The Forex Indicators: August 2009

Monday, August 31, 2009

Symmetrical Triangles (Important Chart Patterns)

Chart formations where the slope of the price's highs & price's lows converge together to a point where it looks like a triangle.

This type of activity is called consolidation.

Buyers & sellers are fighting to push the price in their direction.
2 slopes are getting closer to each other which means that breakout is getting near.
One side of a market will give in.

Saturday, August 29, 2009

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How To Use EMA (Exponential Moving Averages)

Moving averages is a way to smooth price action. From that definition, you should have bear in mind that indicator really helps you to see prices in Forex markets.

What I would like to share with you is how to use EMA or Exponential Moving Averages. As you already know, EMAs are quicker to respond to price action and can catch trend early but susceptible to spikes and can fake you out.

I learned this technique from the internet and it really helps me in Forex trading. It is suitable in any timeframe but the higher the timeframe the fewer the spikes.

Try EMA(3, Yellow) and EMA(30, Red). Wait for the EMA(3, Yellow) crosses EMA(30, Red) and Yellow is above Red, then BUY and if Yellow is below Red, then SELL.

Try this technique on a demo account first and use some filters. If it's okay with you, then you can stick to this technique.

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Important Chart Patterns

Chart Patterns are important because they spot "explosions" on the charts before they even happen and help you making money.

List of patterns:

Symmetrical Triangles
Ascending Triangles
Descending Triangles
Double Top
Double Bottom
Head & Shoulders
Reverse Head & Shoulders

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Thursday, August 27, 2009

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Oscillators & Momentum Inidcators

There are two types of indicators:

Leading indicator
Lagging indicator

Leading indicator
It gives a buy signal before the new trend or reversal occurs.

Lagging indicator
It gives a signal after the trend has started.

What are the difference between both of them?
Leading indicators give a lot of fake-out signals while lagging indicators give signals after the price change is clearly forming a trend.

Oscillators/leading indicators
It is any object or data that moves back and forth between two points.

Oscillators indicators

Stochastics
Parabolic SAR
RSI (Relative Strength Index)

Momentum/lagging indicators
Spot trends once they have been established.

Momentum/lagging indicators
MACD & Moving Averages

So which one is better to use?
Both leading & lagging indicators are important because they need each other in order to help traders to know the market condition.

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Saturday, August 22, 2009

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A Little Bit Of Forex Tips

I would like to share a little bit of Forex tips based on my experience. If you really want to trade Forex and make Forex as your income, don't give up on learning Forex because it's good for you. Forex trading is a business, sometimes you lose, sometimes you win and it's how you minimize your losses and maximize your profits. The most important thing is money management.

If anyone claims that he never loses any single dime of his money, he's lying. Anyone who has started trading Forex loses his money (margin calls), like me, margin calls for 3 times but that doesn't mean I'm a loser. You learn from your mistakes and in the future, you will try to avoid or reduce the mistakes.

If you want to learn Forex, start from the basics and trading through a demo account for at least 6 months and then if you're ready then you can start trading a live account.

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Friday, August 21, 2009

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Relative Strength Index (Common Chart Indicators)

It is similar to stochastics in that it identifies overbought and oversold conditions in the market. It is also scaled from 0 to 100. Typically, readings below 20 indicate oversold, while readings over 80 indicate overbought.

Using RSI

RSI can be used just like stochastics. From the chart above you can see that when RSI dropped below 20, it correctly identified an oversold market. After the drop, the price quickly shot back up.

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Stochastics (Common Chart Indicators)

Stochastics are another indicator that helps to determine where a trend might be ending. It is an oscillator that measures overbought and oversold conditions in the market. The two lines are similar to the MACD lines in the sense that one line is faster than the other.

Stochastics are scaled from 0 to 100. When the lines are above 70, it means the market is overbought. When the lines are below 30, it means the market is oversold.

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Parabolic SAR (Common Chart Indicators)

One indicator that can help us determine where a trend might be ending is the Parabolic SAR (Stop And Reversal). A Parabolic SAR places dots, or points, on a chart that indicate potential reversals in price movement.

Using Parabolic SAR

The nice thing about the Parabolic SAR is that it is really simple to use. Basically, when the dots are below the candles, it is a buy signal; and when the dots are above the candles, it is a sell signal. This is probably the easiest indicator to interpret because it assumes that the price is either going up or down.

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MACD (Common Chart Indicators)

MACD is an acronym for Moving Average Convergence Divergence. It is a tool used to identify moving averages that are indicating a new trend, whether it's bullish or bearish.

With an MACD chart, you will usually see three numbers that are used for its settings.

The first is the number of periods that is used to calculate the faster moving average.
The second is the number of periods that are used in the slower moving average.
And the third is the number of bars that is used to calculate the moving average of the difference between the faster and slower moving averages.

MACD Crossover

Because there are two moving averages with different “speeds”, the faster one will obviously be quicker to react to price movement than the slower one. When a new trend occurs, the fast line will react first and eventually cross the slower line. When this “crossover” occurs, and the fast line starts to “diverge” or move away from the slower line, it often indicates that a new trend has formed.

