by kelly Price
If you want to get started in forex trading then swing trading systems are a great place to start and a stochastic swing trading system can be learned in a few days and then you're ready to make big profits...
Before we look at the stochastic indicator, let's look at why swing trading is an ideal place for novice traders to start their trading careers.
There are two main reasons:
1. You get plenty of trades and don't the patience of long term trend following
2. You get profits and losses quickly so it requires less discipline than trend following.
So let's look at how the system will work.
Swing trading simply aims to take advantage of overbought and oversold scenarios, to buy oversold markets and sell overbought markets.
The stochastic is perfect for this.
Let's quickly get the technical bit out the way and keep in mind, you don't have to understand the maths to use it, just as you don't need to know how an internal combustion engine works to drive a car - it's a visual indicator, you can find on any free chart service and set ups can be spotted by anyone.
This technical indicator is based on the assumption that when a financial instrument is in an uptrend it tends to closer to the high than when it is falling, where the reverse scenario applies i.e. it tends to close near its lows.
How the indicator is plotted
The stochastic is lines the %K, which is a fast line and %D, which is a slow line.
The %K line is more sensitive than %D
The %D line is a moving average of %K.
The %D line gives the actual trading signal
Sounds a bit geeky - but just think of the way a moving average is plotted, then think about the %K as a fast moving average and %D as a slow moving average.The lines are plotted on the forex chart from 1 to 100. 80% and above is considered overbought and 20% below is oversold.
Here we are going to look at stochastic crossovers with bullish or bearish divergence, from overbought or oversold levels. A trader would look to buy when the %K line moves above the %D line and sell when the %K line moves below the %D line. The best crossover is when the following occurs the %K line intersects after the peak of the %D line, (a right-hand crossover). To cut down false signals only take signals that occur in overbought or oversold zones.
Your stochastic system would be as follows.
1. Look at support and resistance levels to key off
2. Check how over bought or oversold the stochastic is i.e. is it at an extreme?
3. Wait and hit the crossover
4. Place stop behind resistance or support
5. Look to take your profit early i.e. before it hits the next support or resistance
Simple but Effective
The above is extremely simple but all the best forex trading systems are. You may want to consider combining the stochastic with other indicators.
Combining with Other Indicators
The perfect one is the Relative Strength Index (RSI) as they compliment each other and the Bollinger Band to indicate volatility and targets.
Anyone One Can do It
Swing trading with stochastics is easy to do fun and can make huge profits so learn more about this great indicator and build your own stochastic system for currency trading success.
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Showing posts with label Forex Trading Indicators. Show all posts
Showing posts with label Forex Trading Indicators. Show all posts
How to Use Momentum Indicators Like the RSI in Forex Trading
by Andrew Shiveley
If you trade the foreign currency market professionally or as a way to earn more money at home, there is a good chance that you have devised a trading system for yourself that creates buy and sell signals. If you do not have a trading system then you should probably consider creating one (or at least keeping a notebook of your trades), but even the best trading systems can sometimes give false signals.
While it is possible to create a technical trading system using anything from moving average crosses to candlestick formations that will run entirely on autopilot, it is also good to throw human supervision into the mix since an autopilot trading system may not be able to take into account things like prevailing market sentiment. Remember that it is *people* and not computers that create market movements, and all these people make trading decisions based upon their emotions and where they think the market will be headed next.
One of the ways to make sure that the trading signals that you receive are valid is to use a momentum indicator in conjunction with your charts and signals. One of the most popular momentum indicators is called the Relative Strength Index (RSI), and the most typical settings for this indicator is either a 14 or 21 day period setting. This indicator sits above or below actual price data, and it should be available on literally every charting package out there. The reason you will probably want to keep your RSI set to either a 14 or 21 day period is that most other traders will be using these settings as well, making the data that the RSI puts out a kind of "self-fulfilling prophecy" since so many other traders will be following it.
In this instance, the term "momentum" can best be defined as the speed at which prices are moving, and momentum indicators like the RSI will reveal whether the market is considered to be overbought or oversold. The best way to understand what an overbought or oversold market means is that prices have been going up or down too fast relative to recent prior activity.
On the RSI, you will be given a value ranging from 0-100. Any level above 70 will typically mean that the market is considered to be overbought, and a level below 30 will mean that the market is considered to be oversold. For you to understand the way that you can use this data in order to determine how valid your trading signals are, I will give an example of a possible trade.
Let's say that your trading system is based on holding open positions from anywhere from two hours up to two days. This falls a bit in between the categories of day trading and swing trading, but since it still tends towards the shorter side then you would probably want to use the shorter period of 14 on your RSI indicator. You can see on your chart that your system has just created a buy signal, and you are wondering whether it would be a wise decision to enter the market.
On the RSI indicator, you can see that there is a value of 77. This tells you that prices have been moving up faster relative to previous trading activity over the last 14 units of whatever time frame your chart is using (if you had a 15 minute chart open then it would be the past 210 minutes), and that the market is considered to be overbought. This is where you can see why this type of indicator is called a "momentum" indicator, because it is revealing to you that the market has recently been rapidly moving upwards.
When your RSI gives you an overbought value, you can judge this one of two ways: either that the market has been moving upwards recently and that it is going to continue to do so, or that the market is "running out of steam" with this upwards movement and that it is likely to reverse. The longer that your RSI tells you that the market has been overbought, the more likely it becomes that this trend is going to reverse. So in this instance, the value of 77 (especially if the RSI only recently moved into overbought territory) would indicate that there is still a lot of room at the top for more upwards movement, and it may be a wise decision to follow this trading signal.
But let's say that when you checked your RSI indicator, it gave you a value or 42. This would probably indicate that the market does not have ver much upwards momentum, so unless you begin to see the RSI rise then it might be a good idea to pass on this buy signal and not enter the market.
