Forex trading is now one of the most sought after jobs for many people of all ages around the world. This is because the major advantages over other capital markets and high yield potential among these advantages is that it is very easy to access the trading platform best forex brokerage firms, with the internet, and therefore, you will see that the currency has a high liquidity, combined with high leverage.

However, brokerage firms and have a good trading platform is only part of what you should do your Forex trading career a winning and profitable. You must have the knowledge and skills necessary to accurately predict what the market will do. One technique used to predict the behavior of the Forex market is that based on Bollinger Bands.

Bollinger Bands This is what is called a bargaining tool and techniques are widely used in capital markets (including Forex) and was created by John Bollinger in the early 1980s. This band technique was developed based on the need for adaptive trading bands and the discovery that market volatility was dynamic, not static, like a thought at this time.

Bollinger Bands consist of a panel of three curves corresponding plucked currency prices. Band in the middle is the size of a medium-term trend and is usually a simple moving average, which is the basis for the upper and lower bands. The interval between the lower and middle band is determined by market volatility, typically the standard deviation of the same data used for the moving average. The default setting is 20 periods and two standard deviations above and below the middle band, of course, this can be customized to fit your needs.

In short, the purpose of Bollinger Bands is to provide a relative definition of high and low prices. By definition, the price is considered high by touching the upper and lower bands when you touch the lower band. Relative definition can be used by Forex traders to compare prices and stock as a useful indicator of the operator when the purpose is to buy and sell decisions strictly.

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The foreign exchange market in general, the broader trends that the stock market as a whole. Why? Equity market, which is really an individual fellowship, governed by the dynamics of certain micro-enterprises. The foreign exchange market, by contrast, is driven by macroeconomic trends can sometimes take years to develop. The best trends are manifested by the lead partner and the currencies of commodity block. Here we see this trend, analyze where and why they occur. Then I also see this type of tide offers the best opportunity for the range for commercial purposes.

Major Currencies

There are only four major currencies currency pairs, which makes it very easy to follow on the market. They are:

• EUR / USD - Euro / U.S. Dollar
• USD / JPY - Dollar Yen U.S. / Japanese
• GBP / USD - British Pound / U.S. Dollar
• USD / CHF - U.S. Dollar / Swiss Franc

It is easy to understand why the United States, European Union and Japan have the money the most active and liquid market in the world, but why the UK? After all, in 2005, India has a larger GDP ($ 3.3 trillion compared to $ 1.7 trillion for the United Kingdom), while Russia's GDP (1.4 million) and the GDP of Brazil (1.5 million) is roughly the total economy of the United Kingdom. Explanation, which applies to many foreign exchange market, it's tradition. English is the first time in the world economy for the development of capital markets and sophisticated at the same time was the British pound and U.S. dollar, which serves as a global reserve currency. Because of this heritage and the supremacy of London as a center of world trade currencies, the pound is still considered one of the major world currencies.

Swiss franc, meanwhile, took its place among the big four known that Swiss neutrality and fiscal prudence. At a time when the Swiss franc is 40% backed by gold, but for many traders in the forex market is still known as "liquid gold". In times of crisis or economic stagflation, traders turn to the Swiss franc as a safe haven.

The main partner of the largest - in fact, most liquid financial instruments in the world, is the EUR / USD. This pair is trading nearly 1 billion per day of notional value from Tokyo to London to New York 24 hours a day, five days a week. The two pieces are the two largest economic entities in the world: United States, with a GDP of U.S. $ 11 billion and the euro area, with a GDP of about $ 10.5 billion.

Although U.S. economic growth was much better than the euro area (3.1% vs.1.6%), the Eurozone economy generates net trade surplus, while the U.S. has a chronic trade deficit. Superior balance sheet of the euro area and the size of the euro area economy has made the euro an attractive alternative reserve currency to the dollar. Thus, central banks, including Russia, Brazil and South Korea have diversified some of their reserves in euros. Obviously, this is a time the diversification process has so many events or changes that affect the currency market. This is why one of the main attributes of a positive trend in the forex market is a long-term.

Long-term observation of the importance
To see the importance of long-term perspective, we look at Figure 1 and Figure 2, using three simple moving average (three SMA) filter.

Figure 1 - EUR / USD exchange rate of March 1 to May 15, 2005. Consider the price action suggests choppiness and the possibility of a downward trend since the beginning of each line of three in each other SMA.

Figure 2 - EUR / USD exchange rate from August 2002 to June 2005. Each bar represents one week and one day (as in Figure 1). And in the long-term chart, a completely different view has emerged - the uptrend remains intact every time down to nothing more than provide a starting point to new heights.

