Using Bollinger Bands for Trading Large Cap Stocks

Using Bollinger Bands for Trading Large Cap Stocks

Using Bollinger Bands for Trading Large Cap Stocks
By CT Larsen

The Bollinger Band is the closest thing to 'The Holy Grail' of technical analysis there is. Especially for large cap stock traders, it just cannot be beat for analyzing charts. Having said that however, there is probably no other technical indicator misused or misunderstood as often as the Bolinger Band (BB). This article is to provide the technical analyst with the basics needed to interpret the many faces of the BB.

Before we begin, let me explain the type of trading done at http://livingonlargecaps.blogspot.com. We trade large cap stocks, we generally hold stocks for less than two months, and make about 3-5% on an average trade. Done over and over again throughout the year, we have made over 50% annual returns for the last three years.

Now lets discuss what the Bollinger Band (BB) is. In its standard usage, the BB is derived from taking the 20 day moving average of the stock price. And then adding and subtracting two standard deviations of that stock price and placing a line above the moving average and below the moving average. Now without having to re-visit my statistics classes of some 25 years ago, I will try to clarify a standard deviation. It is simply a measurement of how far the price has deviated above or below the moving average. A stock going through a particularly volatile patch, will see its BB's expand, and a stock going through a calm period, will see them contract.

BB's are available on most charting software. Yahoo has them on their technical analysis charts, as do most other web sites that are dedicated to technical analysis. If you are unfamiliar with them I urge you to right now, go experiment with them, using a few stocks and market indicators like the Dow, or Nasdaq.

If you are familiar with technical analysis, and use indicators such as the RSI or stochastic. You know one of the unique things about the BB's is they are placed right on the stock charts. They are viewed in the context of the actual price movements. In fact, for me, they define the stock chart. Stock charts tell me way more about future movement with the BB placed on them. I rarely do any analysis without them, except for perhaps an initial viewing of a stock chart I am considering for watch list placement. BB's therefore do not give you a number, like most other indicators, they don't tell you an overbought or oversold condition. They just provide a visual, a story, of where a stock has been. Therefor you have to interpret.

But what can be learned is crucial, to guessing what will happen next. BB's can help you predict price movements, like no other tool. The trick is, to know what to look for. In other articles I will present what I require a price pattern to look like before I even consider it. But for this article, realize that price patterns need to be structured, calm, heading up, down or flat. But they can't be erratic. Erratic price patterns are never worth trading..

If the upper band and the lower band are not moving in unison then the pattern is erratic. There is one exception to this rule, and that is at the beginning of a powerful up or down move. Remember, the bands tell you where the price will fall in relative to the 20 day moving average. Well, if a powerful move is underway, then the price is moving away from the average, and the bands expand. Once the bands expand it is too late to trade that move, but the stock is worth watching, one can climb on board on the next pull back.

But trading the way we do on our blog ,at http://livingonlargecaps.blogspot.com, that has produced greater than 50% return three years running, we like the bands to move in unison. That shows predictability. And predictability is crucial in getting large returns. It is not the home run we are looking for, just hit after hit after hit. Load the bases repeatedly and you generate runs. OK enough baseball analogy. Here is an example, take the chart HIG. With BB's in place look at the chart in early June 2005. It is just after the powerful upward move, that occurred in May. First notice in May how the BBs expanded, as the stock shot straight up. Then in June the bands moved in unison. Around mid June the stock touched its 20 day moving average, then its formation started to 'bowl' as it moved up. Buy it here. Once it hits a 5% profit move up a sliding stop, and ride the price up. Several things can be learned form this chart. The single most bullish pattern, is a stock that has small trading day ranges, and hugs the upper band. It rides it up between the 20 day average, and the top band. The bands are at an upward angle, that is not too steep. And everything moves in unison, both bands, the moving average, and most importantly for profits, the price.

If one should know anything about the stock market, it is this. It is ruled by emotions. Emotions are like springs, they stretch and contract, both for only so long. BB's measure this like no other indicator. A stock, especially widely traded large caps, with all the fundamental research in the world already done, will only lie dormant for so long, and then they will move. The move after such dormant periods will almost always be in the direction of the overall trend. If a stock is above it's 200 day moving average then it is in an uptrend, and the next move will likely be up as well.

Look at the chart CIT, with the BBs of course. See how in June 2005, the BB's contract late in the month. While the price touches the lower BB. See how the stock is above the 200 day moving average. And more importantly the slope of the 200 day moving average is upward. The stock clearly wants to move up. The bands are ridiculously close together. Buy right here, an oversold stock, moving upward, with narrow bands. What happens next is the bands expand, I call it fish lips, I love fish lips. This stock could have been bought in June sold at exhaustion as the bands had expanded with an upper band touch. And then re-purchased in July and done again. While fish lips provide remarkable entry signals, they generally aren't held as long as the upward unison movement of HIG mentioned above.

There you have the two most crucial lessons in Bollinger Bands. The HIG pattern I call riding the wave, and the CIT pattern I call fish lips. Riding the wave can usually be done longer up to two months, using stops along the way, one doesn't even really need to watch it, of course one can as they ca-ching in one those safe profits. The other pattern is fish lips, they are usually held for less than a month, and are exited upon upper band touches, or mare exactly retreats from upper band touches. (When the price touches the upper band and then retreats). Fish lips that re formed out of a flat pattern can often turn into 'riding the wave,' and then are held longer.

CT Larsen has been trading stocks since 1990. Now trading large cap stocks exclusively. He has recorded three straight years of greater than 50% annual returns. You can read his blog at http://livingonlargecaps.blogspot.com.

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Relative Strength Index

Relative Strength Index

Relative Strength Index
By Ramano Richie

This is one of my favorites. I use this indicator at time scale of 5M, 1H, and 1D. So simple to be used and has helped me to have great result in my trades. You don't even need to be an expert to use this indicator.

This technical indicator was developed by Welles Wilder to help investors gauge the current strength of a stock's price relative to its past performance. The usefulness of this indicator is based on the premise that the RSI will usually top out or bottom out before the actual market top or bottom, giving a signal that a reversal or at least a significant reaction in stock price is imminent.

The main purpose of the RSI is to measure the market’s strength and weakness. A high RSI, above 70, suggests an overbought or weakening bull market. Conversely, a low RSI, below 30, implies an oversold market or dying bear market.

But RSI does not indicate a top or a bottom. Sometimes overbought market will be followed by little downward correction in order to gather momentum so it could go up much further. And sometimes oversold market will be followed by little upward correction in order to gather momentum so it could go down much further.

Click here to read more about this indicator and read other things to win forex trading.

Richie is a forex trader and forex technical analyst.
You may read my articles at:
Forex Library
and my daily technical analysis at my brother's blog:
Brian Signal

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The Uses in Forex Trading of Moving Averages and MACD

The Uses in Forex Trading of Moving Averages and MACD

The Uses in Forex Trading of Moving Averages and MACD
By Adrian Pablo

Moving Averages: If you consider the "trend-is-your-friend" statement of technical analysis as a true sentence, the moving averages will be very helpful. Moving averages tell the average price in a given point of time over a defined period of time. They are called moving because they reflect the latest average, while adhering to the same time measure.

A weakness of moving averages is that they lag the market, so they do not necessarily signal a change in trends. To address this issue, using a shorter period, such as 5 or 10 day moving average, would be more reflective of the recent price action than the 40 or 150-day moving averages.

Alternatively, moving averages may be used by combining two averages of distinct time- frames. Whether using 5 and 20-day MA, or 40 and 150-day MA, buy signals are usually detected when the shorter-term average crosses above the longer-term average, i.e. price will likely go up. Conversely, sell signals are suggested when the shorter average falls below the longer one, i.e. price will likely go down.

There are three kind of mathematically distinct moving averages: Simple MA; Linearly Weighted MA; and Exponentially Smoothed. The latter choice is the preferred one because it assigns greater weight for the most recent data, and considers data in the entire life of the instrument making of it a more accurate indicator. More information here; http://www.1-forex.com

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, with the corresponding implications for the currency’s price in each particular situation.