In a third possibility, let's say that the RSI gave you a value of 10. Since this is below 30 then the market would be considered to be oversold, but this could still be a good time to enter the market. If the RSI has been in oversold territory for a long time, it may be time for a reversal. If you feel that the market may be running out of steam on it's downward movement and likely to retrace it's movement upward, this may be an excellent time to enter the market.
All in all, you should make your forex trading decisions based on a number of different factors and never make trading decisions based upon only one signal or indicator. While you are sitting at your computer and deciding how best to enter and exit the market, try not to lose perspective of the fact that it is banks, hedge funds, and other individual traders just like you that are moving the market by creating capital flows, and everybody is making trading decisions based on their emotions. So if every indicator in the world is telling you to buy, but you still felt reluctant because you know that there is a prevailing market bias against the currencies involved, it might probably still be a good idea to pass on the trade.
Trading the foreign exchange market can be a great way to make a living from literally any computer in the world, or as a home business. Learn more about profitable forex trading at http://thecurrencymarkets.com, and see free training videos at http://thecurrencymarkets.com/videos.htm
Article Source: ArticlesToReprint, free content for your website
If you trade the foreign currency market professionally or as a way to earn more money at home, there is a good chance that you have devised a trading system for yourself that creates buy and sell signals. If you do not have a trading system then you should probably consider creating one (or at least keeping a notebook of your trades), but even the best trading systems can sometimes give false signals.
While it is possible to create a technical trading system using anything from moving average crosses to candlestick formations that will run entirely on autopilot, it is also good to throw human supervision into the mix since an autopilot trading system may not be able to take into account things like prevailing market sentiment. Remember that it is *people* and not computers that create market movements, and all these people make trading decisions based upon their emotions and where they think the market will be headed next.
One of the ways to make sure that the trading signals that you receive are valid is to use a momentum indicator in conjunction with your charts and signals. One of the most popular momentum indicators is called the Relative Strength Index (RSI), and the most typical settings for this indicator is either a 14 or 21 day period setting. This indicator sits above or below actual price data, and it should be available on literally every charting package out there. The reason you will probably want to keep your RSI set to either a 14 or 21 day period is that most other traders will be using these settings as well, making the data that the RSI puts out a kind of "self-fulfilling prophecy" since so many other traders will be following it.
In this instance, the term "momentum" can best be defined as the speed at which prices are moving, and momentum indicators like the RSI will reveal whether the market is considered to be overbought or oversold. The best way to understand what an overbought or oversold market means is that prices have been going up or down too fast relative to recent prior activity.
On the RSI, you will be given a value ranging from 0-100. Any level above 70 will typically mean that the market is considered to be overbought, and a level below 30 will mean that the market is considered to be oversold. For you to understand the way that you can use this data in order to determine how valid your trading signals are, I will give an example of a possible trade.
Let's say that your trading system is based on holding open positions from anywhere from two hours up to two days. This falls a bit in between the categories of day trading and swing trading, but since it still tends towards the shorter side then you would probably want to use the shorter period of 14 on your RSI indicator. You can see on your chart that your system has just created a buy signal, and you are wondering whether it would be a wise decision to enter the market.
On the RSI indicator, you can see that there is a value of 77. This tells you that prices have been moving up faster relative to previous trading activity over the last 14 units of whatever time frame your chart is using (if you had a 15 minute chart open then it would be the past 210 minutes), and that the market is considered to be overbought. This is where you can see why this type of indicator is called a "momentum" indicator, because it is revealing to you that the market has recently been rapidly moving upwards.
When your RSI gives you an overbought value, you can judge this one of two ways: either that the market has been moving upwards recently and that it is going to continue to do so, or that the market is "running out of steam" with this upwards movement and that it is likely to reverse. The longer that your RSI tells you that the market has been overbought, the more likely it becomes that this trend is going to reverse. So in this instance, the value of 77 (especially if the RSI only recently moved into overbought territory) would indicate that there is still a lot of room at the top for more upwards movement, and it may be a wise decision to follow this trading signal.
But let's say that when you checked your RSI indicator, it gave you a value or 42. This would probably indicate that the market does not have ver much upwards momentum, so unless you begin to see the RSI rise then it might be a good idea to pass on this buy signal and not enter the market.
In a third possibility, let's say that the RSI gave you a value of 10. Since this is below 30 then the market would be considered to be oversold, but this could still be a good time to enter the market. If the RSI has been in oversold territory for a long time, it may be time for a reversal. If you feel that the market may be running out of steam on it's downward movement and likely to retrace it's movement upward, this may be an excellent time to enter the market.
All in all, you should make your forex trading decisions based on a number of different factors and never make trading decisions based upon only one signal or indicator. While you are sitting at your computer and deciding how best to enter and exit the market, try not to lose perspective of the fact that it is banks, hedge funds, and other individual traders just like you that are moving the market by creating capital flows, and everybody is making trading decisions based on their emotions. So if every indicator in the world is telling you to buy, but you still felt reluctant because you know that there is a prevailing market bias against the currencies involved, it might probably still be a good idea to pass on the trade.
Trading the foreign exchange market can be a great way to make a living from literally any computer in the world, or as a home business. Learn more about profitable forex trading at http://thecurrencymarkets.com, and see free training videos at http://thecurrencymarkets.com/videos.htm
Article Source: ArticlesToReprint, free content for your website
Free Forex Buy And Sell Indicator Online Forex Tools
by: Arkaitz Arteaga
A free Forex Buy and Sell Indicator is a good option if you are someone who trades actively in foreign currencies. This could be a very useful tool for you if you want to keep track of the daily price rises and falls in the forex market. The application can give you precious information regarding currency trading as and when you need this. This will ensure you have the facts with you when you need to make a decision in a fluctuating market.