Three-SMA filter is a good way to measure the strength of the trend. The basic premise of this filter is that if the trend of short-term (seven days SMA) and the medium-term trend (20 day SMA) and long-term trend (65 day SMA) are going in one direction, then the trend is strong.

Some merchants may ask why we use the moving average of 65. An honest answer? Do we take this idea to John Carter, a futures trader and educator, as these are the values ​​used. But the importance of the three secondary filters are not in the values ​​of a particular school, but in the interaction of short-term trends, medium and long term provided by the school. While using a reasonable approximation for each of these trends, three SMA filter provide valuable insight.

See the EUR / USD from both points of view of time, we can see how various trends may be a sign. Figure 1 shows the daily changes for the month of March, April and May 2005, showing the jerky movement with a clear downward trend. Figure 2, however, charts the weekly data for 2003, 2004 and 2005 and shows a very different picture. According to Figure 2, the EUR / USD is still in a clear uptrend despite some very strong corrections along the way.

Warren Buffett, the investor famously known for trading long-term trend, has been widely criticized for holding a long position on EUR / USD has suffered losses along the way. Looking to the creation of Figure 2, however, it becomes much clearer why Buffet may have the last word.

Currency Block Commodity

The three commodity currencies higher liquidity in the forex market is the USD / CAD, AUD / USD and NZD / USD. Canadian dollar, known as the "loonie", the Australian dollar as the "Aussie" and the New Zealand dollar as a "kiwi". The three countries are commodity exporters and extraordinarily strong tendency often in conjunction with the application of each of its major exports.

For example, see Figure 3 showing the relationship between the Canadian dollar and oil prices. Canada is the largest exporter of oil to the United States and nearly 10% of Canada's GDP includes the areas of energy exploration. USD / CAD trades inversely, the strong Canadian dollar so that creates a downtrend in the pair.

Figure 3 - This table shows the relationship between the Canadian dollar and oil prices. The economy of Canada is a rich source of oil reserves. The graph shows that oil price increases, it becomes more affordable for people who have dollars to buy Canadian dollars.

Although Australia does not have a lot of oil reserves, the country is very rich source of precious metals and is the largest exporter of gold the second largest in the world. In Figure 4 we can see the relationship between the Australian dollar and gold.

Figure 4 - The graphic aspect of the relationship between Australia and the gold price (U.S. dollars). Notice how the rise of gold from December 2002 to November 2004, coinciding with a strong upward trend in Australian dollars.

The Crosses are The Best for The Range

Unlike Major League Baseball and the currencies of commodity block, offering traders the opportunity of the strongest trend and more, which shows a cross currency swap is the best jump. In Forex, the cross is defined as the currency pair that does not have the dollar as part of the couple. EUR / CHF is a cross, and perhaps best known for the range of commercial partners. One reason, of course, there is little difference between the growth rate of the European Union and Switzerland. The two areas of current account surpluses and stick to a prudent fiscal policy.

A strategy for operators is to determine the parameter range of coverage for the spouse, divide the parameter with the center line and just below the middle of buying and selling there. Classification is determined by the parameters of high and low prices fluctuate during the given period. For example, the EUR / CHF, traders can go, for the period May 2004 to April 2005, set at the 1, 5550 1.5050 top and bottom of the range of 1.5300 to the axis of the delineation of areas of buying and selling. (See Figure 5).

Figure 5 - This chart EUR / CHF (May 2004-April 2005), with 1.5550 as the upper and lower range of 1.5050 and 1.5300 as the midline. A comprehensive strategy trading involves the sale in the mean and median purchase below.

Remember range traders are agnostic about the address. They want to sell under relatively overbought and oversold conditions on purchase.

Cross currency is so attractive to the time range of strategies as they represent the two cultures and economies of these countries, the imbalances between currencies, as it often returns to equilibrium. It's hard to imagine, for example, that the Swiss will go into depression, while the rest of Europe is growing briskly. The same tendency toward equilibrium, however, can not say that the share of a similar nature. It is easy to imagine how, for example, General Motors could go bankrupt, even though Ford and Chrysler continue to do business. Because currencies represent macroeconomic forces that are not vulnerable to risks that occur at the micro level, as stocks of individual companies. The currency is because it is safer from trade.