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.

Adrian Pablo

Forex Trader and Freelance Writer

http://www.1-forex.com

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Forex Trading Tool - The Three Trendline Strategy

Forex Trading Tool - The Three Trendline Strategy

Forex Trading Tool - The Three Trendline Strategy
By Michael A. Jones

Newcomers to trading the foreign exchange currency markets do well to accept the observation of experienced seasoned traders that the idea of a perfect Forex trading tool is an illusion.

While no perfect Forex trading tool exists, using a combination of tools to identify a converging of favorable market factors can yield a majority of high probability trades over a period of time.

Trendlines certainly deserve close consideration and many successful traders add them to their collection of Forex trading tools.

It should be stated at the outset that trendlines by themselves do not provide a strong enough signal to warrant making a trade. They are a useful addition and provide confirmation of signals from other tools. (See resource box for a visual example of using a trendline as a trade entry point)

The Three Trendline Strategy

Consider these three main types of trendlines you need to know and use if you are going to make any sense of trendlines.

Trendlines are lines drawn across significant lows in an uptrend, and significant highs in a downtrend. The more candles to the left and right of the lowest candle in an uptrend or the highest candle in a downtrend make the low or high point more significant.

1. Short Term Trendlines

Draw these lines across the most recent two lows (for an uptrend) or highs (for a downtrend). These are best observed on a smaller time frame such as a 15 minute or 30 minute chart.

2. Medium Term Trendlines

These are best observed on a higher time frame such as a 60 minute chart. Again connect the nearest significant low to current price action to the previous significant low in an uptrend or the nearest significant high to current price action to the previous significant high in a downtrend.

3. Long Term Trendlines

Use higher time frames such as the 4 hour chart or the daily chart to draw long term trendlines using the same method described for Medium Term Trendlines.

The long term trendline can be a powerful Forex trading tool. Keep in mind that the daily chart is used prominently by traders of big institutions. Such traders probably do not engage in small moves on an intra day level. They are more concerned about taking a position on a currency pair.

The daily chart is consulted by them when making decisions. So by drawing a trendline on a daily chart you can present to yourself graphically just where price is and where it is likely to either possibly bounce and retrace or continue with the current momentum.

Using Trendlines As An Effective Forex Trading Tool

Trendlines on the short time frame merely give you a defined picture of current price action. These trendlines are broken often during the course of a day. It is probably not a good idea to enter trades based on trendline breaks from a small time frame chart. Their main use is to give you a clear, instantly recognizable graphical representation of current price behavior.

However, here is where trendlines can prove to be a useful Forex trading tool:

If you notice price coming back to test a trendline on the higher time frames, (anything over 30 minutes), look at other factors. For example:

• Draw in horizontal lines to mark key support and resistance using previous highs and lows.



• Draw Fibonacci retracement and extension levels.



• Calculate the daily pivot points and put them on your chart.



• Have the 200 EMA (Exponential Moving Average) shown on your charts.

Now, if price were to bounce or touch the trendline on the medium to higher time frames, that is, on the 60 minute, 4 hour, or even daily charts, does that price point also coincide with or match up with one of the other indicators mentioned above?

If for example the trendline intersects with a pivot point which is also a Fibonacci 50% or 62% retracement, or 127% or 162% extension, then you have a convergence of factors. If you entered a trade at that point there is a high probability you will catch at least 10 to 20 pips on the first move on the bounce.

Looking for such opportunities takes patience. They don't come up so often but when they do you can be ALMOST guaranteed a successful trade if you keep your first profit target to a reasonable level.

If trading multiple lots, then be sure to take your first profit at the 10 to 20 pip level and let one or two other lots run if price continues in the direction you anticipate. At the same time of course you would move up your stop to break even point after taking first profit so your trade can now run without risk.

Employ trendlines as a Forex trading tool with caution and discretion. Covering your charts with every trendline possible will only result in confusion and blurry analysis.

One or two trendlines at key or significant swing points, (price highs and lows) can give you a defined, clear picture of price action, which, when coupled with your other Forex trading tools, can result in profitable trades.

See how to use trendlines to get an optimum trade entry point:

http://www.vitalstop.com/Forex/trendline.html

How do you trade the non-farm payroll report? Read this:

http://www.vitalstop.com/Forex/Advisor/forex-strategy-non-farm-payroll.htm

For the best free economic calendars plus a free pivot point calculator and Fibonacci calculator click here:

http://www.vitalstop.com/Forex/tools.html

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Forex Tools & Their Use In Successful Trading

Forex Tools & Their Use In Successful Trading

Forex Tools & Their Use In Successful Trading
By Adrian Pablo

As you start learning more about the Forex trading world and the many opportunities it can offer to traders of all sizes you will realize about the existence of many tools available to the Forex trader for analyzing the market as well as for buying and selling currencies pairs. These software tools are a necessity for the Forex trader because of the volume and volatility that characterizes the FX market.

In order to make successful trades, the Forex trader needs lots of information and current exchange rates, the most evident information you can find, are just the tip of the iceberg. A professional trader needs historical data as well as current information about political and economic conditions that could affect the behavior of currency prices.

Successful Forex trading is all about being able to predict whether a currency will fall or rise against another currency allowing the Forex trader to profit from those currency movements.

Most Forex trading can be characterized as speculative, this means the trader makes buying decisions based on predictions on how the market will respond to current political or economic events, and in order to be profitable with speculation the trader requires up-to-the-minute information and an analysis of current and historical conditions.

A number of tools are available to help you as a Forex trader, so you can minimize your risk and maximize your profits. For example:

Pivot Points, can be used to predict the up or down movements of currency prices. They are calculated as an average of the currencies high, low and closing prices. Pivot Points can tell you whether prices are inside the normal trading range or in the extreme trading ranges.

Risk Probability Calculator (RPC) can be used to identify trades that have more potential gain than potential loss. The RPC can also help you target exit points to end the trade.

Pip value calculators can tell you the actual profit or loss that will result from movements in the Forex markets.

Provided you have downloaded your broker?s trading station software, and once you have decided which currency pair to trade, you can log in to the trading station and then enter the desired currency pair as the current exchange rate appears on the screen. The amount of the trade is entered , this means, how much currency you are willing to buy. Some brokers may even give you the option of specifying the amount you wish to risk, automatically setting a 'stop loss rate' into your order.

After the details of the trade are entered, you will be taken to a confirmation screen where you can accept the current price on screen. You may be given the option of 'freezing' the quoted price, meaning the price of your transaction is exactly what you see on screen without any slippage. Accept the rate and you have placed your trade.

With the use of software tools you can enter a 'stop loss rate' to automatically sell the currency if it falls below a certain rate, avoiding possible losses and giving you peace of mind. But this is not all the automation you can get, you can also enter a 'take profit rate' to automatically sell the currency when it reaches a certain level. This way you won?t need to monitor your account all day in order to take profits once an acceptable number of pips have been earned.

Adrian Pablo is a Forex freelance writer with articles published in a number of places. Get a free report on Fibonacci Trading and learn more about the world of forex trading , visit:

=> http://www.1-forex.com

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Forex Trading Tips

Forex Trading Tips

Forex Trading Tips
By John Gaines

Why do hundreds of thousands online traders and investors trade the forex market every day, and how do they make money doing it?

This two-part report clearly and simply details essential tips on how to avoid typical pitfalls and start making more money in your forex trading.

1. Trade pairs, not currencies - Like any relationship, you have to know both sides. Success or failure in forex trading depends upon being right about both currencies and how they impact one another, not just one.
   
   
   
   




2. Knowledge is Power - When starting out trading forex online, it is essential that you understand the basics of this market if you want to make the most of your investments.
   
   
   
   

   The main forex influencer is global news and events. For example, say an ECB statement is released on European interest rates which typically will cause a flurry of activity. Most newcomers react violently to news like this and close their positions and subsequently miss out on some of the best trading opportunities by waiting until the market calms down. The potential in the forex market is in the volatility, not in its tranquility.
   

