Various techniques and terms for Forex

Various techniques and terms

Many different techniques and indicators can be used to follow and predict

trends in markets. The objective is to predict the major components of the

trend: its direction, its level and the timing. Some of the most widely known

include:

Bollinger Bands - a range of price volatility named after John Bollinger,

•

who invented them in the 1980s. They evolved from the concept of

trading bands, and can be used to measure the relative height or depth

of price. A band is plotted two standard deviations away from a simple

moving average. As standard deviation is a measure of volatility,

Bollinger Bands adjust themselves to market conditions. When the

markets become more volatile, the bands widen (move further away

from the average), and during less volatile periods, the bands contract

(move closer to the average).

Bollinger Bands are one of the most popular technical analysis

techniques. The closer prices move to the upper band, the more

overbought is the market, and the closer prices move to the lower

band, the more oversold is the market.

Support / Resistance – The

Support level

is the lowest price an

•

instrument trades at over a period of time. The longer the price stays

at a particular level, the stronger the support at that level. On the

chart this is price level under the market where buying interest is

sufficiently strong to overcome selling pressure. Some traders believe

that the stronger the support at a given level, the less likely it will

break below that level in the future. The

Resistance level

is a price at

which an instrument or market can trade, but which it cannot exceed,

for a certain period of time. On the chart this is a price level over the

market where selling pressure overcomes buying pressure, and a price

advance is turned back.

•

Support / Resistance Breakout - when a price passes through and stays

beyond an area of support or resistance.

CCI - Commodity Channel Index - an oscillator used to help determine

when an investment instrument has been overbought and oversold. The

Commodity Channel Index, first developed by Donald Lambert,

quantifies the relationship between the asset's price, a moving average

(MA) of the asset's price, and normal deviations (D) from that average.

The CCI has seen substantial growth in popularity amongst technical

investors; today's traders often use the indicator to determine cyclical

trends in equities and currencies as well as commodities.

The CCI, when used in conjunction with other oscillators, can be a

valuable tool to identify potential peaks and valleys in the asset's price,

and thus provide investors with reasonable evidence to estimate

changes in the direction of price movement of the asset.

Hikkake Pattern – a method of identifying reversals and continuation

•

patterns, this was discovered and introduced to the market through a

series of published articles written by technical analyst Daniel L.

Chesler, CMT. Used for determining market turning-points and

continuations (also known as trending behavior). It is a simple pattern

that can be viewed in market price data, using traditional bar charts,

or Japanese candlestick charts.

Moving averages - are used to emphasize the direction of a trend and to

•

smooth out price and volume fluctuations, or “noise”, that can confuse

interpretation. There are seven different types of moving averages:

•

simple (arithmetic)

•

exponential

•

time series

•

weighed

•

triangular

•

variable

•

volume adjusted

The only significant difference between the various types of moving

averages is the weight assigned to the most recent data. For example,

a simple (arithmetic) moving average is calculated by adding the

closing price of the instrument for a number of time periods, then

dividing this total by the number of time periods.

The most popular method of interpreting a moving average is to

compare the relationship between a moving average of the

instrument’s closing price, and the instrument’s closing price itself.

•

Sell signal: when the instrument’s price falls below its moving

average

•

Buy signal: when the instrument’s price rises above its moving

average

The other technique is called the double crossover, which uses short-

term and long-term averages. Typically, upward momentum is

confirmed when a short-term average (e.g., 15-day) crosses above a

longer-term average (e.g., 50-day). Downward momentum is confirmed

when a short-term average crosses below a long-term average.

MACD - Moving Average Convergence/Divergence - a technical

•

indicator, developed by Gerald Appel, used to detect swings in the

price of financial instruments. The MACD is computed using two

exponentially smoothed moving averages (see further down) of the

security's historical price, and is usually shown over a period of time on 

a chart. By then comparing the MACD to its own moving average

(usually called the "signal line"), traders believe they can detect when

the security is likely to rise or fall. MACD is frequently used in

conjunction with other technical indicators such as the RSI (Relative

Strength Index, see further down) and the stochastic oscillator (see

further down).

•

Momentum – is an oscillator designed to measure the rate of price

change, not the actual price level. This oscillator consists of the net

difference between the current closing price and the oldest closing

price from a predetermined period.

The formula for calculating the momentum (M) is:

M = CCP – OCP

Where:  CCP – current closing price

OCP – old closing price

Momentum

and

rate of change

(ROC) are simple indicators showing

the difference between today's closing price and the close N days ago.

"Momentum" is simply the difference, and the ROC is a ratio expressed

in percentage. They refer in general to prices continuing to trend. The

momentum and ROC indicators show that by remaining positive, while

an uptrend is sustained, or negative, while a downtrend is sustained.

A crossing up through zero may be used as a signal to buy, or a crossing

down through zero as a signal to sell. How high (or how low, when

negative) the indicators get shows how strong the trend is.

•

RSI - Relative Strength Index - a technical momentum indicator,

devised by Welles Wilder, measures the relative changes between the

higher and lower closing prices. RSI compares the magnitude of recent

gains to recent losses in an attempt to determine overbought and

oversold conditions of an asset.

The formula for calculating RSI is:

RSI = 100 – [100 / (1 + RS)]

Where:  RS - average of N days up closes, divided by

average of N days down closes

N - predetermined number of days

The RSI ranges from 0 to 100. An asset is deemed to be overbought

once the RSI approaches the 70 level, meaning that it may be getting

overvalued and is a good candidate for a pullback. Likewise, if the RSI

approaches 30, it is an indication that the asset may be getting

 

oversold and therefore likely to become undervalued. A trader using

RSI should be aware that large surges and drops in the price of an asset

will affect the RSI by creating false buy or sell signals. The RSI is best

used as a valuable complement to other stock-picking tools.

•

Stochastic oscillator - A technical momentum indicator that compares

an instrument's closing price to its price range over a given time period.

The oscillator's sensitivity to market movements can be reduced by

adjusting the time period, or by taking a moving average of the result.

This indicator is calculated with the following formula:

%K = 100 * [(C – L14) / (H14 – L14)]

C= the most recent closing price;

L14= the low of the 14 previous trading sessions;

H14= the highest price traded during the same 14-day period.

The theory behind this indicator, based on George Lane’s observations,

is that in an upward-trending market, prices tend to close near their

high, and during a downward-trending market, prices tend to close

near their low. Transaction signals occur when the %K crosses through a

three-period moving average called the “%D”.

Trend line - a sloping line of support or resistance.

•

•

Up trend line – straight line drawn upward to the right along

successive reaction lows

•

Down trend line – straight line drawn downwards to the right

along successive rally peaks

Two points are needed to draw the trend line, and a third point to

make it valid trend line.  Trend lines are used in many ways by traders.

One way is that when price returns to an existing principal trend line’ it

may be an opportunity to open new positions in the direction of the

trend in the belief that the trend line will hold and the trend will

continue further. A second way is that when price action breaks

through the principal trend line of an existing trend, it is evidence that

the trend may be going to fail, and a trader may consider trading in the

opposite direction to the existing trend, or exiting positions in the

direction of the trend.

Don’t fall in love with your Forex position.

Never take revenge of your Forex position