A free forex buy and sell indicator takes the guesswork out of forex trading. It makes sure you are trading based on solid facts and not just on a whim. It will also ensure you are backed with historical data on trends regarding the currencies you are trading in.
There are many sites where you can check out free forex buy and sell indicators. These sites offer customers software which can help predict whether it is wise to sell or to hold on to the currencies you are trading in. Some sites which offer buy and sell indicators are business4profitsystems and swingcurrency. You might want to try out a few sites and find out which one is best suited to your requirements.
Apart from the free indicators, there are a host of other sites which allow you to download such applications for a fee. Such paid sites might give you superior quality and better features, which a free one cannot offer. Applications like Forex AutoPilot also called FAPS are fast gaining popularity among users. This is an automated software which trades at anytime provided you leave your computer on. the software requires you to feed in the basic ranges in which you would like to trade and rest assured the software will take care of the rest. This might sound a little dicey to those of you who would like to be in total control of your forex trading. The Forex Autopilot has an in built free forex buy and sell indicator. But this comes only in its demo version.
Another well received software for forex buy and sell indication is Doubling stocks. This software also helps you make cardinal decisions in the forex market regarding when to buy, sell or exit a trade. This is not an automated software, so you will need to do the trading yourself on the basis of what the software tells you. This would be reassuring for those of you who need to have complete control over what you are trading. This software application also comes with a free demo package. The demo software is definitely very rich and detailed. It would be a boon for those who are entering the forex trading business and provide valuable support for those who have experience in the forex markets.
Apart from these two there are many other sites which sell forex buy and sell indicators for a price. What you need to keep in mind when you purchase this software is the sensitivity of the software to daily fluctuations in the market. Automated robots like FAPS offer a demo version which allows you to do mock trading without spending a cent. You might want to try this option before you actually buy the software. This way you can be completely sure about the accuracy and the appropriateness of the advice offered.
Author Resource:-> For more information about Stock Market visit http://marketstock.net/category/stockmarket For more information about Forex visit http://marketstock.net/category/forex
Article From Article Center Article Directory
A free Forex Buy and Sell Indicator is a good option if you are someone who trades actively in foreign currencies. This could be a very useful tool for you if you want to keep track of the daily price rises and falls in the forex market. The application can give you precious information regarding currency trading as and when you need this. This will ensure you have the facts with you when you need to make a decision in a fluctuating market.
A free forex buy and sell indicator takes the guesswork out of forex trading. It makes sure you are trading based on solid facts and not just on a whim. It will also ensure you are backed with historical data on trends regarding the currencies you are trading in.
There are many sites where you can check out free forex buy and sell indicators. These sites offer customers software which can help predict whether it is wise to sell or to hold on to the currencies you are trading in. Some sites which offer buy and sell indicators are business4profitsystems and swingcurrency. You might want to try out a few sites and find out which one is best suited to your requirements.
Apart from the free indicators, there are a host of other sites which allow you to download such applications for a fee. Such paid sites might give you superior quality and better features, which a free one cannot offer. Applications like Forex AutoPilot also called FAPS are fast gaining popularity among users. This is an automated software which trades at anytime provided you leave your computer on. the software requires you to feed in the basic ranges in which you would like to trade and rest assured the software will take care of the rest. This might sound a little dicey to those of you who would like to be in total control of your forex trading. The Forex Autopilot has an in built free forex buy and sell indicator. But this comes only in its demo version.
Another well received software for forex buy and sell indication is Doubling stocks. This software also helps you make cardinal decisions in the forex market regarding when to buy, sell or exit a trade. This is not an automated software, so you will need to do the trading yourself on the basis of what the software tells you. This would be reassuring for those of you who need to have complete control over what you are trading. This software application also comes with a free demo package. The demo software is definitely very rich and detailed. It would be a boon for those who are entering the forex trading business and provide valuable support for those who have experience in the forex markets.
Apart from these two there are many other sites which sell forex buy and sell indicators for a price. What you need to keep in mind when you purchase this software is the sensitivity of the software to daily fluctuations in the market. Automated robots like FAPS offer a demo version which allows you to do mock trading without spending a cent. You might want to try this option before you actually buy the software. This way you can be completely sure about the accuracy and the appropriateness of the advice offered.
Author Resource:-> For more information about Stock Market visit http://marketstock.net/category/stockmarket For more information about Forex visit http://marketstock.net/category/forex
Article From Article Center Article Directory
Understanding Major Economic Indicators
by martinchandra
When focusing exclusively on the impact that economic indicators have on price action in a particular market, the foreign exchange markets are the most challenging, and therefore, have greatest potential for profits of any market.
Obviously, factors other than economic indicators move prices and as such make other markets more or less potentially profitable. But since a currency is a proxy for the country it represents, the economic health of that country is priced into the currency. One very important way to measure the health of an economy is through economic indicators.
The challenge comes in diligently keeping track of the nuts and bolts of each country 's particular economic information package. Here are a few general comments about economic indicators and some of the more closely watched data.
Most economic indicators can be divided into leading and lagging indicators.
Leading indicators are economic factors that change before the economy starts to follow a particular pattern or trend. Leading indicators are used to predict changes in the economy.
Lagging Indicators are economic factors that change after the economy has already begun to follow a particular pattern or trend.
The Gross Domestic Product (GDP)
The sum of all goods and services produced either by domestic or foreign companies. GDP indicates the pace at which a country 's economy is growing (or shrinking) and is considered the broadest indicator of economic output and growth.
Industrial Production
It is a chain-weighted measure of the change in the production of the nation 's factories, mines and utilities as well as a measure of their industrial capacity and of how many available resources among factories, utilities and mines are being used (commonly known as capacity utilization). The manufacturing sector accounts for one-quarter of the economy. The capacity utilization rate provides an estimate of how much factory capacity is in use.