   
   
   




3. Unambitious trading - Many new traders will place very tight orders in order to take very small profits. This is not a sustainable approach because although you may be profitable in the short run (if you are lucky), you risk losing in the longer term as you have to recover the difference between the bid and the ask price before you can make any profit and this is much more difficult when you make small trades than when you make larger ones.
   
   
   
   




4. Over-cautious trading - Like the trader who tries to take small incremental profits all the time, the trader who places tight stop losses with a retail forex broker is doomed. As we stated above, you have to give your position a fair chance to demonstrate its ability to produce. If you don't place reasonable stop losses that allow your trade to do so, you will always end up undercutting yourself and losing a small piece of your deposit with every trade.
   
   
   
   




5. Independence - If you are new to forex, you will either decide to trade your own money or to have a broker trade it for you. So far, so good. But your risk of losing increases exponentially if you either of these two things:
   
   
   
   

   Interfere with what your broker is doing on your behalf (as his strategy might require a long gestation period);
   

   
   
   

   Seek advice from too many sources - multiple input will only result in multiple losses. Take a position, ride with it and then analyse the outcome - by yourself, for yourself.
   

   
   
   




6. Tiny margins - Margin trading is one of the biggest advantages in trading forex as it allows you to trade amounts far larger than the total of your deposits. However, it can also be dangerous to novice traders as it can appeal to the greed factor that destroys many forex traders. The best guideline is to increase your leverage in line with your experience and success.
   
   
   
   




7. No strategy - The aim of making money is not a trading strategy. A strategy is your map for how you plan to make money. Your strategy details the approach you are going to take, which currencies you are going to trade and how you will manage your risk. Without a strategy, you may become one of the 90% of new traders that lose their money.
   
   
   
   




8. Trading Off-Peak Hours - Professional FX traders, option traders, and hedge funds posses a huge advantage over small retail traders during off-peak hours (between 2200 CET and 1000 CET) as they can hedge their positions and move them around when there is far small trade volume is going through (meaning their risk is smaller). The best advice for trading during off peak hours is simple - don't.
   
   
   
   




9. The only way is up/down - When the market is on its way up, the market is on its way up. When the market is going down, the market is going down. That's it. There are many systems which analyse past trends, but none that can accurately predict the future. But if you acknowledge to yourself that all that is happening at any time is that the market is simply moving, you'll be amazed at how hard it is to blame anyone else.
   
   
   
   




10. Trade on the news - Most of the really big market moves occur around news time. Trading volume is high and the moves are significant; this means there is no better time to trade than when news is released. This is when the big players adjust their positions and prices change resulting in a serious currency flow.
    
    
    
    




11. Exiting Trades - If you place a trade and it's not working out for you, get out. Don't compound your mistake by staying in and hoping for a reversal. If you're in a winning trade, don't talk yourself out of the position because you're bored or want to relieve stress; stress is a natural part of trading; get used to it.
    
    
    
    




12. Don't trade too short-term - If you are aiming to make less than 20 points profit, don't undertake the trade. The spread you are trading on will make the odds against you far too high.
    
    
    
    




13. Don't be smart - The most successful traders I know keep their trading simple. They don't analyse all day or research historical trends and track web logs and their results are excellent.
    
    
    
    




14. Tops and Bottoms - There are no real "bargains" in trading foreign exchange. Trade in the direction the price is going in and you're results will be almost guaranteed to improve.
    
    
    
    




15. Ignoring the technicals- Understanding whether the market is over-extended long or short is a key indicator of price action. Spikes occur in the market when it is moving all one way.
    
    
    
    




16. Emotional Trading - Without that all-important strategy, you're trades essentially are thoughts only and thoughts are emotions and a very poor foundation for trading. When most of us are upset and emotional, we don't tend to make the wisest decisions. Don't let your emotions sway you.
    
    
    
    




17. Confidence - Confidence comes from successful trading. If you lose money early in your trading career it's very difficult to regain it; the trick is not to go off half-cocked; learn the business before you trade. Remember, knowledge is power.

The second and final part of this report clearly and simply details more essential tips on how to avoid the pitfalls and start making more money in your forex trading.

1. Take it like a man - If you decide to ride a loss, you are simply displaying stupidity and cowardice. It takes guts to accept your loss and wait for tomorrow to try again. Sticking to a bad position ruins lots of traders - permanently. Try to remember that the market often behaves illogically, so don't get commit to any one trade; it's just a trade. One good trade will not make you a trading success; it's ongoing regular performance over months and years that makes a good trader.
   
   
   
   




2. Focus - Fantasising about possible profits and then "spending" them before you have realised them is no good. Focus on your current position(s) and place reasonable stop losses at the time you do the trade. Then sit back and enjoy the ride - you have no real control from now on, the market will do what it wants to do.
   
   
   
   




3. Don't trust demos - Demo trading often causes new traders to learn bad habits. These bad habits, which can be very dangerous in the long run, come about because you are playing with virtual money. Once you know how your broker's system works, start trading small amounts and only take the risk you can afford to win or lose.
   
   
   
   




4. Stick to the strategy - When you make money on a well thought-out strategic trade, don't go and lose half of it next time on a fancy; stick to your strategy and invest profits on the next trade that matches your long-term goals.
   
   
   
   




5. Trade today - Most successful day traders are highly focused on what's happening in the short-term, not what may happen over the next month. If you're trading with 40 to 60-point stops focus on what's happening today as the market will probably move too quickly to consider the long-term future. However, the long-term trends are not unimportant; they will not always help you though if you're trading intraday.
   
   
   
   




6. The clues are in the details - The bottom line on your account balance doesn't tell the whole story. Consider individual trade details; analyse your losses and the telling losing streaks. Generally, traders that make money without suffering significant daily losses have the best chance of sustaining positive performance in the long term.
   
   
   
   




7. Simulated Results - Be very careful and wary about infamous "black box" systems. These so-called trading signal systems do not often explain exactly how the trade signals they generate are produced. Typically, these systems only show their track record of extraordinary results - historical results. Successfully predicting future trade scenarios is altogether more complex. The high-speed algorithmic capabilities of these systems provide significant retrospective trading systems, not ones which will help you trade effectively in the future.
   
   
   
   




8. Get to know one cross at a time - Each currency pair is unique, and has a unique way of moving in the marketplace. The forces which cause the pair to move up and down are individual to each cross, so study them and learn from your experience and apply your learning to one cross at a time.
   



9. Risk Reward - If you put a 20 point stop and a 50 point profit your chances of winning are probably about 1-3 against you. In fact, given the spread you're trading on, it's more likely to be 1-4. Play the odds the market gives you.
   
   
   
   




10. Trading for Wrong Reasons - Don't trade if you are bored, unsure or reacting on a whim. The reason that you are bored in the first place is probably because there is no trade to make in the first place. If you are unsure, it's probably because you can't see the trade to make, so don't make one.
    
    
    
    




11. Zen Trading- Even when you have taken a position in the markets, you should try and think as you would if you hadn't taken one. This level of detachment is essential if you want to retain your clarity of mind and avoid succumbing to emotional impulses and therefore increasing the likelihood of incurring losses. To achieve this, you need to cultivate a calm and relaxed outlook. Trade in brief periods of no more than a few hours at a time and accept that once the trade has been made, it's out of your hands.
    
    
    
    




12. Determination - Once you have decided to place a trade, stick to it and let it run its course. This means that if your stop loss is close to being triggered, let it trigger. If you move your stop midway through a trade's life, you are more than likely to suffer worse moves against you. Your determination must be show itself when you acknowledge that you got it wrong, so get out.
    
    
    
    




13. Short-term Moving Average Crossovers - This is one of the most dangerous trade scenarios for non professional traders. When the short-term moving average crosses the longer-term moving average it only means that the average price in the short run is equal to the average price in the longer run. This is neither a bullish nor bearish indication, so don't fall into the trap of believing it is one.
    