However, the risk is present in all the speculation, and the merchant has no pair trading range without a stop loss. A reasonable strategy is to use a stop in half the total amplitude range. In the case of the range of CAD / CHF is defined in Figure 5, stops above the seeds 250 below top and bottom 250. In other words, if the pair reached 1.5800 1.4800 or, the merchant must be stopped outside the store because of the high probability of damage.

Interest Rates - Final Part
While the USD / CHF has a relatively narrow range of 500 pips in recent years is shown in Figure 5, a pair like GBP / JPY has a much wider range in 1800 nuggets, shown in Figure 6. Interest rates are the reason why there is a difference.

The interest rate differential between the two countries affecting trade in the range of its currency pairs. For the period shown in Figure 5, the Swiss interest rate by 75 basis points (bp) and the rate of the euro area is 200 basis points, creating a spread of only 125 points basis. However, for the period represented in Figure 6, however, interest rates in the UK is 475 basis points, while in Japan - which is held by deflation - 0 bps rate, 475 basis points overcome the difference between the two countries. The golden rule in the Forex is a differential interest rates higher, the more stable partner.

Figure 6 - This chart of GBP / JPY (December 2003-November 2004). Consider the pair reach almost 1800 pips!

To further demonstrate the relationship between trade and the interest rate, the following is a table of different crosses, their interest rate spreads and the maximum pip movement up and down during the period May 2004 to May 2005.

Currency Pair	Central Bank Rates (in basis points)	Interest Rate Spread (in basis points)	12-Month TradingRange (in pips)
AUD/JPY	AUD - 550  / JPY - 0	550	1000
GBP/JPY	GBP - 475 /  JPY - 0	475	1600
GBP/CHF	GBP - 475 / CHF - 75	400	1950
EUR/GBP	EUR - 200 / GBP - 475	275	550
EUR/JPY	EUR - 200 / JPY - 0	200	1150
EUR/CHF	EUR - 200 / CHF - 75	125	603
CHF/JPY	CHF - 75 / JPY - 0	75	650

Although the relationship is not perfect, is certainly big enough. Notice how the couple with a wider interest rate spreads typically trade in a wider range. Therefore, when reviewing the strategy in the range of forex trading, traders should be aware of differences in volatility and interest adjustments. Without taking into account the interest rate differential can change the range of ideas to lose potentially valuable proposals.

The forex market is very flexible, adaptable to both trend and range traders, but as with any successful business, the right knowledge is the key.

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You'll love this lesson. Using pivot points as a trading strategy has been around a long time and was originally used by floor traders. This is a fun and easy way for merchants floor to get an idea of ​​where the market is heading during the day, with only a simple calculation.

The pivot point is the speed at which changes in market direction for the day. Using some simple arithmetic and the previous days high, low and close, a number of perspectives. These points can be critical support and resistance. Pivot levels level support and resistance calculated from what are collectively known as pivot levels.

Every day, the market must follow the fence open, high, low and to date (in some markets like forex are 24 hours but generally use 17 hours EST on open and closed). This information basically contains all the information needed to use pivot points.

The reason pivot points are so popular is that they are predictive rather than delay. It uses information from the previous day to calculate potential turning points for the day is going to trade (today).

Because many traders follow pivot points you will often find that the market reacts at these levels. It gives you the opportunity to negotiate.

If you prefer single axis shows the formula used is:

Resistance 3 = High + 2 * (Pivot - Low)
Resistance 2 = Pivot + (R1 - S1)
Resistance 1 = 2 * Pivot - Low
Pivot Point = (High + Low + Close) / 3
Support 1 = 2 * Pivot - High
Support 2 = Pivot - (R1 - S1)
Support 3 = Low - 2 * (High - Pivot) As you can see from the above formula, just by having the previous days high, low and close you eventually finish with 7 points, 3 resistance levels, 3 levels support and the pivot points real.

If the market opens above the pivot point, then through the day is long positions. If the market opens below the pivot point, then through the day is short for retailers.

The three pivot points are the most important R1, S1 and the actual pivot point.

The general idea behind the pivot point of negotiation to find a change or a break of R1 or S1. When the market reaches R2, R3 or S2, S3 the market already overbought or oversold and these levels should be used to leave the place of entry.

Ideally, the entire market opening above the pivot level and then slightly since then to R1 and R2. You go to a break of R1 with the aim of R2 and if the market is almost half is very strong in the R2 and R3 stations with the rest of his position.

Unfortunately life is not that simple and we must deal with each trading day the best way possible. I chose at random the day of the week and what follows are some ideas on how you can be traded that day with the pivot points.

