St ochast ic oscillat or: This is used t o indicat e overbought / oversold condit ions on a scale of 0-100%. The indicat or is based on t he observat ion t hat in a st rong up-t rend, period closing prices t end t o concent rat e in t he higher part of t he period's range. Conversely, as prices fall in a st rong down-t rend, closing prices t end t o be near t he ext reme low of t he period range. St ochast ic calculat ions produce t wo l ines, %K and %D, t hat are used t o indicat e overbought / oversold areas of a chart . Divergence bet ween t he st ochast ic l ines and t he price act ion of t he underlying inst rument gives a powerful t rading signal.
Moving Average Convergence/ Divergence (MACD): This indicat or involves plot t ing t wo moment um l ines. The MACD l ine is t he dif ference bet ween t wo exponent ial moving averages and t he signal or t rigger l ine, which is an exponent ial moving average of t he dif ference. If t he MACD and t rigger l ines cross, t hen t his is t aken as a signal t hat a change in t he t rend is l ikely.
Number theory:
Fibonacci numbers: The Fibonacci number sequence (1, 1, 2, 3, 5, 8, 13, 21, 34 . . . ) is const ruct ed by adding t he f irst t wo numbers t o arrive at t he t hird. The rat io of any number t o t he next larger number is 61. 8%, which is a popular Fibonacci ret racement number. The inverse of 61. 8%, which is 38. 2%,
is also used as a Fibonacci ret racement number (as well as ext ensions of t hat rat io, 161. 8%, 261. 8%). Wave pat t erns and behavior, ident if ied in Forex t rading, correlat e (t o some ext ent ) wit h relat ions wit hin t he Fibonacci series. The t ool is used in t echnical analysis t hat combines various numbers of Fibonacci ret racement s, all of which are drawn f rom dif ferent highs and lows. Fibonacci clust ers are indicat ors which are usually found on t he side of a price chart and look l ike a series of horizont al bars wit h various degrees of shading. Each ret racement level t hat overlaps wit h anot her, makes t he horizont al bar on t he side darker at t hat price level. The most signif icant levels of support and resist ance are found where t he Fibonacci clust er is t he darkest . This t ool helps gauging t he relat ive st rengt h of t he support or resist ance of various price levels in one quick glance. Traders of t en pay close at t ent ion t o t he volume around t he ident if ied levels t o confirm t he st rengt h of t he support / resist ance.
Gann numbers: W. D. Gann was a st ock and a commodit y t rader working in t he '50s, who reput edly made over $50 million in t he market s. He made his fort une using met hods t hat he developed for t rading inst rument s based on relat ionships bet ween price movement and t ime, known as t ime/ price equivalent s. There is no easy explanat ion for Gann's met hods, but in essence he used angles in chart s t o det ermine support and resist ance areas, and t o predict t he t imes of fut ure t rend changes. He also used l ines in chart s t o predict support and resist ance areas.
[ c] Waves
Elliott's wave theory: The El l iot t Wave Theory is an approach t o market analysis t hat is based on repet it ive wave pat t erns and t he Fibonacci number sequence. An ideal El l iot t wave pat t ern shows a f ive-wave advance followed by a t hree-wave decline.
[ d] Gaps
Gaps are spaces lef t on t he bar chart where no t rading has t aken place. Gaps can be creat ed by fact ors such as regular buying or selling pressure, earnings announcement s, a change in an analyst 's out look or any ot her t ype of news release.
An up gap is formed when t he lowest price on a t rading day is higher t han t he highest high of t he previous day. A down gap is formed when t he highest price of t he day is lower t han t he lowest price of t he prior day. An up gap is usually a sign of market st rengt h, while a down gap is a sign of market weakness. A br eakaw ay gap is a price gap t hat forms on t he complet ion of an import ant price pat t ern. It usually signals t he beginning of an import ant price move. A r unaw ay gap is a price gap t hat usually occurs around t he mid-point of an import ant market t rend. For t hat reason, it is also called a m easur i ng gap. An exhaust i on gap is a price gap t hat occurs at t he end of an import ant t rend and signals t hat t he t rend is ending.
[ e] Trends
A t rend refers t o t he direct ion of prices. Rising peaks and t roughs const it ut e an up t rend; falling peaks and t roughs const it ut e a downt rend t hat det ermines t he st eepness of t he current t rend. The breaking of a t rend l ine usually signals a t rend reversal. Horizont al peaks and t roughs charact erize a t rading range.
In general, Charles Dow cat egorized t rends int o 3 cat egories: (a) Bull t rend (up-t rend: a series of highs and lows, where each high is higher t han t he previous one); (b) Bear t rend (down-t rend: a series of highs and lows, where each low is lower t han t he previous one); (c) Treading t rend (horizont al- t rend: a series of highs and lows, where peaks and lows are around t he same as t he previous peaks and lows).
Moving averages are used t o smoot h price informat ion in order t o confirm t rends and support -and-resist ance levels. They are also useful in deciding on a t rading st rat egy, part icularly in fut ures t rading or a market wit h a st rong up or down t rend. Recognizing a t rend may be done using st andard deviat ion, which is a measure of volat il it y. Bollinger Bands, for example, il lust rat e t rends wit h t his approach. When t he market s become more volat ile, t he
bands widen (move furt her away f rom t he average), while during less volat ile periods, t he bands cont ract (move closer t o t he average).
Various Trend lines
Pat t ern recognit ion in Trend l ines, which det ect and draw t he following pat t erns: ascending; descending; symmet rically & ext ended t riangles; wedges; t rend channels.