    
    
    




14. Stochastic - Another dangerous scenario. When it first signals an exhausted condition that's when the big spike in the "exhausted" currency cross tends to occur. My advice is to buy on the first sign of an overbought cross and then sell on the first sign of an oversold one. This approach means that you'll be with the trend and have successfully identified a positive move that still has some way to go. So if percentage K and percentage D are both crossing 80, then buy! (This is the same on sell side, where you sell at 20).
    
    
    
    




15. One cross is all that counts - EURUSD seems to be trading higher, so you buy GBPUSD because it appears not to have moved yet. This is dangerous. Focus on one cross at a time - if EURUSD looks good to you, then just buy EURUSD.
    
    
    
    




16. Wrong Broker - A lot of FOREX brokers are in business only to make money from yours. Read forums, blogs and chats around the net to get an unbiased opinion before you choose your broker.
    
    
    
    




17. Too bullish - Trading statistics show that 90% of most traders will fail at some point. Being too bullish about your trading aptitude can be fatal to your long-term success. You can always learn more about trading the markets, even if you are currently successful in your trades. Stay modest, and keep your eyes open for new ideas and bad habits you might be falling in to.
    
    
    
    




18. Interpret forex news yourself - Learn to read the source documents of forex news and events - don't rely on the interpretations of news media or others.
    
    
    
    

John Gaines

online trading, currency trading, financial service

A veteran of online trading, John Gaines offers the financial services industry his perspectives and expertise on a variety of trading systems and financial instruments, including forex, CFDs, futures, options and stocks.

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How To Earn Serious Money With Forex

How To Earn Serious Money With Forex

How To Earn Serious Money With Forex
By Des Smith

The market

The currency trading (FOREX) market is the biggest and the fastest growing market on earth. Its daily turnover is more than 2.5 trillion dollars, which is 100 times greater than the NASDAQ daily turnover.

Markets are places to trade goods. The same goes with FOREX. The Forex goods (or merchandise) are the currencies of various countries. You buy Euro, paying with US dollars, or you sell Japanese Yens for Canadian dollars. That's all.

How does one profit in Forex?

Very simple and obvious: buy cheap and sell for more! The profit is generated from the fluctuations (changes) in the currency exchange market.

The nice thing about the FOREX market, is that regular daily fluctuations, say - around 1%, are multiplied by 100! (in general FOREX companies offer trading ratios from 1:50 to 1:200). If, for example, the exchange rate of "your" pair of currencies increased by 0.6% in the last 4 hours, your profit will be 60% on your investment! Such can happen in one business day, or in a few hours, even minutes.

Moreover, you cannot lose more than your "margin"! You may profit unlimited amounts, but you never lose more than what you initially risked and invested.

You can implement your choice (the pair of currencies, the volume amount) under any direction to which the market is moving, and yet make profit. It does not matter whether the exchange rate is going up or down: you can always decide to buy Euro and sell dollar, or vice versa - buy dollar and sell Euro. You don't have to physically possess certain currencies in order to perform "buy" or "sell" with them.

How do I trade Forex?

You select the pair of currencies with which you wish to make a Forex deal. You determine the volume (the amount of the deal). You deposit the "margin" (collateral needed to facilitate the deal. Usually - only a very small portion of the whole deal, say: 1% or 1:100).

Before you finally activate the deal, you can still "freeze" it for a few seconds. That enables you to either change the terms, or accept it as is, or altogether regret the whole idea. The "freeze" feature is a unique service.

When your Forex deal is running (you hold an "open position"), you can monitor its status and check scenarios online, whenever you wish. You may change some terms in the deal, or close it (and cash the profit, if any, or minimize the loss, if any). Moreover, some companies let you determine a "take-profit" rate, with which the deal will close automatically for you, when and if such rate occurs in the market. Meaning: you do not have to stay near your computer when you hold open positions.

Good luck!

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The Top Four Forex Brokers

The Top Four Forex Brokers

The Top Four Forex Brokers
By Eddie Tobey

This article contends that the best forex brokers are: Saxo Bank, GAIN Capital, GCI Financial Ltd., and CMS Forex. CMS Forex accepts no commission, demands a small amount of only $200 to establish a mini account, provides users with a Free Demo account, provides leverage as high as 400:1, and has a 3 to 4 pip spread on major currencies.

Saxo Bank’s ForexTrading.com offers 24 hour online trading, streaming news from three major providers, detailed analysis from in-house experts, direct online chat to dealers, and a secure
trading environment.

GAIN Capital gives its asset managers robust technology, wholesale dealing spreads, consistent liquidity, fast execution, and access to a wide range of sophisticated tools. GAIN Capital’s proprietary trading technology today supports over $60 billion in monthly trade volume. GAIN Capital’s FOREXTrader has streaming prices in 14 currency pairs, real time profit and loss account information, sophisticated risk management tools, a variety of simple and complex order types, and full reporting capabilities.

Professional dealing practices and a service-oriented approach has earned GAIN Capital a reputation as a world class provider of foreign exchange services. Client and partners from over 110 countries currently rely on their technology, execution and clearing services, and administrative tools.

For individual investors, GAIN Capital operates FOREX.com, which offers advanced, yet easy-to-use trading tools along with lower account minimums and extensive educational resources.

GCI Financial is one of the world’s largest online brokers offering commission-free trading in Forex. GCI Financial offers Internet trading software, fast and efficient execution, and the low margin requirements. GCI Financial’s free trading software gives the investor the edge in execution, market information, and account management.

GCI Financial offers forex and indices on an online dealing platform. In their forex trading platform the trader can add and remove instruments from the ""dealing prices"" window to fully customize the trading.

Forex Broker Info provides detailed information on forex brokers, forex trading and market makers, and other forex-related topics. Forex Broker Info is the sister site of Incorporating in Florida Web.

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Candlestick Patterns For Swing Traders

Candlestick Patterns For Swing Traders

Candlestick Patterns For Swing Traders
By Craig Ferguson

Candlestick charts are an effective way to study the emotions of other traders. Candlestick patterns provide a trader with a picture of human emotions that are used to make buy and sell decisions.

On a piece of paper, write down the following statement with a big black marker:

There is nothing on a chart that matters more than price. Everything else is secondary.

Take that piece of paper and tape it to the top of your monitor! I think too often swing traders get caught up in so many other forms of technical analysis that they miss the most important thing on a chart. You do not need anything else on a chart but candles to be a successful swing trader! There is nothing that can improve your trading more than learning the art of reading candlestick charts.

There are only two groups of people in the stock market. There are buyers and sellers. We want to find out which group is in control of the price action now. We use candles to figure that out. When stocks close at the bottom of the range we conclude that the sellers are in control. When stocks close at the top of the range we conclude that buyers are in control.

In the stock market, for every buyer there has to be a seller and for every seller there has to be a buyer. If a stock closes at the top of the range, this means that buyers were more aggressive and were willing to get in at any price. The sellers were only willing to sell at higher prices. This causes the stock to move up.

If a stock closes at the bottom of the range, this means that sellers were more aggressive and were willing to get out at any price. The buyers were only willing to buy at lower prices. This causes the stock to move down.

Where a stock closes in relation to the range tells us who is winning the war between buyers and sellers. This is the most important thing to know when reading candlestick charts. We can classify candles in two categories: wide range candles (WRC) and narrow range candles (NRC). Wide range candles state that there is high volatility (interest in the stock) and narrow range candles state that there is low volatility (little interest in the stock). Stocks tend to move in the direction of wide range candles.

The number one rule when reading candlestick charts is this: You want to buy a stock when nobody wants it and sell a stock when everybody wants it! This is the only way to consistently make money swing trading!

I know what you’re thinking. You thought this was going to be about hammers, doji’s, and shooting stars. Sorry to disappoint you, but knowing all of the different types of candlestick patterns is really not at all necessary once you understand why a candle represents the struggle between buyers and sellers.

Take the hammer candlestick pattern. What happened to make up this candle? The stock opened, then at some point the sellers took control of the stock and pushed it lower. But in the end, the buyers “won the war” and had enough strength to close the stock at the top of the range.

When we are reading candlestick charts, why would we need to know the name of the pattern? What we do need to know is why the candle looks the way that it does rather than spending our time memorizing candlestick patterns!