On August 12, 04 Euro / Dollar (EUR / USD) as follows:
High - 1.2297
Low - 1.2213
Close - 1.2249

This gives us:

Resistance 3 = 1.2377
Resistance 2 = 1.2337
Resistance 1 = 1.2293
Pivot Point = 1.2253
A = 1.2209 support
Support 2 = 1.2169
Support 3 = 1.2125

A glance at the map below 5 minutes

The green line is the pivot point. The blue lines are resistance levels R1, R2 and R3. The red lines are support levels S1, S2 and S3.

There are many ways to trade today with the pivot points, but I will walk through some of them and explain why it is not good in certain situations and why some are bad.

Breakout Trade

In the early days we were at the pivot point, so our tendency is for short operations. Channel formed so you would be out of the channel, preferably downward. In this trade must sell entry order just below the bottom line of canal with a stop order just above the upper channel line and the goal of S1. The problem today is that, S1 was very close to the breakout level and there is enough meat in the trade (13 pips). This is a good entry technique for you. This does not correspond to these days, does not mean it does not come the next day.

Decrease in trade

This is one of my favorite game. The market through S1 and then deleted. A control input is placed below support, which in this case is the last low before the withdrawal. A stop is placed above the back (the most recent high - high) and the target set for S2. The problem once again, that day is that the target of S2 is closed, and the market did not support previous, which tells us that the market sentiment began to change.

Overcoming resistance

As the day progresses, the market began to return to S1 and formed a channel (congestion area). This is another good game to trade. An input command is placed just above the upper duct line, with stops just below the bottom line of the channel and the target will be the first pivot axis. If trade in more than one position, then cover with half of its market position is close to the pivot axis, tighten the market action from the top, then look at this level. As it happened, the market never stopped and the second goal became R1. Also be obtained easily and closes the rest position to this level.

Advanced

As I mentioned earlier, there are many ways to trade with pivot points. A more sophisticated method is the use of a cross of two moving averages as a confirmation of the break. You can even use a combination of indicators that will help you make the decision. Perhaps the crossing of two ways, but also MACD must be in buying mode. Waste time with some of your favorite indicators but remember that the signal is the rest of the confirmation of the level and the only indicator.

Even in models around pivot levels or failures but that's not the point of this lesson. I just want to introduce another possible way to negotiate.

Happy Trading!

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As we learned in the last section, the best trading opportunities present themselves just after a breakthrough in price consolidation.

Not every consolidation pattern; however, is tradable. There are additional patterns, which significantly increase the odds of the trade following through in the desired direction.

The tools, which we present, are:

1. support/resistance
2. trends
3. moving averages.

Support and Resistance

Support and resistance are general price areas that have halted the movement of stock in the past.

Support lines are horizontal lines that correspond with an area where stock previously bounced.

Resistance lines are horizontal lines corresponding with an area where stock resisted moving through.

Support and resistance lines are used to help access how much the stock price will remove before it is halted.

There are two main types of support and resistance;

1. Major price support/resistance
2. Minor price support/resistance

Major Price Support/Resistance

Major Price Support is an artificial horizontal line representing an area where a stocks downward movement was halted to give way to a new upward movement (Figure 16).

Figure 16

Therefore, the price level is supporting the price of the stock.

Similarly, Major Price Resistance is an artificial horizontal line representing an area where a stocks u ward movement was halted to give way to a new downward movement.

Therefore, the price level is resisting the price of the stock.

When considering a stock as a trading opportunity it is important to note the location of the nearest support and resistance levels.

Stocks near areas of support make for better buy opportunities and stocks near areas of resistance make for better short opportunities.

In the same way, the trader should be more cautious about shorting stock above areas of support, and buying stock near areas of resistance.

Minor Price Support/Resistance

Minor Price Support is an artificial horizontal line representing an area, which previously served as price resistance, but has now transformed to price support ( Figure 17).

Likewise, Minor Price Resistance is an artificial horizontal line representing an area, which previously served as price support, and has now transformed to price resistance (Figure 18).

Figure 17

Figure 18

When considering a stock as a trading opportunity it is important to note the location of the nearest support and resistance levels.

Stocks near areas of support make for better buy opportunities and stocks near areas of resistance make for better short opportunities.

In the same way, the trader should be more cautious about shorting stock above areas of support, and buying stock near areas of resistance.

Trends

Figure 20

Every stock is in one of three states (Figure 20):

1. Up Trend
2. Down Trend
3. Sideways Trend

An Up Trend is defined by a series of higher highs and higher lows.

A Down Trend is defined by a series of lower highs followed by lower lows.

