educations

Simple Moving Average (SMA)

written on march 23 2011 taken from http://www.golearnforex.net

Simple Moving Average (SMA) is one of the easiest indicators to use as Technical Analysis for Forex trading. SMA indicates the average price (closing/opening) of a given time period, where each of the chosen periods carries the same weight for the average.

The maths behind SMA is simple. For example, let’s say that you are developing an SMA chart for the USD/JPY closing price in a 5-day time frame. The first 5 days USD/JPY closing prices are 125.0, 124.0, 126.0, 123.0, 127.0 — thus the first dots of your SMA graph will be 125.0 (average of the first 5 days USD/JPY closing price). Assume the USD/JPY closing price is 126.0 for day sixth, your second SMA point will be (124.0 + 126.0 + 123.0 + 127.0 + 126.0)/5= 125.2. The calculation goes on for the following dots and SMA chart is defined by joining these SMA dots.

SMA graph “moves” because for each calculation, we use the ‘latest number of time periods’ data and drop the oldest data.

Relative Strength Index (RSI) in Forex trading

written on march 23 2011 taken from http://www.golearnforex.net

The Relative Strength Index (RSI) is one of the most popular Technical Indicators in oscillator charting methods. RSI is normally used to compare the currency strength and to predict currency price movements.

The RSI, developed by J. Wilder, contrasts the downtrend and uptrend prices over a period of time. The RSI gives more emphasis to the latest data and provides a better indication than what is provided by other oscillators. As the RSI is less sensitive to sharp price fluctuations, it helps to sift unwanted “noise” in the Forex market.

Mathematics calculations behind RSI charting:

RSI= 100 – 100/(1+RS) where RS = sum of positive closing prices divide by sum of negative closing prices. RSI helps traders to predict price movements and to identify market turning points. A rise in RSI will normally be followed by a rise in the currency price; and vise versa, a downtrend RSI indicates that the currency price is more likely dropping.

In addition to being a momentum indicator, Forex traders also use the RSI as a volume indicator. Because of the nature of the Forex market as an ”Over the Counter” market (OTC), real time volume reporting is not possible. The RSI has a scale from 0 to 100. Any reading that is below 30 denotes an oversold market condition while any reading above 70 denotes an overbought market condition.

The chart below indicates a RSI reading of below 30:

This chart shows an RSI reading of above 70 meaning that the currency pair is getting overbought:

Five Different Ways of Using the RSI:

1. To indicate overbought or oversold market conditions. These conditions are indicated by reading at 30 or 70.

2. Divergences – if the price of a currency reaches a new high and the RSI doesn’t show the same situation, this normally indicates that a price reversal is imminent.

3. Support & Resistance – The RSI can also be used to indicate the support and resistance levels of a currency trend.

4. To indicate chart formations more clearly. Chart patterns like “double tops” or “Head & Shoulder” can be seen more clearly with the RSI than on the price chart itself.

5. Failure Swings – if the RSI breaches its previous peak or low, this may mean that a price breach may be on the way.

Trading Forex in MACD: Moving Average Convergence/Divergence

written on march 23 2011 taken from http://www.golearnforex.net

MACD uses exponential moving averages (EMA), which are lagging indicators, to include some trend-following characteristics. These lagging indicators are turned into a momentum oscillator by subtracting the longer period of EMA from the shorter period of EMA. Translating the words into mathematics, this is what a MACD calculation looks like:

MACD = EMA [shorter period] – EMA[longer period]

The resulting plot forms a line that oscillates above and below zero (positive when EMA[shorter] > EMA[longer] and negative whenever EMA[shorter] < EMA[longer]), without any upper or lower limits. MACD is a centered oscillator and the guidelines for using centered oscillators apply. Besides the resulting plot, a standard signal line (or some call it trigger line) is added in the MACD graph for the indication. In maths form, this is how we get the signal line:

Signal = EMA [certain period] of MACD

Generally, a 12 day EMA is often userd as the EMA[shorter period]; 26 day EMA for the EMA[longer period]; and 9 day EMA of MACD is used as the signal line. These are the standard figures used by the creator of MACD, Gerald Appel, when the technical indicator first used in 1979. Another popular calculation periods in modern days is 7, 13, 5; where EMA[7] is used for the short period, EMA[13] is used for the long period, and 5 days for EMA of MACD (the signal line).