Purchasing Managers Index (PMI)
The National Association of Purchasing Managers (NAPM), now called the Institute for Supply Management, releases a monthly composite index of national manufacturing conditions, constructed from data on new orders, production, supplier delivery times, backlogs, inventories, prices, employment, export orders, and import orders. It is divided into manufacturing and non-manufacturing sub-indices.
Producer Price Index (PPI)
The Producer Price Index (PPI) is a measure of price changes in the manufacturing sector. It measures average changes in selling prices received by domestic producers in the manufacturing, mining, agriculture, and electric utility industries for their output. The PPIs most often used for economic analysis are those for finished goods, intermediate goods, and crude goods.
Consumer Price Index (CPI)
The Consumer Price Index (CPI) is a measure of the average price level paid by urban consumers (80% of population) for a fixed basket of goods and services. It reports price changes in over 200 categories. The CPI also includes various user fees and taxes directly associated with the prices of specific goods and services.
Durable Goods
Durable Goods Orders measures new orders placed with domestic manufacturers for immediate and future delivery of factory hard goods. A durable good is defined as a good that lasts an extended period of time (over three years) during which its services are extended.
Employment Cost Index (ECI)
Payroll employment is a measure of the number of jobs in more than 500 industries in all states and 255 metropolitan areas. The employment estimates are based on a survey of larger businesses and counts the number of paid employees working part-time or full-time in the nation 's business and government establishments.
Retail Sales
The retail sales report is a measure of the total receipts of retail stores from samples representing all sizes and kinds of business in retail trade throughout the nation. It is the timeliest indicator of broad consumer spending patterns and is adjusted for normal seasonal variation, holidays, and trading-day differences. Retail sales include durable and nondurable merchandise sold, and services and excise taxes incidental to the sale of merchandise. Excluded are sales taxes collected directly from the customer.
Housing Starts
The Housing Starts report measures the number of residential units on which construction is begun each month. A start in construction is defined as the beginning of excavation of the foundation for the building and is comprised primarily of residential housing.
Housing is very interest rate sensitive and is one of the first sectors to react to changes in interest rates. Significant reaction of start/permits to changing interest rates signals interest rates are nearing trough or peak. To analyze, focus on the percentage change in levels from the previous month. Report is released around the middle of the following month.
About the Author
Martin Chandra is a full-time investor.
Article Source: Content for Reprint
When focusing exclusively on the impact that economic indicators have on price action in a particular market, the foreign exchange markets are the most challenging, and therefore, have greatest potential for profits of any market.
Obviously, factors other than economic indicators move prices and as such make other markets more or less potentially profitable. But since a currency is a proxy for the country it represents, the economic health of that country is priced into the currency. One very important way to measure the health of an economy is through economic indicators.
The challenge comes in diligently keeping track of the nuts and bolts of each country 's particular economic information package. Here are a few general comments about economic indicators and some of the more closely watched data.
Most economic indicators can be divided into leading and lagging indicators.
Leading indicators are economic factors that change before the economy starts to follow a particular pattern or trend. Leading indicators are used to predict changes in the economy.
Lagging Indicators are economic factors that change after the economy has already begun to follow a particular pattern or trend.
The Gross Domestic Product (GDP)
The sum of all goods and services produced either by domestic or foreign companies. GDP indicates the pace at which a country 's economy is growing (or shrinking) and is considered the broadest indicator of economic output and growth.
Industrial Production
It is a chain-weighted measure of the change in the production of the nation 's factories, mines and utilities as well as a measure of their industrial capacity and of how many available resources among factories, utilities and mines are being used (commonly known as capacity utilization). The manufacturing sector accounts for one-quarter of the economy. The capacity utilization rate provides an estimate of how much factory capacity is in use.
Purchasing Managers Index (PMI)
The National Association of Purchasing Managers (NAPM), now called the Institute for Supply Management, releases a monthly composite index of national manufacturing conditions, constructed from data on new orders, production, supplier delivery times, backlogs, inventories, prices, employment, export orders, and import orders. It is divided into manufacturing and non-manufacturing sub-indices.
Producer Price Index (PPI)
The Producer Price Index (PPI) is a measure of price changes in the manufacturing sector. It measures average changes in selling prices received by domestic producers in the manufacturing, mining, agriculture, and electric utility industries for their output. The PPIs most often used for economic analysis are those for finished goods, intermediate goods, and crude goods.
Consumer Price Index (CPI)
The Consumer Price Index (CPI) is a measure of the average price level paid by urban consumers (80% of population) for a fixed basket of goods and services. It reports price changes in over 200 categories. The CPI also includes various user fees and taxes directly associated with the prices of specific goods and services.
Durable Goods
Durable Goods Orders measures new orders placed with domestic manufacturers for immediate and future delivery of factory hard goods. A durable good is defined as a good that lasts an extended period of time (over three years) during which its services are extended.
Employment Cost Index (ECI)
Payroll employment is a measure of the number of jobs in more than 500 industries in all states and 255 metropolitan areas. The employment estimates are based on a survey of larger businesses and counts the number of paid employees working part-time or full-time in the nation 's business and government establishments.
Retail Sales
The retail sales report is a measure of the total receipts of retail stores from samples representing all sizes and kinds of business in retail trade throughout the nation. It is the timeliest indicator of broad consumer spending patterns and is adjusted for normal seasonal variation, holidays, and trading-day differences. Retail sales include durable and nondurable merchandise sold, and services and excise taxes incidental to the sale of merchandise. Excluded are sales taxes collected directly from the customer.
Housing Starts
The Housing Starts report measures the number of residential units on which construction is begun each month. A start in construction is defined as the beginning of excavation of the foundation for the building and is comprised primarily of residential housing.