Craig Ferguson is a part-time swing trader. Visit Swing-Trade-Stocks.com to learn his complete swing trading strategy using technical analysis.

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Technical Analysis - Candlestick Basics

Technical Analysis - Candlestick Basics

Technical Analysis - Candlestick Basics
By David Thorpe

Background

It is believed that Candlestick trading first appeared sometime during the 19th Century. The development of the Candlestick is credited to Japanese rice traders and it is more than likely that the concept evolved over many years into what we see on our charts today.

Formation

Just like the traditional Bar chart, each Candlestick displays an open, high, low and close over a given time period. Depending on the fill of the body you can tell at first glance whether the candle closed higher or lower than it opened.
It is also important to pay attention to the high and low formations displayed by the shadows/ wick/ tails. These can form the basis of important Candlestick patterns that can help predict the future market direction.

Candle Vs Bar Vs Line

Most people prefer using a Bar or a Candlestick chart over a line chart because of the extra information displayed to the user. A line chart is unable to show highs and lows during a set time period and therefore it often fails to display vital information about the price action. As you can see from the picture below the same data over the same time period can look very different depending on the chart you use.

The reason why an individual would generally prefer to use a Candlestick over a traditional Bar chart is completely aesthetical. After all, both are displaying the same data but the filled Vs hollow structure of a candle’s body is very easy on the eye and quick to interpret.

Basic Interpretation of Bull Vs Bear

A Candlestick is designed to draw you a picture of the battle between bull and bear, fear and greed and demand Vs supply. There are many different patterns, each with their own significant meaning but you can interpret the basics as follows:

a) Long hollow/ filled Candles indicate that there was strong buying/ selling pressure during the given time period and the bulls/ bears were in complete control.

b) Small hollow/ filled Candles indicate a lack of market volatility with neither the bulls nor the bears able to move the market. This could be due to an impending data release or lack of true market direction.

c) Long lower shadows/ wick/ tails indicate the market was unable to maintain the selling pressure and hold for a close at low levels. This could be due to strong buying at important technical levels with the new low representing good support for the market.

d) Long upper shadows/ wick/ tails indicates strong buying pressure that was unable to be sustained. As above it could be due to technical levels and represents good resistance for the market, especially if the candle printed with high volume.

e) Long upper and lower shadows/ wicks/ tails indicate major market volatility and an inability of either the bulls or the bears to control the market. This often occurs at major data releases where the figures are unable to provide a clear indication to the future movement of the market.

What a Candlestick Doesn’t Show You

With these basic interpretations in mind we must now consider what a candle fails to show us that might be relevant to your interpretation on the price data. A Candle cannot show you which came first, the high or the low, or the order of events that occurred in-between. For example, a long filled candle shows selling pressure clearly overwhelming buying pressure but it could not alert you to a 50% retrace that occured during the day.

There are multiple combinations of price action that could occur during the Candle’s set time period. One way to overcome this lack of information is to switch between time frames. For example, if you are observing a chart with Candlesticks on a one day time period you can change the period to one hour, fifteen minutes and one minute to get an increasingly detailed view of each days price action. The process of switching between time frames is a very popular and important one with technical analysts.

Blended Candlesticks

As you switch through the time frames you will notice that longer-term Candlestick patterns are made up of many smaller time framed Candles. This is known as blending. The example below shows the many fifteen-minute Candles that came together to form the long filled one-hour Candles.

Diagrams: http://www.passion-trading.munbuns.com and navigate to the Articles section.

David Thorpe is a senior contributor for http://www.passion-trading.munbuns.com a free educational resource centre for traders and investors. The site has a dedicated forex
trading and currency trading portal and its goal is to stimulate the minds of its users, enabling them to achieve a greater understanding the forex market, thus helping them to become more profitable.

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Candlestick Charting

Candlestick Charting - Learn How to Make Bigger Trading Profits!

Candlestick Charting - Learn How to Make Bigger Trading Profits!
By Stephen Todd

The Japanese have used Candlestick charting for centuries.

Candlestick charting is more popular than ever today as it adds an extra dimension to trading to give any trader an edge.

If you are serious about making money, then you should consider candlestick-charting techniques.

History of Candlestick Charting

In the 1700's, Homma, a Japanese trader in rice, noticed how the price of rice was influenced by not only supply and demand, but also how the price was strongly influenced by the psychology of traders. He understood that when emotions came into play a vast difference between the value and the price of rice occurred.

This difference between the value and price of any commodity is as applicable to markets today as it was in rice centuries ago.

The re-emergence of Japanese candlestick charting in recent years owes much to the writing of Steve Nison, whose book, "Japanese charting techniques," is considered the definitive recent work on the subject.

Advantages of candlestick charts include:

1. They can Complement other Technical Tools

You can use Candlestick charts with a number of other common technical indicators such as stochastics, moving averages; Bollinger bands etc. and they can act as an additional filter for trades.

2. Provide Advance Warnings of Market Reversals

Because of the way candlestick charts are drawn, they can give warnings of market reversals far quicker than traditional bar charts, and are a great way to spot overbought or oversold scenarios.

This can of course improve market timing and bottom line profits.

3. They're Easy for Everyone to Use

Because candlestick charts use, the same open, high, low and close data that traditional bar charts use, they are easy to use for both novice and experienced traders.

4. Unique Insight into Market Momentum

The way the candlestick chart is drawn not only gives the direction of price, but also the momentum behind the market move. This is down to the way the candlestick chart graphically illustrates the relationship behind the open, high, low, and close by the drawing of the candlestick chart.

Just like a bar chart, a daily candlestick line contains the market's open, high, low and close for the days trading.

However, candlestick charting adds an extra dimension in the way that they are drawn.
The candlestick has a wide part, called the "real body." This real body represents the range between the open and close of that day's trading.

When filled in black, the real body means the close was lower than the open.

If the real body is empty, it means the exact opposite: the close was higher than the open.
Above and below the real body are the "shadows." Chartists see these as the wicks of the candle, and it is the shadows that show the high and a low price of that day's trading.

If the upper shadow on the filled-in body is short, it indicates that the open that day was closer to the high of the day. Conversely, a short upper shadow on a white or unfilled body indicates the close was near the high.

5. Candlesticks Made Easy

Candlestick charting programs such as Supercharts, Tradestation, Incredible charts and many others include candlestick charting as a standard option, making them easy to incorporate into your trading strategy.

If you are trading with Fibonacci numbers, Dow Theory or a breakout method, candlestick charts can be incorporated and give an extra dimension to your trading.

>To find out more about candlestick charting and how you can increase your trading profits, visit our site: http://www.financial-trading-success.com

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Japanese Candlestick Charts

Japanese Candlestick Charts

Japanese Candlestick Charts
By Tim Grimsley

When asked to time about the advantage of japanese, I stated that I they definitely had a positive impact on my account. Candlesticks make trading a lot easier for me. To draw a comparison, I would say that plain bar charts are to candlesticks, as radio is to color television. They are a movie playing out in front of you, the key is learning to interpret the scenes.
Candlesticks allow you to see at a glance what type of "mood" the market is in. Are the bulls or bears winning the battle?

Classic candlesticks are originally from Japan, hence the name. In traditional candlesticks are filled or hollow to indicate market direction. Most chart companies today serve them as green and red. The green bars indicate the market has move higher in price, while the red indicates lower prices.

Candlesticks are also read by patterns, this type of interpretation takes a little while to master. Those who use the patterns to daytrade must have extensive practice at spotting them. Daytrading is a fast moving game and you must be able to recognize the different patterns almost instantly.

I trade patterns rarely. Instead I use candlestick indications combined with other indicators to form an overall picture of market patterns and direction. For those new to trading I would suggest that they learn to read candlestick charts right from the start. If I were starting out again that is exactly what I would do.

Continue

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Candlestick Charting

Candlestick Charting – Adding a Visual Dimension To Your Trading

Candlestick Charting – Adding a Visual Dimension To Your Trading
By Stephen Todd

Candlestick charting is great for traders wanting an extra edge in their quest for profits - this is due to the way the candle bodies are drawn, that gives a better insight that is visual, and shows trader psychology.

