting programs. The Japanese used candlestick charts before charting ever became popular in the West (rice futures were active in Japan as early as the 1700s), and they are the earliest form of technical analysis. Whereas bar charts use bars and point and figure charts use Xs and Os, candlestick charts use rows of candles with wicks on either end. The body of each candle is the distance between the opening and closing prices. If the closing price is higher than the open, the body is left empty or white (or it could be one color, like blue). If the closing price is lower than the open, the body is filled in with black (or another color, like red). The upper wick represents the high, and the lower wick represents the low. The wicks are not as important as the body. In other words, candlestick chartists are not as interested in the day’s high or low as they are in the relationship between the open and the close. I am not an expert on candlestick charts; entire books have been written on the various patterns for those who want to delve deeper.
Incorrect
Japanese candlestick charts
Candlestick charts are the third major charting method available on most charting programs. The Japanese used candlestick charts before charting ever became popular in the West (rice futures were active in Japan as early as the 1700s), and they are the earliest form of technical analysis. Whereas bar charts use bars and point and figure charts use Xs and Os, candlestick charts use rows of candles with wicks on either end. The body of each candle is the distance between the opening and closing prices. If the closing price is higher than the open, the body is left empty or white (or it could be one color, like blue). If the closing price is lower than the open, the body is filled in with black (or another color, like red). The upper wick represents the high, and the lower wick represents the low. The wicks are not as important as the body. In other words, candlestick chartists are not as interested in the day’s high or low as they are in the relationship between the open and the close. I am not an expert on candlestick charts; entire books have been written on the various patterns for those who want to delve deeper.
Question 2 of 10
2. Question
What does the bullish and bearish engulfing line consist of?
I. The bullish engulfing line consists of a white (or colored in, at times empty) body that totally engulfs, or covers, the previous day’s body.
II. The high of the body is higher than the high of the previous body, and the low is below the previous high.
III. The white body is formed by a low opening met by strong buying, which pushes the price to close above the previous candle. This is a bullish indicator that is seen often at major bottoms.
IV. Bearish engulfing lines are seen at tops—a long black (or colored in, at times empty) candle that totally engulfs, or covers, the previous day’s candle. This is often seen at a blow-off top.
Correct
The bullish engulfing line consists of a white (or colored in, at times empty) body that totally engulfs, or covers, the previous day’s body. In other words, the
high of the body is higher than the high of the previous body, and the low is below the previous low. The white body is formed by a low opening met by strong buying, which pushes the price to close above the previous candle. This is a bullish indicator that is seen often at major bottoms. Bearish engulfing lines are the mirror image seen at tops—a long black (or colored in, at times empty) candle that totally engulfs, or covers, the previous day’s candle. This is often seen at a blow-off top. It is a powerful signal for candlestick people.
Incorrect
The bullish engulfing line consists of a white (or colored in, at times empty) body that totally engulfs, or covers, the previous day’s body. In other words, the
high of the body is higher than the high of the previous body, and the low is below the previous low. The white body is formed by a low opening met by strong buying, which pushes the price to close above the previous candle. This is a bullish indicator that is seen often at major bottoms. Bearish engulfing lines are the mirror image seen at tops—a long black (or colored in, at times empty) candle that totally engulfs, or covers, the previous day’s candle. This is often seen at a blow-off top. It is a powerful signal for candlestick people.
Question 3 of 10
3. Question
How Spreads can be used as a valuable forecasting tool?
I. Spreads can be used to predict the market path of most resistance.
II. The commodity futures markets are in “carrying charge” or “normal” configurations. This is when the distant months buy at a higher price (or premium) to the closing months.
III. An inverted market is the product of a perceived or real near-term shortage of the commodity in question.
IV. Inversion could be caused by a mining strike, a government program, big near-term export demand, or a classic short squeeze—actually, any number of things. The important point here is that the spreads can give you important clues about the strength or weaknesses within a market.