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Bollinger Bands (Common Chart Indicators)

Bollinger Bands

Bollinger bands are used to measure a market's volatility. It is a tool that tells us whether the market is quiet or active. When the bands are close together, it means the price is quite and when the bands expand, it means the price is active.

The Bollinger Bounce

One thing you should know is that price tends to return to the middle of the bands which means we will open a position when the price bounces at a certain levels (support or resistance). The strategy is best used when the market is ranging.

The Bollinger Squeeze

The bollinger squeeze is pretty self explanatory. When the bands "squeeze" together, it usually means that a breakout is going to occur.

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Moving Averages

Price Smoothies

A moving average is a simple way to smooth out price action over time. By "moving average", we mean that you are taking the average closing price of a currency for the last "x" number of periods.

Simple Moving Average (SMA)

A simple moving average is the simplest type of moving average. It is calculated by taking the last "x" period's closing prices and then dividing that number by "x".

Simple moving averages are slower to respond to price action but will save you from spikes and fakeouts.

Exponential Moving Average (EMA)
Exponential moving averages give more weight to the most recent periods.

Exponential moving averages put more weight to recent prices and therefore show us what traders are doing now.

The difference between SMA and EMA:

SMA

Pros:
Displays a smooth chart, which eliminates most fakeouts.

Cons:
Slow moving, which may cause a lag in buying and selling.
EMA

Pros:
Quick moving, and is good at showing recent swings.

Cons:
More prone to cause fakeouts and give errant signals.

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Fibonacci

We usually use Fibonacci Retracement levels as Support & Resistance.

Fibonacci Retracement Levels
0.236, 0.382, 0.500, 0.618, 0.718

Fibonacci Extension Levels
0,0.382, 0.618, 1.000, 1.382, 1.618

Since so many traders watch these same levels and place buy & sell orders on them to enter trades or place stops, the support & resistance levels become a self-fulfilling expectation.

Fibonacci Retracement

In an uptrend, the general idea is to go long the market on a retracement to a Fibonacci support level. In order to find the retracement levels, you would click on a significant Swing Low and drag the cursor to the most recent Swing High.

The same way if the market goes to a downtrend, you should drag your mouse from Swing High to Swing Low.

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Channels

If we take this trend line theory one step further and draw a parallel line at the same angle of the uptrend or downtrend, we will have created a channel just like the picture below:

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Trend Lines

Trend lines are the most common form of technical analysis used today.

There are 3 most common terms used to define trend lines:

Uptrend
Downtrend
Sideways

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Support & Resistance

Support & resistance is one of the most widely used concepts in trading. Let's take a look at an example below:

Look at the diagram above. As you can see, this zig zag pattern is making its way up (bullish market). When the market moves up and then pulls back, the highest point reached before it pulled back is now resistance.

As the market continues up again, the lowest point reached before it started back is now support.

Plotting Support & Resistance

Support & resistance levels are not exact numbers, often it appears broken, soon after you find out market was just testing it.
To help you filter false breakouts, think of support & resistance more of as "zones" rather than concrete numbers.
One way to find out and find these zones is to plot support & resistance on a line chart rather than a candlestick.

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Thursday, August 20, 2009

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Reversal Patterns (Japanese Candlesticks)

Prior Trend

For a pattern to qualify as a reversal pattern, there should be a prior trend to reverse. Bullish reversals require a preceding downtrend and bearish reversals require a prior uptrend.

Hammer & Hanging Man
The hammer & hanging man look exactly alike but have totally different meaning depending on past price action. Both have little bodies (black or white), long lower shadows and short or absent upper shadows.

The hammer is a bullish trend reversal pattern that forms during a downtrend.

Criteria

The long shadow is about two or three times of the real body.
Little or no upper shadow.
The real body is at the upper end of the trading range.
The color of the real body is not important.

The hanging man is a bearish reversal pattern that can also mark a top or strong resistance level.

Criteria

The long lower shadow is about two or three times of the real body.
Little or no upper shadow.
The real body is ath the upper end of the trading range.
The color is not important.

Inverted Hammer & Shooting Star

The inverted hammer occurs when price has been falling suggests the possibility of reversal.

The shooting star is a bearish reversal pattern occurs when price has been rising.

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Basic Candlestick Patterns (Japanese Candlesticks)

Spinning Tops

Candlesticks with a long upper shadow, long lower shadow and small real bodies are called spinning tops. The color of the real body is not very important.
The patterns indicate the indecision between the buyer and the seller.

Marubozu
It means there are no shadows from the bodies and it depends whether the candlestick's body is filled or hollow, the high and low are the same as it's open or close.

A white marubozu contains a long white body with no shadows which means a very bullish candle.
A black marubozu contains a long black body with no shadows which means a very bearish candle.

Doji (Draw)

Doji candlesticks have the same open and close price (bodies are extremely short).
The Doji should have a very small body that appears as a thin line.
Neither buyers nor sellers were able to gain control and the result was essentially draw.

An example of Doji:

Long White Candle + Doji
If a doji forms after a series of candlesticks with hollow bodies, the doji signals that buyers becoming exhausted and weakening (the weakening of Bullish).

Long Black Candle + Doji
If a doji forms after a series of candlesticks with long filled bodies, the doji signals that sellers becoming exhausted and weakening (the weakening of bearish).