More traders than ever are using candlestick charts due to the extra trading edge they can get with this form of charting - if you have not used them before, then this article is for you.

Candlestick charts are not new, and have been used for hundreds of years by Japanese traders to predict and act on market movements.

Candlestick charting giving greater insight into human psychology

In the 1700's, Homma, a Japanese trader in rice, noticed how the price of rice was influenced by human psychology as much as the supply and demand situation. Homma used candlestick charts to trade rice and amassed a huge fortune in the markets. In fact, it was rumored he never to have had a single losing trade!

Human psychology has never changed, and has remained constant over time - candlestick charting is therefore just as useful today, as it was hundreds of years ago.

The Re-emergence of Candlestick Charting

Steve Nison, book, "Japanese charting techniques," bought candlestick charting back into the public domain in the 1990s. Currency traders soon started using candlestick charting instead of bar charts for greater insight into market movements.

So why use Candlestick Charts?

1. They complement other Technical Tools

You can use candlestick charts as you would use the common bar chart, and you can combine them with traditional market indicators. Candlestick charts are a great way to spot opportunities, and then filter, and time trades with other indicators.

2. Spotting trend changes

Because of the way candlestick charts are viewed, they can give warnings of market reversals, far more visually than traditional bar charts.

If you look at candlestick charting, the human psychology of the move literally jumps out the page at you.

3. Straightforward to use

Candlestick charts use, the same open, high, low and close data that traditional bar charts use, and are easy to draw.

In addition, there are many packages like supercharts and tradestation that will draw them automatically for traders.

The different candle names are also easy to remember.

4. Define market momentums

The way the candlestick chart is drawn not only gives the direction of price, but also the momentum behind the move.

The candlestick chart graphically illustrates the relationship behind the open, high, low, and close by the body - and adds an extra visual edge, due to the way they are drawn.

The candlestick has a wide part, called the "real body." This real body represents the range between the open and close of that day's trading.

When filled in black, the real body means the close was lower than the open.

If the real body is empty, it means the opposite - the close was higher than the open.

Above and below the real body we see the "shadows." We see these as the wicks of the candle (which give them their name), and the shadows actually show the high and the low of the day's trading.

If the upper shadow on the filled-in body is short, it indicates that the open that day was closer to the high of the day. On the other hand, a short upper shadow on a white, or unfilled body shows the close was near the high.

A Visual Aid to Give You an Edge

Candlestick charts should be used rather than traditional bar charts because they give you an extra visual dimension.

Regardless, of whether you are a day trader, position trader, system trader or a trader who likes to make your own trades, there is really nothing to dislike about candlestick charts!

Easy and fun to use, and providing a greater insight into market moves, along with the ability to use in any type of trading, means if you aren’t already using candlestick charting, then its time to start.

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An Introduction to Candlesticks

An Introduction to Candlesticks

An Introduction to Candlesticks
By Diana O.

Candlesticks is a method of charting used to analyze supply and demand, similar to the bar chart used to view price activities. The Candlestick chart also shows the same data as the bar chart except that it focuses on the connection between opening prices and closing prices. The Candlestick method is important for helping investors see prices from a different perspective and many investors even find that they are easier to read.

Why is it called Candlesticks?

The Candlestick Chart is actually the oldest chart type that was used to predict prices. It was first used in the 1700s when the Japanese utilized it to analyze and predict the prices of rice. The chart is composed of white and black candles, usually with 'wicks' found at both ends. How the candlestick looks and what color it contains can indicate several things.

For example, a black body indicates a close that is lower compared to the open within a specific time period. This points to a bearish market. A body that is white or open indicates a close that is higher compared to the open, which points to a bullish market. A vertical line found above or below the candlestick body is referred to as the upper or lower shadow, representing the high and low price extremes for that period.

If you know what you see when you look at charts, you'll find that the Candlestick chart is much more 3-dimensional compared to regular bar charts. To the trained eye of an investor, a Candlestick chart offers more in terms of appeal compared to the standard bar chart. There are four factors that make up a Candlestick chart. These are the open, closing, high and low pricing within a particular time period. For Japanese analysts, open and closing prices are considered the most critical in a given day.

The Japanese have given names to each Candlestick formation. There are many of them and it would be wise to learn and understand them all. Here are some:

White candlestick: occurs when closing prices are higher compared to the open.

Black candlestick: occurs when the opening prices are higher compared to the closing

Shaven Head: a candlestick that does not have an upper shadow

Shaven Bottom: a candlestick that does not have a lower shadow

Doji line: this does not have a candlestick body. You see a horizontal line instead, indicating that the open and closing are close or almost the same.

Spinning tops: appears as small candlesticks and indicates a balance between the bears and the bulls. Spinning tops can appear as black or white.

Shadow and Tail: the shadow refers to the part of trading range found outside the body. A long tail indicates support while a tall shadow shows resistance.

Hammer: this appears as a candlestick (may be black or white) has a small body and lower shadow that is two times the length of the body, with very little or no upper shadow. This candlestick should appear in a downtrend to be called a hammer.

The Morning Star: similar to the island pattern that appears on a bar chart and is considered as a reversal pattern indicating a bullish bottom. This appears as 3 candlesticks with the first one having a black body, the second with a small body with gaps or opens and the third as a white candlestick that moves into the black body during the first period.

The Evening Star: is considered as a reversal pattern indicating a bearish top, also appears as 3 candlesticks. The first candlestick is white and long and the third has a black body that moves into the white candlestick. The one in the middle is the one that forms the star.

Hanging man: has small bodies and long wicks or lower shadows. Considered bearish if they appear after an up trend.

Dark cloud cover: a white candle and a black candle that is considered bearish if it appears during an upward trend.

How can a Candlestick chart help me?

The major advantage of Candlesticks is that it provides investors with an easy-to-read system with which to view any changes that might occur in supply and demand. Simply by using the Candlesticks to perform critical day analysis, investors can find evidence of any trend reversals in time. This serves as an advance warning to investors about how the market will move. Used in combination with other methods and with market indicators, Candlesticks can provide investors with a lot of potential in trading.

Why do I need a Candlestick chart to read prices?

Prices are a product of supply and demand and they are subject to many things aside from prevailing economic conditions. Prices are also affected by many human emotions such as greed, panic, fear, even hysteria. These emotions often cause dramatic change on prices. Besides, many of the movements that occur in the market are not always based on fact but on expectations.

Get ready to pick up what you need to know to learn forex the way the biggest forex traders do. I try to help people understand at http://www.forexlearnguard.com that to succeed in any business you need something else as knowledge that makes creating wealth much easier. Visit http://www.forexlearnguard.com and enjoy our beware center.

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Forex Secret

Forex Secret - Moving Averages As The Basic Indicator At Forex

Forex Secret - Moving Averages As The Basic Indicator At Forex
By Vyacheslav Vasilevich

The given chapter is dedicated to the problem of Moving Averages (MA). It is one of the principal indices at Forex. In their book "Computer analysis of future markets", Ch. Lebo and D. Douglas state that the greatest sums of real money are earned by making use exactly of the MA index. Even taken together, all other technical indices are less helpful. This is true. However, Ch. Lebo and D. Douglas have not mentioned that 19 of 20 traders do lose their game when they mainly use this index (MA).

Here I try to expose the origin of such a high rate of losses and losers (19 of 20 traders!). The losses are caused by a somewhat simplified approach to the utilization of this so important technical index by "classicists" of Forex. The analogous view on MA index is inherent in the up-to-date analysts as well. Further, traders do the same. However, for the latter misunderstanding of the analytical approach to MA results in losses of real money at Forex.

Take a look at the charts submitted by J. Murphy in his book "The technical analysis of future markets" (Part 9). There plots are keep on "migrating" (roaming) from one manual of Forex to another.