Correct
Spreads—a valuable forecasting tool
I’ve found that by monitoring the spread of action in many of the actively traded physical commodities, a trader can get valuable clues about how bullish or bearish a market is. Spreads also can be used to predict the market path of least resistance. Typically, commodity futures markets are in “carrying charge” or “normal” configurations. (In London, they would say the market is in contango.) This is when the distant months sell at a higher price (or premium) to the closing months.
This configuration is called an inverted market. (In London, it’s called backwardation.) What causes a market to invert? In most cases, an inverted market is the product of a perceived or real near-term shortage of the commodity in question. This can be caused by weather. For example, cold weather tends to push the nearby natural gas over the back or could even push the nearby cattle contracts above the backs because cattle do not gain weight efficiently in cold weather and could conceivably be “pushed back”—not ready for market in a timely manner. Inversion could be caused by a mining strike, a government program, big near-term export demand, or a classic short squeeze—actually, any number of things. The important point here is that the spreads can give you important clues about the strength or weaknesses within a market.
Incorrect
Spreads—a valuable forecasting tool
I’ve found that by monitoring the spread of action in many of the actively traded physical commodities, a trader can get valuable clues about how bullish or bearish a market is. Spreads also can be used to predict the market path of least resistance. Typically, commodity futures markets are in “carrying charge” or “normal” configurations. (In London, they would say the market is in contango.) This is when the distant months sell at a higher price (or premium) to the closing months.
This configuration is called an inverted market. (In London, it’s called backwardation.) What causes a market to invert? In most cases, an inverted market is the product of a perceived or real near-term shortage of the commodity in question. This can be caused by weather. For example, cold weather tends to push the nearby natural gas over the back or could even push the nearby cattle contracts above the backs because cattle do not gain weight efficiently in cold weather and could conceivably be “pushed back”—not ready for market in a timely manner. Inversion could be caused by a mining strike, a government program, big near-term export demand, or a classic short squeeze—actually, any number of things. The important point here is that the spreads can give you important clues about the strength or weaknesses within a market.
Question 4 of 10
4. Question
What should be done when a spread cross zero?
I. When spreads “cross zero,” more times than not, this indicates a significant indicator of a change in the price-and-demand balance of the commodity being studied.
II. If the spread in question crosses zero to the upside, play the bull spreads (long nearby, short the deferred) or play the market from the short side.
III. If the market crosses zero to the downside, play the bear spreads (short the nearby, long the deferred), or play the market from the short side.
IV. Spreads can give important clues about the strength or weaknesses within a market.
Correct
Here’s another powerful trading tip: Watch for spreads to cross “even money.” I’ve noticed that when spreads “cross zero,” more times than not, this indicates a
significant indicator of a change in the supply-and-demand balance of the commodity being studied. My advice is to go with the flow. If the spread in question crosses zero to the upside, play the bull spreads (long nearby, short the deferred) or play the market from the long side. If the market crosses zero to the
downside, play the bear spreads (short the nearby, long the deferred), or play the market from the short side. For example, consider the spread between May
2003 sugar and March 2004 sugar, shown in Figure 8.29. Note that this action took place during mid-2002 into early 2003 (the 2004 contract is listed two years
prior to its expiration).
Incorrect
Here’s another powerful trading tip: Watch for spreads to cross “even money.” I’ve noticed that when spreads “cross zero,” more times than not, this indicates a
significant indicator of a change in the supply-and-demand balance of the commodity being studied. My advice is to go with the flow. If the spread in question crosses zero to the upside, play the bull spreads (long nearby, short the deferred) or play the market from the long side. If the market crosses zero to the
downside, play the bear spreads (short the nearby, long the deferred), or play the market from the short side. For example, consider the spread between May
2003 sugar and March 2004 sugar, shown in Figure 8.29. Note that this action took place during mid-2002 into early 2003 (the 2004 contract is listed two years
prior to its expiration).
Question 5 of 10
5. Question
Which of the following statements is/are true for Head and shoulders?
I. The H&S is a reversal pattern that signals a change in the prevailing major trend.
II. When we see an H&S pattern, it’s time to either exit and take your profits, cut your losses, or establish a new position in the new direction.