Housing is very interest rate sensitive and is one of the first sectors to react to changes in interest rates. Significant reaction of start/permits to changing interest rates signals interest rates are nearing trough or peak. To analyze, focus on the percentage change in levels from the previous month. Report is released around the middle of the following month.
About the Author
Martin Chandra is a full-time investor.
Article Source: Content for Reprint
Using Indicators to Identify Trends
by martinchandra
Of the many market sayings thrown around by traders, perhaps none is more overused and less understood than the old adage 'the trend is your friend'.
All too often, the phrase is used after a trader has taken a counter-trend position and subsequently been stopped out at a loss. Remorse sets in at this point and most traders kick themselves not only for having lost on a counter-trend trade, but also for not having caught the latest move in the trend itself.
To avoid this all too common scenario, we will suggest using several technical tools to identify whether or not a trend is in place and then use additional indicators to help maximize trading profits. Having a strategy in place to identify trends is essential to successful trading in any market, but especially so in the case of the forex markets.
Currencies have a greater tendency to move in trending fashion due to the longer-term macroeconomic elements that drive exchange rates, such as interest rate cycles or global trade imbalances. Currencies are also pre-disposed to short-term, intra-day trends due to international capital flows reacting in unison to day-to-day economic and political news.
In its most basic sense, a trend is simply a prolonged market movement in one general direction, either up or down. From a traders' perspective, though, that simple definition is so broad as to be relatively meaningless.
A more relevant definition of a trend would be one where a trend is defined as a predictable price response at levels of support/resistance that change over time. For example, in an uptrend the defining feature is that prices rebound when they near support levels, ultimately establishing new highs. In a downtrend, the opposite is true-price increases will reverse as they near resistance levels, and new lows will be reached. This definition reveals the first of the tools used to identify whether a trend is in place or not-trendline analysis to establish support and resistance levels.
Trendline analysis is often underestimated because it is perceived as overly subjective and retrospective in nature. While both criticisms have some truth, they overlook the reality that trendlines help focus attention on the underlying price pattern, filtering out the noise of the market. For this reason, trendline analysis should be the first step in determining the existence of a trend. If trendline analysis does not reveal a discernible trend, it 's probably because there isn't one.
Trendline analysis is best employed starting with longer timeframes (daily or weekly charts) first and then carrying them forward into shorter timeframes (hourly or 4-hourly) where shorter-term levels of support and resistance can then be identified.
This approach has the advantage of highlighting the most significant levels of support/resistance first and less important levels next. This helps reduce the chances of following a short-term trendline break while a major long-term level is lurking nearby.
Another technical tool that can be deployed to verify the existence of a trend is the directional movement indicator system (DMI), developed by J. Welles Wilder.
Using the DMI removes the guesswork involved with spotting trends and can also provide confirmation of trends identified by trendline analysis. The DMI system is comprised of the ADX (average directional movement index) and the DI+ and DI- lines.
The ADX is used to determine whether or not a market is trending (regardless if it 's up or down), with a reading over 25 indicating a trending market and a reading below 20 indicating no trend. The ADX is also a measure of the strength of a trend -- the higher the ADX, the stronger the trend. Using the ADX, traders can determine whether or not there is a trend and thus whether or not to use a trend following system.
As its name would suggest, the DMI system is best employed using both components. The DI+ and DI- lines are used as trade entry signals. A buy signal is generated when the DI+ line crosses up through the DI- line; a sell signal is generated when the DI- line crosses up through the DI+ line. Only if that extreme point is breached in the subsequent period is a trade signal confirmed.
The ADX can then be used as an early indicator of the end/pause in a trend. When the ADX begins to move lower from its highest level, the trend is either pausing or ending, signaling it is time to exit the current position and wait for a fresh signal from the DI+/DI- crossover.
About the Author
Martin Chandra is a full-time investor.
Article Source: Content for Reprint
Of the many market sayings thrown around by traders, perhaps none is more overused and less understood than the old adage 'the trend is your friend'.
All too often, the phrase is used after a trader has taken a counter-trend position and subsequently been stopped out at a loss. Remorse sets in at this point and most traders kick themselves not only for having lost on a counter-trend trade, but also for not having caught the latest move in the trend itself.
To avoid this all too common scenario, we will suggest using several technical tools to identify whether or not a trend is in place and then use additional indicators to help maximize trading profits. Having a strategy in place to identify trends is essential to successful trading in any market, but especially so in the case of the forex markets.
Currencies have a greater tendency to move in trending fashion due to the longer-term macroeconomic elements that drive exchange rates, such as interest rate cycles or global trade imbalances. Currencies are also pre-disposed to short-term, intra-day trends due to international capital flows reacting in unison to day-to-day economic and political news.
In its most basic sense, a trend is simply a prolonged market movement in one general direction, either up or down. From a traders' perspective, though, that simple definition is so broad as to be relatively meaningless.
A more relevant definition of a trend would be one where a trend is defined as a predictable price response at levels of support/resistance that change over time. For example, in an uptrend the defining feature is that prices rebound when they near support levels, ultimately establishing new highs. In a downtrend, the opposite is true-price increases will reverse as they near resistance levels, and new lows will be reached. This definition reveals the first of the tools used to identify whether a trend is in place or not-trendline analysis to establish support and resistance levels.
Trendline analysis is often underestimated because it is perceived as overly subjective and retrospective in nature. While both criticisms have some truth, they overlook the reality that trendlines help focus attention on the underlying price pattern, filtering out the noise of the market. For this reason, trendline analysis should be the first step in determining the existence of a trend. If trendline analysis does not reveal a discernible trend, it 's probably because there isn't one.
Trendline analysis is best employed starting with longer timeframes (daily or weekly charts) first and then carrying them forward into shorter timeframes (hourly or 4-hourly) where shorter-term levels of support and resistance can then be identified.