Chart 14.1. There is an example of combination of the 10-days simple MA (SMA) with the 40-days one. The reader should pay attention how accurately the tendency in price movement is repeated by the short 10-days MA. The 40-days MA is behind of the price movement somewhat farther. MA value evens up (levels) the spread of prices. At the same time, these MA are always keep on being behind from the market dynamics in time. The 10-days MA is designated as the solid line; the 40-days MA is presented in the form of the dotted line. (For view picture see notes in end of article)

Chart14.2. There is an example of the 20-days simple MA. Traders regard intersections of MA curves by prices as signals for opening the corresponding positions. In the period that corresponds to the chart right border, the price indices are below the MA curve. This indicates that the market is at the stage in decline . One should pay attention to the following fact. The 20-days MA curve evens up the price dynamics. All the same, this 20-days MA curve is keeping behind from the market dynamics in time.

(For view picture see notes in end of article)

According to these pictures, everything is clear - isn't it? That is, at a certain point one must stake on "sell", at another point one must stake on "buy", etc. Probably, looking at this chart, any beginner could think that his account would be doubled after several days of the work at Forex. However, in fact, just 1 of 20 traders does earn his money. At the same time, all traders (19 losers included) make use of MA index in this or that form during their work at Forex.

Hence, one must get to learn how to make use of MA in order to gain profit but not to sustain damages.

First, let us examine the problems concerning MA. One must understand the reasons why the majority of traders lose their money when using MA. After this, one must find the way-out.

The problem #1. Which charts the classicists of Forex do not include into their manuals.

Let us scrutinize the graphs given below. After this, you can clearly understand why 19 of 20 traders leave Forex for good.

Chart 14.3. From March 24 till April 16, 2006, in EUR/USD pair movement the 10th and 40th MA intersected one another 11 times. (For view picture see notes in end of article)

Chart 14.4. From January 13 till February 3, 2006, in USD/JPY pair movement the 10th and 40th MA have 12 times intersected one another. (For view picture see notes in end of article)

Chart 14.5. From February 16 till April 16 of 2006, in GBP/USD pair movement 10th and 40th MA have 13 times intersected one another. (For view picture see notes in end of article)

Chart 14.6. From March 14 till April 7 of 2006, in GBP/USD pair movement 10th and 40th MA have intersected one another 9 times. (For view picture see notes in end of article)

The conclusions are the following.

Here we deal with a flat. In contrast to the trend, in a flat MA don't "obey" the rules submitted in the classical manuals. Rather on the contrary, when a faster MA intersects a slower one, it can be a sign of an imminent reversal. Respectively, a deal must be open in the direction opposite to the MA opening. Such a situation is typical of a trend within the time frame (TF) smaller than a flat within a larger TF.

Conclusions.

· One must not regard MA separately from the flat and trend - how it has been done in all classical manuals of Forex.

· As regards the duration in time, a flat is longer than a trend.

· First of all, you must learn to clearly distinguish the moment of the flat finish (end) from the start of the trend. Only after this you may open a real account at Forex. Otherwise, you will lose your money - as it does happen to 19 of 20 traders.

The problem #2. Within what TF one should work with MA. Some classicists of Forex prefer D1 (DeMark). J. Murphy uses M5 (for the intra-day trading) and up to W1. E. Neiman and B. Williams use D1, W1, etc.

However, these specialists avoid answering the principal question. That is, what a trader must do when MA are reversed towards different directions in various TF.

· For instance, within M5 MA go upwards.

· Within H1 they go downwards.

· On the contrast, MA do come together in the chart H4.

A. Elder has partially explained this problem in his three-shield system. Advantages and drawbacks of this approach are examined in a separate chapter.

The problem #3. There can be trends strong or weak . Let us examine a trend of the simplest kind - i.e., the intra-session one (see the chart on February 13, 2006). To the participants of Masterforex-V Trading Academy, I recommended the following.

a). As regards the European session on February 13, 2006, I advised to make super-short deals on "sale" with GBP/EUR pair.

b). As regards the American session on February 13, 2006, I advised to make super-short deals on "buy" with the same currency pairs (GBP/EUR).

c). As regards the European session on February 14, 2006, I recommended to make a prolonged deal on "sale" (all over the trading session).

d). As regards the American session on February 14, 2006, I advised to make super-short deals on "buy" with the same currency pairs.

In any classical manual of Forex the criteria of the difference between the strong (heavy) or weak (feeble) trends are not pointed out. Consequently, the two advices to a trader can be given.

A). to "allow the profit to come in (to flow)" when the trend is strong (heavy).

B). to open super-short deals to gain the profit of 10-20 points because the currency pair movement is restricted, which is detectable during the very first movements.

This technique, when used in the daily trading in Masterforex-V Trading Academy, gives reasons to doubt the correctness of the statements made by Ch. Lebo and D. Lucas. In their book "The computer analysis of future markets", the authors state that MA indices always indicate the trend direction. However, with MA one cannot estimate the trend strength (the heaviness or weakness of this trend). It is especially important if one estimates the trend strength with the help of MA indices, taken from other systems of Forex technical analysis.

Problem #4. MA index drawbacks exert influence on other technical indicators, based on them (MA). Therefore, such indicator will deceive a trader during trades even more than MA does it.

For instance, there are MACD (Moving Average Convergence/Divergence ), Alligator, Awesome Oscillator, CCI (Commodity Channel Index), Moving Average Envelopes, Moving Average of Oscillator, Bollinger Bands, Stochastic Oscillator, etc. All such indices are based on MA. When developing such indices, the authors issued from MA. Further each of them added to this basis what he liked. It could be the rate of change in the price, the trading volume, the closing price value with respect to the previous data, etc. Who has added what to MA does not make a secret. One can learn it, for instance, from MetaTrader software engineers from MetaQuotes Software Corp.

In this connection, there arise the following questions.

1. What for each author adds to MA a characteristic according to his own choice?

2. Why there are so many indicators and, consequently, their developers? Why an improvement, made by one creator, has not satisfied a subsequent author?

3. What a drawback is inherent in the notion of MA itself - so that they must be infinitely (and to no effect) be improved, being unusable in their original form?

Hence, a large number of professionals waste their time, understanding that the indices available are unusable. You can judge by yourself. Let us put oscillators at the foot (bottom) of the chart. One can pick them out of one's choice - even all of them. In practice, all charts demonstrate the same. That is, each of newer designers has realized the drawbacks in the work of his predecessor. However, an original oscillator, developed by every new specialist, indicates the same data as oscillators developed by a previous author.

Problem #5. According to J. Murphy, the following approach is axiomatic in the framework of the classical Forex (see "Technical analysis of future markets"; Part 9). The point of entering the deal is the crossing of a slower MA by a quicker one. For instance, if MA #10 intersects MA #40 top-down, this corresponds to opening a deal on "sell". I can give thousands of examples when the deal opening in accordance with this formula was too late. This can happen in the cases of the trend strategic/tactical correction - especially under the conditions of strategic reversals. Otherwise, the deal opening according to this formula can be erroneous (fallacious) - in a flat. The above-given charts illustrate some cases when the opening according to this formula is wrong.

Thus, a vicious circle becomes developed. On the one hand, the period length must be taken into account in order to exclude the "market noise" influence. On the other hand, one must consider the delay in MA as compared with real changes in the market. This problem is still unsolved.

· The higher is MA number (100, 200), the weaker is MA reaction to the "market noise". At the same time, the delay in MA during reversals is more considerable.

· The smaller is MA number (5, 10), the more intensive is MA reaction to the "market noise". That is, an ordinary (common) correction can be mistaken for a heavy and rash reversal.

Problem #6. For traders, improvement in MA results in consequences even worse. All theorists and traders acknowledge that MA are being late. However, methods in solving the given problem are imperfect (so to say, "middle-of-the-road"). For instance, instead of simple MA, the following improved versions are submitted:

* Exponential Moving Average;
* Smoothed Moving Average;
* Linear Weighted Moving Average.