III. The H&S tells that a market is making a top or bottom, and it also tells us how far the ensuing move will travel.
IV. The H&S picks the top or the bottom.
Correct
Head and shoulders
The H&S is a reversal pattern that signals a change in the prevailing major trend. We’ll take up some ink reviewing this concept here because, in my experience, it remains one of the most reliable. (I also will add my own twists to identifying and analyzing this pattern.) When you see an H&S pattern, it’s time to either exit and take your profits, cut your losses, or establish a new position in the new direction. An interesting characteristic of the H&S is that it not only tells you a market is making a top or bottom, but it also tells you how far the ensuing move will travel. The H&S does not actually pick the top or the bottom, but it gives you the sign after the top or bottom is in place.
Incorrect
Head and shoulders
The H&S is a reversal pattern that signals a change in the prevailing major trend. We’ll take up some ink reviewing this concept here because, in my experience, it remains one of the most reliable. (I also will add my own twists to identifying and analyzing this pattern.) When you see an H&S pattern, it’s time to either exit and take your profits, cut your losses, or establish a new position in the new direction. An interesting characteristic of the H&S is that it not only tells you a market is making a top or bottom, but it also tells you how far the ensuing move will travel. The H&S does not actually pick the top or the bottom, but it gives you the sign after the top or bottom is in place.
Question 6 of 10
6. Question
Which of the following is/are the characteristics of Head and shoulder patterns?
I. The head (H) is a price low.
II. Peak lower than the head to the left is the left shoulder (LS), and another peak lower than the head to the right is the right shoulder (RS).
III. The line connecting the lows of the declines from the shoulders and the head is called the neckline (NL).
IV. The neckline is often vertical (similar to a support line). However, it can also be upward sloping, similar to an up trendline, or downward sloping, similar to a down trendline.
Correct
The head (H) is a price peak; another peak lower than the head to the left is the left shoulder (LS), and another peak lower than the head to the right is the
right shoulder (RS). The line connecting the lows of the declines from the shoulders and the head is called the neckline (NL). In a classic H&S, the neckline is often horizontal (similar to a support line). However, it can also be upward sloping (as in Figures 8.31 and 8.32), similar to an up trendline, or downward sloping, similar to a down trendline. This is where your analytical skills come into play. Many of the best H&S patterns are mutants, which resemble the original but in a skewed way.
Incorrect
The head (H) is a price peak; another peak lower than the head to the left is the left shoulder (LS), and another peak lower than the head to the right is the
right shoulder (RS). The line connecting the lows of the declines from the shoulders and the head is called the neckline (NL). In a classic H&S, the neckline is often horizontal (similar to a support line). However, it can also be upward sloping (as in Figures 8.31 and 8.32), similar to an up trendline, or downward sloping, similar to a down trendline. This is where your analytical skills come into play. Many of the best H&S patterns are mutants, which resemble the original but in a skewed way.
Question 7 of 10
7. Question
How is Head and shoulder patterns analyzed?
I. H&S starts developing when the left shoulder and the head are in place and the market starts to rally from the neckline.
II. If it fails at a lower high than the major high, the left shoulder is in formation. A classic H&S often has a right shoulder of the approximate same size and duration as the left.
III. It can be lower or higher, longer or shorter, but its peak will ultimately end up lower than the head. The pattern is not complete until the right shoulder is completed and the decline from the right shoulder’s peak breaks under the neckline.
IV. When peak breaks under the neckline, a bottom is presumed. It is time to exit longs and go short. After the initial breakout below the neckline, the market often rallies back up to approximately the neckline, giving the trader an excellent low-risk shorting.