This approach has the advantage of highlighting the most significant levels of support/resistance first and less important levels next. This helps reduce the chances of following a short-term trendline break while a major long-term level is lurking nearby.
Another technical tool that can be deployed to verify the existence of a trend is the directional movement indicator system (DMI), developed by J. Welles Wilder.
Using the DMI removes the guesswork involved with spotting trends and can also provide confirmation of trends identified by trendline analysis. The DMI system is comprised of the ADX (average directional movement index) and the DI+ and DI- lines.
The ADX is used to determine whether or not a market is trending (regardless if it 's up or down), with a reading over 25 indicating a trending market and a reading below 20 indicating no trend. The ADX is also a measure of the strength of a trend -- the higher the ADX, the stronger the trend. Using the ADX, traders can determine whether or not there is a trend and thus whether or not to use a trend following system.
As its name would suggest, the DMI system is best employed using both components. The DI+ and DI- lines are used as trade entry signals. A buy signal is generated when the DI+ line crosses up through the DI- line; a sell signal is generated when the DI- line crosses up through the DI+ line. Only if that extreme point is breached in the subsequent period is a trade signal confirmed.
The ADX can then be used as an early indicator of the end/pause in a trend. When the ADX begins to move lower from its highest level, the trend is either pausing or ending, signaling it is time to exit the current position and wait for a fresh signal from the DI+/DI- crossover.
About the Author
Martin Chandra is a full-time investor.
Article Source: Content for Reprint
Using Technical Indicators: Bollinger Bands & MACD
by martinchandra
A good understanding of the basic tenets of technical analysis can vastly improve one 's trading skills.
When using technical analysis, price is the primary tool. Simply put, "everything is already in the rate." However, technical analysis involves a bit more than simply staring at price charts hoping to find a "yellow brick road" to a bonanza payday. Along with various methods of plotting price action on charts by using bars, candlesticks, and Xs and Os on point and figure charts, market technicians also employ many technical studies that help them to delve deeper into the data. By using these studies in conjunction with their price charts, traders are able to build much stronger cases to buy, sell or remain on the sidelines than they could by simply looking at price charts alone.
Here are descriptions of some of the more widely used and time-tested studies that technicians keep in their toolboxes:
Bollinger Bands
Bollinger Bands are volatility curves used to identify extreme highs or lows in relation to price. Bollinger Bands establish trading parameters, or bands, based on the moving average of a particular instrument and a set number of standard deviations around this moving average.
For example, a trader might decide to use a 10-day moving average and 2 standard deviations to establish Bollinger Bands for a given currency. After doing so, a chart will appear with price bars capped by an upper boundary line based on price levels 2 standard deviations higher than the 10-day moving average and supported by a lower boundary line based on 2 standard deviations lower than the 10-day moving average. In the middle of these two boundary lines will be another line running somewhat close to the middle area depicting in this case, the 10-day moving average. Both the moving average and the number of standard deviations can be altered to best suit a particular currency.
Jon Bollinger, creator of Bollinger Bands recommends using a simple 20-day moving average and 2 standard deviations. Because standard deviation is a measure of volatility, Bollinger Bands are dynamic indicators that adjust themselves (widen and contract) based on the current levels of volatility in the market being studied.
When prices hit the upper or lower boundaries of a given set of Bollinger Bands, this is not necessarily an indication of an imminent reversal in a trend. It simply means that prices have moved to the upper limits of the established parameters. Therefore, traders should use another study in conjunction with Bollinger Bands to help them determine the strength of a trend.
MACD - Moving Average Convergence Divergence
MACD is a more detailed method of using moving averages to find trading signals from price charts. Developed by Gerald Appel, the MACD plots the difference between a 26-day exponential moving average and a 12-day exponential moving average. A 9-day moving average is generally used as a trigger line, meaning when the MACD crosses below this trigger it is a bearish signal and when it crosses above it, it 's a bullish signal.
As with other studies, traders will look to MACD studies to provide early signals or divergences between market prices and a technical indicator. If the MACD turns positive and makes higher lows while prices are still tanking, this could be a strong buy signal.
Conversely, if the MACD makes lower highs while prices are making new highs, this could be a strong bearish divergence and a sell signal.
One final word of advice: Don't get too caught up in the mathematics involved in putting together each study. It is much more important to understand how and why studies can and should be manipulated based on the time periods and sensitivities that you determine are ideal for the currency you are trading.
These ideal levels can only be determined after applying several different parameters to each study until the charts and studies begin to reveal the "details behind the details."
About the Author
Martin Chandra is a full-time investor.
Article Source: Content for Reprint
A good understanding of the basic tenets of technical analysis can vastly improve one 's trading skills.
When using technical analysis, price is the primary tool. Simply put, "everything is already in the rate." However, technical analysis involves a bit more than simply staring at price charts hoping to find a "yellow brick road" to a bonanza payday. Along with various methods of plotting price action on charts by using bars, candlesticks, and Xs and Os on point and figure charts, market technicians also employ many technical studies that help them to delve deeper into the data. By using these studies in conjunction with their price charts, traders are able to build much stronger cases to buy, sell or remain on the sidelines than they could by simply looking at price charts alone.
Here are descriptions of some of the more widely used and time-tested studies that technicians keep in their toolboxes:
Bollinger Bands
Bollinger Bands are volatility curves used to identify extreme highs or lows in relation to price. Bollinger Bands establish trading parameters, or bands, based on the moving average of a particular instrument and a set number of standard deviations around this moving average.