There are individuals who prefer to change simple MA into exponential MA, etc. (they consider this to be the means of optimization this index). J. Murphy struck such "admirers" the heaviest blow. In "Technical analysis of future markets" (Part 9), he quoted a certain statistics. These data were initially submitted in the paper "Computers will help you in the game at future markets" by Hockhaimer in YB "Commodities", 1978. There the analysis is given to effectiveness of different ??? (TA) in the period 1970-1976 at various future markets. The conclusion is the following. The simple MA is the most effective.

Ch. Lebo and D. Lucas arrived at the analogous conclusion. These authors admit that there is a seeming (apparent) refinement of weighted- and exponential MA. However, in practice, every test observed or carried out by them indicates decided superiority of simple MA to all others from the viewpoint of gaining profit. According to Ch. Lebo and D. Lucas, the application of exponential MA, as a rule, results in "jerking", too costly for traders. This confirms the authors' opinion. That is, if a method of entering the deal is based on obscure calculations, there are more negative consequences of its application than positive ones. The future trade is rather art than a science. The mathematical refinement of a method does not guarantee profits.

Such conclusions makes a true shock for those who neglect the problem of MA - for those who just prefer to replace simple MA by exponential-, smoothed- and linear-weighted ones. In particular, this concerns E. Neiman. The latter, in "Trader's small encyclopedia", persistently (strongly) recommends to apply the exponential MA (EMA). He states that simple MA to times reacts to one change in the course. Figuratively speaking, the simple MA (SMA) "barks" as a dog. For the first time this happens when a new value is received. For the second time the "barking" is heard when this value is quitted from the calculation of MA. As compared with SMA, EMA reacts to the change in one value of the course just once - i.e., when this value is received. This is why EMA is preferable.

Comments. As the charts given below indicate, MA crosses the price 11 times. However, where did E. Neiman see dogs who cannot "bark" more than once or twice? One can imagine how many traders have lost their deposits due to the recommendations given by E. Neiman .

The charts submitted below confirm my statements. Everybody can compare SMA with EMA in order to independently answer the following question. Is it preferable to apply rather EMA than SMA (as E. Neiman insists)? Or the difference between these indices is minimal? As one can see, analysts of Forex just play with exponential-, smoothed- and linear-weighted MA. In practice, various "improvements" in SMA do not heighten the working trader's profits.

Chart 14.7. EUR/USD pair movement on April 17-24, 2006(For view picture see notes in end of article)

Chart 14.8. EUR/USD pair movement on April 17-24, 2006(For view picture see notes in end of article)

Both J. Murphy and Hockhaimer were perfectly correct in pointing out the difference between SMA and EMA. At the same time, they have not drawn the principal conclusion that one can easily make issuing from the statistics submitted by these authors. That is both types of MA just slightly differ one from another. Besides, the same drawbacks are inherent in the both variants of MA.

· According to J. Murphy, deals must be opened after a slower MA is intersected by a faster one. However, in this case occurs a substantial (time) delay. This is depicted in the above-given charts (the intersection of MA ##10, 40). One can clearly see that MA intersection takes place when almost a half of the path is already passed through.

· According to J. Murphy, a deal must be opened not after the first intersection of MA ##10 and 40 but after the second one (the so-called "optimization"). However, I can give a large number of examples where the 1st intersection yields hundreds point of profit. At the same time, the 2nd intersection occurs in a flat (in its essence, it is attenuation of the previous basic movement). That is, J. Murphy does not recommend opening a deal during this basic intensive movement! Besides, as one can see in these charts, MA 12 times intersect one another. According to J. Murphy, which intersection is the 2nd one?

· How can J. Murphy recommend such "optimization" when it results in the following?

· Table 14.1

The kind of commodity assets

The best combination

The net accumulated profits or damages

The maximum sequence of damages

The total number of deals

The number of profitable deals

The number of deals made at a loss

GBP

3,49

117,482

-7,790

160

68

92

DM

4,40

78,631

-3,909

169

78

91

JPY

4,28

120,899

-4,367

131

74

57

SWISSI

6,50

172,454

-7,467

148

66

82

As one can see, J. Murphy's results after his "optimization" are worse than 50/50. That is 322 deals of 608 are made at a loss.

· J. Murphy made an attempt to artificially combine MA with timing loops (time cycles). For this purpose, he made use of Fibonacci number "mysticism". That is, he chose Fibonacci numbers according to his own tastes. Applying such numbers in some cases, under other conditions he "happily forgot" about them. In this sense, the case of MA ##10 and 40 is typical.

· J. Murphy has not elaborated a universal combination of MA. In each example different combinations of MA are submitted (either 10-40 or 1-21, or 13-34-144, or 4-9-18, etc.).

And what is more, according to J. Murphy, MA duration must be chosen so that it should correspond to the cycles that determine the given market development.

As a trader, I arrive at the distressing conclusions concerning J. Murphy technique of MA application at Forex - as J. Murphy gives examples of currency pairs.

· J. Murphy uses different combinations of MA at the daily trades. However, as a trader, he has not elaborated his own "working" combination of MA.

· Different MA can be required for different charts. J. Murphy clearly garbles historical examples of situations at the market, suitable for various combinations of MA.

· J Murphy himself considers that one can get a reliable prognosis with the help of his charts. The reader can develop his own opinion concerning this statement. Just I wonder, of what kind this "reliable prognosis" can be. Really, a universal technique of giving analysis to the market is not developed. In addition, in different situations different MA are used.

· However, J. Murphy never kept back that he was not a trader but a "technical analyst" and a Professor in New-York Financial Institute. In spring, 1981 the leadership of this institute ask him to organize a course of the technical analysis.

As far as I'm concerned, I made no secret of my attitude towards "analysts". Really, to what the latter can teach a beginner or an experienced trader if such "analyst" cannot work at the stock exchange himself?

As it is evident, an author of detective stories (even the most gifted individual but not a lawyer) will never be invited to lecture in a department of law. At the same time, the analogous situation at Forex is almost a rule. For instance, training courses at Forex Brokers are mainly based on the books by J. Murphy and E. Neiman. I have already exposed mistakes, inaccuracies and drawbacks, inherent in just one chapter (#9) of the book "Technical analysis of future markets" by Murphy. As regards the whole book, the number of mistakes of various types is about several hundreds. All courses of training attached to various Forex Brokers contain those very mistakes. As the result, at least 19 of 20 traders lose their deposits.

However either E. Neiman or J. Murphy and other "analysts" don't do this. Probably, E. Neiman, a leading employee of "UkrSocBank", has no MA working combination of his own. Maybe, he just writes "financial bestsellers". According to Alpina public house, in his books the basic notions and techniques, necessary for the successful trading, are submitted in the form easy of access. This is a point to be considered.

In brief, one can make the following conclusions.

· MA is an important parameter from the viewpoint of giving analysis to Forex market and gaining regular profits there.

· At present, the MA problem presentation technique by "classicists" of Forex has clearly appeared in deadlock. This is why the overwhelming majority of traders lose their money.

· I would like to emphasize the following. Either the numbers of MA, or their modifications (the simple-, exponential-, or linear weighted MA) do not matter. One must clearly distinguish when the work either along - or against MA reversal would be preferable. The reader must open a real account not earlier clearly understanding of the following factors. One must know when to work on the MA reversal and when against it. One must see with which other systems of analysis the technique of MA should be combined - in order to detect long and super-short deals. One must learn the signs of reversal and the trend continuation - as well as correlation between the trends themselves. You see, your chances to get into the company of 19 traders-losers from 20 are considerably prevail the opportunity of being 1 of 20 traders who regularly gains profit at Forex.

Note:

Full text of this article and pictures of examples http://www.masterforex-v.su/001_014.htm

If you wish to be trained on Trading System Masterforex-V - one of new and most effective techniques of trade on Forex in the world visit http://www.masterforex-v.su/

Vyacheslav Vasilevich (Masterforex-V)

Professional Trader from 2000 year.

President of Masterforex-V Trading Academy.

Author of Books:

1. Trade secrets by a professional trader or what B. Williams, A. Elder and J. Schwager not told about Forex to traders.

2. Technical analyses in Trading System MasterForex-V.

3. Entry and Exit Points at Forex Market

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