Correct
You can spot an H&S developing when the left shoulder and the head are in place and the market starts to rally from the neckline. If it fails at a lower high than the major high, the right shoulder is in formation. A classic H&S often has a right shoulder of the approximate same size and duration as the left. However, it
can be lower or higher, longer or shorter, but its peak will ultimately end up lower than the head. The pattern is not complete until the right shoulder is completed and the decline from the right shoulder’s peak breaks under the neckline. When that happens, a top is presumed. It is time to exit longs and go short. After the initial breakout below the neckline, the market often rallies back up to approximately the neckline, giving the trader an excellent low-risk shorting
opportunity. H&S patterns can also sometimes provide false signals. Suspect a false signal if the market is able to rally back above the peak of RS (this is the
place to initially set your risk point). This will not occur with the best H&S signals; most will not rally beyond NL. If the market trades above the peak of
the right shoulder, you can safely assume that all bets are off and this one isn’t “right.”
Incorrect
You can spot an H&S developing when the left shoulder and the head are in place and the market starts to rally from the neckline. If it fails at a lower high than the major high, the right shoulder is in formation. A classic H&S often has a right shoulder of the approximate same size and duration as the left. However, it
can be lower or higher, longer or shorter, but its peak will ultimately end up lower than the head. The pattern is not complete until the right shoulder is completed and the decline from the right shoulder’s peak breaks under the neckline. When that happens, a top is presumed. It is time to exit longs and go short. After the initial breakout below the neckline, the market often rallies back up to approximately the neckline, giving the trader an excellent low-risk shorting
opportunity. H&S patterns can also sometimes provide false signals. Suspect a false signal if the market is able to rally back above the peak of RS (this is the
place to initially set your risk point). This will not occur with the best H&S signals; most will not rally beyond NL. If the market trades above the peak of
the right shoulder, you can safely assume that all bets are off and this one isn’t “right.”
Question 8 of 10
8. Question
What are the characteristics of an inverted head and shoulder pattern?
I. An H&S occurs at major bottoms as well and looks like the mirror image of one that forms at the top.
II. The head is at the lowest point, with one higher shoulder, one on each side.
III. It is not traded the same way.
IV. The extended and complex bottoming pattern signaled the start of a major move that greatly exceeded the minimum objective.
Correct
An H&S occurs at major bottoms as well and looks like the mirror image of one that forms at the top. Some traders call these inverted head and shoulders or reverse head and shoulders. In this variety, the head is at the lowest point, with two higher shoulders, one on each side. Other than the fact that these are the mirror image of the tops, you trade them the same way. The gold H&S bottom shown in Figure 8.34 is of the simple, classic variety; the soybean is more complex. Note how the extended and complex bottoming pattern illustrated in Figure 8.35 signaled the start of a major move that greatly exceeded the minimum objective.
Incorrect
An H&S occurs at major bottoms as well and looks like the mirror image of one that forms at the top. Some traders call these inverted head and shoulders or reverse head and shoulders. In this variety, the head is at the lowest point, with two higher shoulders, one on each side. Other than the fact that these are the mirror image of the tops, you trade them the same way. The gold H&S bottom shown in Figure 8.34 is of the simple, classic variety; the soybean is more complex. Note how the extended and complex bottoming pattern illustrated in Figure 8.35 signaled the start of a major move that greatly exceeded the minimum objective.
Question 9 of 10
9. Question
Which of the following is/are the rules for trading H&S?
I. Never anticipate. When I first discovered H&S patterns, I had a great trade, but then it seemed I started finding them everywhere. I would start to sell after a right shoulder and a head developed, only to lose money. I would see complete H&S patterns develop and take action before penetration of the neckline, only to have my head handed to me.
II. The bigger the H&S pattern and the shorter it takes to develop, the bigger the subsequent resulting move.
III. The count is a minimum measurement. Odds actually favor the move carrying much further.
IV. After the market breaks the neckline, watch for the return move back to the neckline. This occurs in at least half of all valid cases and offers a place to enter with a close stop.
Correct
10 rules for trading H&S
Here are ten rules for successfully trading using H&S patterns:
1. Never anticipate. When I first discovered H&S patterns, I had a great trade, but then it seemed I started finding them everywhere. I would start to sell after a right shoulder and a head developed, only to lose money. I would see complete H&S patterns develop and take action before penetration of the neckline, only to have my head handed to me. As Yogi Berra said, “It ain’t over till it’s over.” Wait until the pattern is completed before you trade it.