For example, a trader might decide to use a 10-day moving average and 2 standard deviations to establish Bollinger Bands for a given currency. After doing so, a chart will appear with price bars capped by an upper boundary line based on price levels 2 standard deviations higher than the 10-day moving average and supported by a lower boundary line based on 2 standard deviations lower than the 10-day moving average. In the middle of these two boundary lines will be another line running somewhat close to the middle area depicting in this case, the 10-day moving average. Both the moving average and the number of standard deviations can be altered to best suit a particular currency.
Jon Bollinger, creator of Bollinger Bands recommends using a simple 20-day moving average and 2 standard deviations. Because standard deviation is a measure of volatility, Bollinger Bands are dynamic indicators that adjust themselves (widen and contract) based on the current levels of volatility in the market being studied.
When prices hit the upper or lower boundaries of a given set of Bollinger Bands, this is not necessarily an indication of an imminent reversal in a trend. It simply means that prices have moved to the upper limits of the established parameters. Therefore, traders should use another study in conjunction with Bollinger Bands to help them determine the strength of a trend.
MACD - Moving Average Convergence Divergence
MACD is a more detailed method of using moving averages to find trading signals from price charts. Developed by Gerald Appel, the MACD plots the difference between a 26-day exponential moving average and a 12-day exponential moving average. A 9-day moving average is generally used as a trigger line, meaning when the MACD crosses below this trigger it is a bearish signal and when it crosses above it, it 's a bullish signal.
As with other studies, traders will look to MACD studies to provide early signals or divergences between market prices and a technical indicator. If the MACD turns positive and makes higher lows while prices are still tanking, this could be a strong buy signal.
Conversely, if the MACD makes lower highs while prices are making new highs, this could be a strong bearish divergence and a sell signal.
One final word of advice: Don't get too caught up in the mathematics involved in putting together each study. It is much more important to understand how and why studies can and should be manipulated based on the time periods and sensitivities that you determine are ideal for the currency you are trading.
These ideal levels can only be determined after applying several different parameters to each study until the charts and studies begin to reveal the "details behind the details."
About the Author
Martin Chandra is a full-time investor.
Article Source: Content for Reprint
Using Technical Indicators: Stochastics & RSI
by martinchandra
Stochastics
Relative Strength Index (RSI)
About the Author
Martin Chandra is a full-time investor.
Article Source: Content for Reprint
A good understanding of the basic tenets of technical analysis can vastly improve one 's trading skills.
When using technical analysis, price is the primary tool. Simply put, "everything is already in the rate." However, technical analysis involves a bit more than simply staring at price charts hoping to find a "yellow brick road" to a bonanza payday. Along with various methods of plotting price action on charts by using bars, candlesticks, and Xs and Os on point and figure charts, market technicians also employ many technical studies that help them to delve deeper into the data. By using these studies in conjunction with their price charts, traders are able to build much stronger cases to buy, sell or remain on the sidelines than they could by simply looking at price charts alone.
Here are descriptions of some of the more widely used and time-tested studies that technicians keep in their toolboxes:
Stochastics
Stochastic studies, or oscillators, are another useful tool for monitoring the expected sustainability of a trend. They provide a trader with information about the closing price in the current trading period relative to the prior performance of the instrument being analyzed.
Stochastics are measured and represented by two different lines, %K and %D and are plotted on a scale ranging from 0 to 100. Indications above 80 represent strong upward movement while level indications below 20 represent strong downward movements. The mathematics behind the studies are not as important as knowing what the stochastics are telling you. The %K line is the faster, more sensitive indicator while the %D line takes more time to turn. When the %K line crosses over the %D line, this could be an indication that a market is about to reverse course. Stochastic studies are not useful in choppy, sideways markets. At times when prices are fluctuating in a narrow range, the %K and %D lines might be crossing many different times and will be telling you nothing more than the market is moving sideways.
Stochastics are most useful in measuring the strength of a trend and as augurs of a coming reversal in prices. When prices are making new highs or lows and your stochastics are doing the same, you can be reasonably certain that the trend will continue. On the other hand, many traders finds that the best trading opportunity comes when their stochastic indicator is flattening out or moving in the opposite direction of prices. When these divergences occur, it 's time to book profits and/or to establish a position in the opposite direction of the prior trend.
As should always be the case when using any technical tool, do not act on the first signal you see. Wait at least one or two trading sessions for confirmation of what the study is indicating before you commit to a position.
Relative Strength Index (RSI)
RSI measures the momentum of price movements. It is also plotted on a scale ranging from 0 to 100. Traders will tend to look at RSI readings over 80 as an indicator of a market that is overbought or susceptible to a downturn, and readings under 20 as a market that is oversold or ready to turn higher.
This logic therefore implies that prices cannot rise or fall forever and that by using an RSI study, one can determine with a reasonable degree of certainty when a reversal will come about. However, be very wary of trading on RSI studies alone. In many instances, an RSI can remain at very lofty or sunken levels for quite a while without prices reversing course. At these times, the RSI is simply telling you that a market is quite strong or quite weak and shows no signs of changing course.
RSI studies can be adjusted to whatever time sensitivity a trader feels necessary for his or her particular style. For instance, a 5-day RSI will be very sensitive and will tend to give many more signals, not all of them sustainable, than say a 21-day RSI, which will tend to be less choppy. As with other studies, try a variety of time periods for the currency that you are trading based on your trading style. Longer term, position type traders, will tend to find that shorter time frames used for an RSI (or any other study for that matter) will give too many signals and will result in over-trading. On the other hand, shorter time frames will probably be ideal for day-traders trying to capture many shorter-term price fluctuations.
As with stochastics, look for divergences between prices and the RSI. If your RSI turns up in a slumping market or turns down during a bull run, this could be a good indication that a reversal is just around the corner. Wait for confirmation before you act on divergent indications from your RSI studies.
One final word of advice: Don't get too caught up in the mathematics involved in putting together each study. It is much more important to understand how and why studies can and should be manipulated based on the time periods and sensitivities that you determine are ideal for the currency you are trading.