Again, translating words into a maths presentation, this is how a standard MACD calculation looks:

• MACD = EMA [12] – EMA[26]
• Signal = EMA [9] of MACD

Green line = MACD Black line = Signal Purple blocks = MACD – Signal

MACD Indications

Here’s how traders take MACD as trading indicators. From the maths of MACD,

• MACD = EMA [12] – EMA[26]
• Signal = EMA [9] of MACD

A bullish signal (buy in signal) is triggered whenever

• A positive MACD (12-day EMA is trading above the 26-day EMA, EMA[12] > EMA[26])
• Moving average positive crossover (MACD is trading above the EMA[9] of MACD)
• Center line positive crossover (MACD=0 and MACD is trading above the EMA[9] of MACD)

A bearish signal (sell off signal) is triggered whenever

• A negative MACD (12-day EMA is trading below the 26-day EMA, EMA[12] < EMA[26])
• Moving average negative crossover (MACD is trading below the EMA[9] of MACD)
• Center line negative crossover (MACD=0 and MACD is trading below the EMA[9] of MACD)

MACD is more than just about market momentum, it also gives the signal in the trend indication.

If MACD is positive and rising, then the gap between the 12-day EMA and the 26-day EMA will be widening. This indicates that the rate-of-change of the faster moving average is higher than the rate-of-change for the slower moving average. Positive momentum is increasing and this would be considered bullish. If MACD is negative and declining further, then the negative gap between the faster moving average and the slower moving average will be expanding. Downward momentum is accelerating and this would be considered bearish.

Often in reality, the Forex exchange price may drop to new selloff low but the MACD does not hit the new low, this maybe the sign of end of bearish. Or vise versa, the Forex exchange price may hit new high but the MACD might not be hitting on the new high point, this often indicates the change of trend from bullish to bearish.

Usage of MACD divergence in Forex trading

The major usage (or benefit) of trading with MACD divergence is that the MACD chart has the ability to overshadow on trend change, which in turn trigger the sell off or buy in signal. Simply said, negative divergence indicates a change of bullish trend to bearish, while a positive divergence indicates a change of bearish trend to bullish. As MACD trading is taking a relative simple approach on the market, MACD is often used along with other technical analysis (stochastic oscillator for example).

Parabolic SAR in Forex trading

written on march 23 2011 taken from http://www.golearnforex.net

Parabolic SAR is a technical analysis method to predict entry and exit points in Forex Market. It’s widely used in Forex trading market because of its accuracy during trending period. Parabolic SAR is a time/price system. It was first introduced by J.Welles Wilder in his acclaimed book “New Concepts in Technical Trading Systems” (1978). SAR stands for ‘stop and reverse’ and the term ‘parabolic’ comes from the shape of the curve (resembling a parabola) created on the technical chart.

Fibonacci Numbers in Forex Trading

written on march 23 2011 taken from http://www.golearnforex.net

Fibonacci Retracements:

Fibonacci ratios are actually a series of numbers that are used to help describe a natural progression of proportions. These numbers were discovered by the mathematician Leonard Fibonacci. The main idea behind Fibonacci ratios is to use them as indicator for resistance and support levels. They can be used to indicate the levels where traders can  realize their profits.

In brief, these are the Fibonacci Numbers:

0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144 ….

Note what’s the relationship in this series of numbers? The answer is each number is the sum of the previous two numbers: 0+1= 1, 1+1= 2, 1+2=3, 2+3= 5 ….and so on. The series of number seems like just another numbers game but there are infinite proves that show natural phenomena tends to go according to Fibonacci Numbers (for example bee lines).

Another term that often goes along with Fibonacci Numbers is ‘The Golden Ratio’.

In Fibonacci Numbers series, if we take the ratio of two successive numbers in the Fibonacci series (that is, we divide each number by the number after it in the sequence) we will move towards a particular constant value. That value is 0.6180345 which has been referred to as “the golden ratio”. If you also calculate the ratios using alternate numbers in the Fibonacci series (that is, do the same calculation but skip over a number) the resulting ratios approaches 0.38196.

In technical trading, these two figures are widely used to predict the market movement (0.382 and 0.618 retracement). Commonly known, a 0.382 retracement indicates a ‘follow’ or ‘continuation’ in trend; while for 0.618, it is normally refers to a change in trends.

When the market is bullish, the idea is to go long on the market position. With your trading platform software, you can calculate the Fibonacci Retracements levels so you know at which points that you have to realize your profits. Due to the fact that the majority of Forex traders are relying on the Fibonacci Retracements levels for their trading strategies, the Fibonacci Retracements levels actually become a self fulfilling prophecy.
The following example illustrates how the concept of Fibonacci Retracement levels work.

The following chart is a daily chart of the USD/CAD currency pair. Based on the chart, the swing high is at 1.3063 while the swing low is at 1.0784.  The plotted Fibonacci Retracements levels are at:

•    1.1670 (0.382)
•    1.1970 (0.500)
•    1.2200 (0.618)

Thus, if the USD/CAD currency pair retraces its movement back from its bottom, traders will react by placing sell orders at the levels indicated as the market continues its downward swing. Typically, the price will halt their gain at one of the plotted levels as the sell order generates enough resistance for the price. With reference to the chart, they tried to rally but however just closed at 1.17 without breaching the 0.382 Fibonacci Retracements levels.

Any trader who had taken out a short position at the 0.382 Fibonacci Retracements level would have been able to realize a big profit.