2. The bigger the H&S pattern and the longer it takes to develop, the bigger the subsequent resulting move.
3. The count is a minimum measurement. Odds actually favor the move carrying much further. However, a warning here: As with all other chart patterns, you are not dealing with a certainty here. If your count says the market will fall 400 points, and it falls 380 and starts to reverse, it would be a shame to let all your profits evaporate over a lousy 20 points.
4. After the market breaks the neckline, watch for the return move back to the neckline. This occurs in at least half of all valid cases and offers a place to enter with a close stop.
5. Watch the slope of the neckline. Downward-sloping necklines for H&S tops increase the odds for a more powerful bear move to follow. Upward sloping necklines for inverted H&S bottoms increase the odds for a more powerful bull move to follow.
6. Be volume aware. The most reliable neckline breakouts are accompanied with higher-than-average volumes. I have sometimes seen the highest daily volume days of the year associated with H&S patterns.
7. Watch for the head to also form an “island” (see Figure 8.36). This combines two very powerful patterns and geometrically increases the validity of the signal.
Incorrect
10 rules for trading H&S
Here are ten rules for successfully trading using H&S patterns:
1. Never anticipate. When I first discovered H&S patterns, I had a great trade, but then it seemed I started finding them everywhere. I would start to sell after a right shoulder and a head developed, only to lose money. I would see complete H&S patterns develop and take action before penetration of the neckline, only to have my head handed to me. As Yogi Berra said, “It ain’t over till it’s over.” Wait until the pattern is completed before you trade it.
2. The bigger the H&S pattern and the longer it takes to develop, the bigger the subsequent resulting move.
3. The count is a minimum measurement. Odds actually favor the move carrying much further. However, a warning here: As with all other chart patterns, you are not dealing with a certainty here. If your count says the market will fall 400 points, and it falls 380 and starts to reverse, it would be a shame to let all your profits evaporate over a lousy 20 points.
4. After the market breaks the neckline, watch for the return move back to the neckline. This occurs in at least half of all valid cases and offers a place to enter with a close stop.
5. Watch the slope of the neckline. Downward-sloping necklines for H&S tops increase the odds for a more powerful bear move to follow. Upward sloping necklines for inverted H&S bottoms increase the odds for a more powerful bull move to follow.
6. Be volume aware. The most reliable neckline breakouts are accompanied with higher-than-average volumes. I have sometimes seen the highest daily volume days of the year associated with H&S patterns.
7. Watch for the head to also form an “island” (see Figure 8.36). This combines two very powerful patterns and geometrically increases the validity of the signal.
Question 10 of 10
10. Question
How can you tell if a head and shoulder pattern is false?
I. One good indication is that your margin account will start to show a drastic profit.
II. Don’t freeze when it’s not acting properly; when in doubt, get out.
III. Be suspicious if the pattern occurs at a high volume.
IV. The market can retrace to the neckline (this is normal and a good place to position), but if the pattern is good, the retracement really shouldn’t go much further.
Correct
When the pattern is complete, it should act correctly. These patterns are fairly reliable and do not often deviate from their true purpose, unless, of course, they are false. How can you tell if a pattern is false? One good indication is that your margin account will start to show a loss. Don’t freeze when it’s not acting properly; when in doubt, get out. Be suspicious if the pattern occurs at a low volume. Remember that the market can retrace to the neckline (this is normal and a good place to position), but if the pattern is good, the retracement really shouldn’t go much further.
Incorrect
When the pattern is complete, it should act correctly. These patterns are fairly reliable and do not often deviate from their true purpose, unless, of course, they are false. How can you tell if a pattern is false? One good indication is that your margin account will start to show a loss. Don’t freeze when it’s not acting properly; when in doubt, get out. Be suspicious if the pattern occurs at a low volume. Remember that the market can retrace to the neckline (this is normal and a good place to position), but if the pattern is good, the retracement really shouldn’t go much further.
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