These ideal levels can only be determined after applying several different parameters to each study until the charts and studies begin to reveal the "details behind the details."
About the Author
Martin Chandra is a full-time investor.
Article Source: Content for Reprint
Using Technical Indicators: Moving Averages & Fibonacci
by martinchandra
Moving Averages
There are three basic types of moving averages:
- Simple
- Weighted
- Exponential
Fibonacci Retracements
About the Author
Martin Chandra is a full-time investor.
Article Source: Content for Reprint
A good understanding of the basic tenets of technical analysis can vastly improve one 's trading skills.
When using technical analysis, price is the primary tool. Simply put, "everything is already in the rate." However, technical analysis involves a bit more than simply staring at price charts hoping to find a "yellow brick road" to a bonanza payday. Along with various methods of plotting price action on charts by using bars, candlesticks, and Xs and Os on point and figure charts, market technicians also employ many technical studies that help them to delve deeper into the data. By using these studies in conjunction with their price charts, traders are able to build much stronger cases to buy, sell or remain on the sidelines than they could by simply looking at price charts alone.
Moving Averages
One of the most basic and widely used indicators in a technical analyst 's tool box, moving averages help traders verify existing trends, identify emerging trends, and view overextended trends about to reverse. Moving averages are lines overlaid on a chart indicating long term price trends with short term fluctuations smoothed out.
There are three basic types of moving averages:
- Simple
- Weighted
- Exponential
A simple moving average gives equal weight to each price point over the specified period. The user defines whether the high, low, or close is used and these price points are added together and averaged. This average price point is then added to the existing string and a line is formed. With the addition of each new price point the sample set drops off the oldest point. The simple moving average is probably the most widely used moving average.
A weighted moving average gives more emphasis to the latest data. A weighted moving average multiplies each data point by a weighting factor which differs from day to day. These figures are added and divided by the sum of the weighting factors. A weighted moving average allows the user to successfully smooth out a curve while having the average more responsive to current price changes.
An exponential moving average is another way of "weighting" the more recent data. An exponential moving average multiplies a percentage of the most recent price by the previous period 's average price. Defining the optimum moving average for a particular currency pair involves "curve fitting". Curve fitting is the process of selecting the right number of periods with the correct type of moving average to produce the results the user is trying to achieve. By trial and error, technicians work with the time periods to fit the price data.
Because the moving average is constantly changing based on the latest market data, many traders will use different "specified" time frames before they come up with a series of moving averages that are optimal for a particular currency.
For example, a trader might create a 5-day, a 15-day and a 30-day moving average for a currency and then plot them on his or her price chart. He might start out using simple moving averages and end up using weighted moving averages. In creating these moving averages, traders need to decide on the exact price data that will be used in this study; meaning closing prices vs. opening prices vs. high/low/close etc. After doing so, a series of lines are created that reflect the 5-day, 15-day and 30-day moving average of a currency.
Once the data is layered over a price chart, traders can determine how well these chosen periods keep track of the trend being followed. If, for example, a market is trending higher, you'd expect the 30-day moving average to be a very accurate trend line, providing a line of support for prices on their way higher. If prices seem too close under this 30-day moving average on several occasions without resulting in a halt in the up trend, a trader will simply adjust the time period to say a 45-day or 60-day moving average in order to optimize the average. In this way, the moving average will act as a trend line.
After determining the optimum moving average for a currency, this average price line can be used as a line of support in maintaining a long position or resistance in maintaining a short position. Breaches of this line can also be used as a signal that a currency is in the process of reversing course, in which case a trader will want to pare back an existing position or come up with entry levels for a new position. For example, if you determine that a 30-day moving average has shown itself to be a good support line for USD-JPY in an upward trending market, then market closes under this 30-day moving average line could be a signal that this trend could be running out of steam. However, it is important to wait for confirmation of these signals. One way to do this is to wait for another close below the level. On the second close under the average, you should begin to pare down your position. Another confirmation involves using other, shorter term moving averages.
While a longer term moving average can help to define and support a particular trend, shorter term moving averages can provide lead signals that a trend is ending before prices dip below your longer term moving average line. For this reason, most traders will plot several moving averages on the same chart. In a market that is trending higher, a shorter term moving average might signal a market reversal by turning down and crossing over the longer term moving average. For example, if you are using a 15-day and a 45-day moving average in a market that is in an up trend, and the 15-day moving average turns down and crosses over the 45-day moving average, this could be an early signal that the up trend is ending and it is probably time to begin to pare down your position.
Fibonacci Retracements
Fibonacci retracement levels are a sequence of numbers discovered by the noted mathematician Leonardo da Pisa during the twelfth century. These numbers describe cycles found throughout nature and when applied to technical analysis can be used to find pullbacks in the currency market.
Fibonacci retracement involves anticipating changes in trends as prices near the lines created by the Fibonacci studies. After a significant price move (either up or down), prices will often retrace a significant portion (if not all) of the original move. As prices retrace, support and resistance levels often occur at or near the Fibonacci Retracement levels.
In the currency markets, the commonly used sequence of ratios is 23.6 %, 38.2%, 50% and 61.8%. Fibonacci retracement levels can easily be displayed by connecting a trend line from a perceived high point to a perceived low point. By taking the difference between the high and low, the user can apply the % ratios to achieve the desired pullbacks.
One final word of advice: Don't get too caught up in the mathematics involved in putting together each study. It is much more important to understand how and why studies can and should be manipulated based on the time periods and sensitivities that you determine are ideal for the currency you are trading. These ideal levels can only be determined after applying several different parameters to each study until the charts and studies begin to reveal the "details behind the details."
About the Author
Martin Chandra is a full-time investor.
Article Source: Content for Reprint
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