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Price indicators

2:03 PM |

           Relative St rength Index (RSI): The RSI measures t he rat io of up-moves t o down-moves and normalizes t he calculat ion, so t hat  t he index is expressed in a range of 0-100. If t he RSI is 70 or great er, t hen t he inst rument is assumed t o be overbought (a sit uat ion in which prices have  risen  more  t han  market expect at ions). An RSI of 30 or less is t aken as a signal t hat t he inst rument may be oversold (a sit uat ion in which prices have fallen more t han  t he  market expect at ions).
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.

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Charts and diagrams

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Forex  chart s are  based  on  market  act ion  involving  price.  Chart s are  maj or t ools in Forex t rading. There are many kinds of chart s, each of which helps t o visually analyze market condit ions, assess and creat e forecast s, and ident if y behavior pat t erns.
Most chart s present t he behavior of currency exchange rat es over t ime. Rat es (prices) are measured on t he vert ical axis and t ime is shown of t he horizont al axis.
Chart s are used by bot h t echnical and fundament al analyst s. The t echnical analyst analyzes t he “ micro” movement s, t rying t o  mat ch  t he  act ual occurrence wit h known pat t erns. The fundament al analyst t ries  t o  f ind correlat ion bet ween t he t rend seen  on  t he  chart  and  “ macro”  event s occurring parallel t o t hat (polit ical and ot hers).
What is an appropriat e t ime scale t o use on a chart ?
It depends on t he t rader’ s st rat egy. The short -range invest or  would probably select a day chart (unit s of hours, minut es), where  t he  medium  and  long- range invest or would use t he weekly or mont hly chart s. High resolut ion chart s (e. g. – minut es and seconds) may show “ noise” , meaning t hat wit h f ine det ails in view, it is somet imes harder t o see t he overall t rend.
The maj or t ypes of chart s:

Poi nt and f i gur e char t s - chart s based on price  wit hout  t ime.  Unlike most  ot her invest ment  chart s,  point  and f igure chart s do not  present  a l inear represent at ion of t ime. Inst ead, t hey show t rends in price.
Increases are represent ed by a rising st ack of Xs, and decreases are represent ed  by  a declining st ack  of  Os.  This t ype  of  chart  is used  t o f il t er out non-significant price movement s, and enables t he t rader t o easily det ermine crit ical support and resist ance levels.  Traders  will place  orders  when  t he  price  moves  beyond  ident if ied  support   / resist ance levels.

Candl est i ck char t

This kind of chart is based on an ancient Japanese met hod. The chart represent s prices at t heir opening, high, low and closing  rat es,  in  a form of candles, f or each t ime unit select ed.
The empt y (t ransparent ) candles show increase, while t he  dark  (full) ones show decrease.
The lengt h of t he body shows t he range bet ween opening and closing, while t he whole candle (including t op and bot t om wicks)  show  t he whole range of t rading prices for t he select ed t ime unit .

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1:57 PM | ,

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