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Brain Teasers

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  1. Brain Teasers • You have 8 red and 16 blue socks. There’s no light in your room, so you have to choose your socks in the dark. What’s the minimum # of socks you need to choose to ensure you have at least a matching pair.

  2. Answer • Three • Two socks can be different, but a third must match one of the first two

  3. Technicals + Algo. Trading

  4. What is Technical Analysis (TA) • What determines the price of ____? • Fundamental vs. Technical Analysis • Fundamentals = Valuations • Technicals = Market Action • TA is probabilistic • Says that this is “likely” to happen

  5. Assumptions • Prices SOMETIMES move in trends • “Markets may witness extended periods of random fluctuation, interspersed with shorter periods of nonrandom behavior. The goal is to identify those periods” –Shcwager • History repeats itself • Because of market psychology • Market efficiency

  6. Charting Patterns • Visualize price movements • Can be simple “eyeballing intuition” or looking for specific patterns • Many charts use Candlesticks

  7. Eyeballing • Trade on up/downtrends • Breaks support/resistance

  8. Head and Shoulders

  9. Head and Shoulders • Target = High/low point -/+ neckline • The more level the neck, the more reliable the pattern

  10. Double Top/Bottom • Have to keep tight stops in case support/resistance is broken

  11. Combination Patterns • Strong signal

  12. Hook Reversal • Most reliable after strong trends

  13. Hammers

  14. RSI • Momentum indicator • Shows breakouts or trend reversals • Leading indicator • RSI=Avg closes up / Avg closes down • 14,16,9,25 day lookback

  15. MACD • Momentum indicator • Lagging indicator • MACD = difference b/w fast and slow moving averages • Generally 12, 26 period EMA’s • Signal line • 9 period EMA • Can turn into leading indicator • Works best when used with another indicator

  16. MACD

  17. Bollinger Bands • Price/Volatility levels over time • Consists of 3 bands • Usually 20 bar SMA, 2 std devs • Gives a relative level of high/low • Multiple ways of trading • Most effective is range trading during low vol periods • Options implications too

  18. Bollinger Bands

  19. When to use TA • “In the short run, the market is a voting machine, but in the long run, it is a weighing machine.” – Buffet • Entry/Exit prices • Algorithmic Traders (computers) • Markets • Currencies = Great • Futures = Great • Stocks = Decent

  20. Algorithmic Trading • All you know is prices • Understandable why algorithms almost always are technicals based • All algos have a thesis behind them (when X happens, Y is likely to happen) • Can be very hard to code ideas sometimes