A Sideways Trend is defined by a series of relatively equal highs and lows.

Even the strongest stocks will need a period of rest through a pullback in price or a period of marking time with little to no price movement.

A strong stock will often pull back in price as short to medium term traders take their profits off the table, and in the process, increase selling pressure, which will temporarily push the stock lower.

A strong stock, after rest will often resume its rally after these slight pullbacks.

The trader has better odds in his favor by playing the stock in the direction of the trend.

For example, stocks in and up trend can be bought, and stocks in a downtrend can be shorted (Figures 21 & 22).

Figure 21

Figure 22

A stock in a sideways pattern can be either bought our shorted if the stock ison strong price support or resistance.

In otherwise, the trader should enter long positions only on up trending stocks that have pulled back for rest ready to resume the rally.

Likewise, the trader should enter short positions on down trending stocks that have pulled back for rest ready to resume the decline.

Moving Averages

The most basic form of moving average, and the one we recommend to all our traders is called the simple moving average.

The simple moving average is the average of closing prices for all price points used.

For example, the simple 10 moving average would be defined as follows:

10MA = (P1 + P2 + P3 + P4 + P5 + P6 + P7 + P8 + P9 + P10) / 10

Where P1 = most recent price, P2 = second most recent price and so on

The term "moving" is used because, as the newest data point is added to the moving average, the oldest data point is dropped.

As a result, the average is always moving as the newest data is added. Moving averages can be used as support and resistance levels.

Stocks tend to rebound off of moving averages much in the same way that they rebound off major and minor support and resistance lines.

A moving average can be plotted using any period; however, the periods that seem to provide the strongest support and resistance for short term trading are the 10MA, 20MA, 50 MA, 100MA and 200MA.

Figure 23

Figure 24

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Throw a baseball straight up into air. As the ball approaches the top of its projectile path it will decelerate to a speed of zero, and then reverse downward picking up speed as it approaches the ground.

Now imagine yourself drilling into a piece of wood. You suddenly hit a hard spot in the wood at which time bear down with all of your might to overcome the temporary resistance created by the knot in the wood.

When you penetrate the knot you surge forward and quickly poke through to the other side. These are two analogies to help explain the patterns of stocks as they transition between one move and the next move.

When a stock is completing a move, it experiences a period of deceleration, which is referred to by chartist as price consolidation.

Consolidation is one of the most important signals that a stock is about to begin a new move.

The move can be a continuation in the same direction, or it can be a reversal in the opposite direction.

The area of consolidation represents a battle zone where the bears are at war with the bulls.

The outcome of the battle often defines the direction of the next move.

As short-term traders, it is important to identify these areas of consolidation and enter a trade just as the new move is beginning.

During the consolidation period or 'battle zone', traders, both long and short are patiently waiting on the sidelines watching to learn the outcome of the battle.

As these winners emerge, there is often a scramble of traders jumping in with the winning team.

The candlestick patterns gives the trader excellent clues on when this move is about to take place, and helps the trader time his entry so that he can get in at the very beginning.

There are four different consolidation patterns experienced by stocks, they are:

1. Bearish Continuation
2. Bullish Continuation
3. Bearish Reversal
4. Bullish Reversal.

The Bearish Continuation Consolidation Pattern

Several strong bearish candlesticks precede the Bearish Continuation pattern where the bears are clearly in control (Figure 12).

Figure 12

The bears and bulls then begin to battle by pushing the stock up and down in price in a tightly formed consolidation zone.

The narrowing size of the candlesticks toward a line of support indicates that the bears are winning the battle. The bulls finally weaken and allow the bears to penetrate the line of support, at which time the bears quickly conquer new territory by taking the stock to lower prices.

By recognizing the consolidation pattern the trader is able to short the stock just after the stock breaks the line of support, and profit from the sharp move downward.

The cause of the sharp sell off is fueled by the emotions of the traders watching for the outcome of the battle. Traders who bought the stock in the area of consolidation in hope of a rally off of support, are now scrambling to exit their losing positions.

Traders who are short from the period before the area of consolidation are realizing that their original entries were correct and are adding to their winning positions.

The Bullish Reversal Consolidation Pattern

Several strong bearish candlesticks precede the Bullish Reversal Continuation pattern where the bears are clearly in control (Figure 13).

Figure 13

The bears and bulls then begin to battle by pushing the stock up and down in price in a tightly formed consolidation zone.

The narrowing size of the candlesticks toward a line against upward resistance indicating that the bulls are winning territory from the bears.

The bears finally weaken and allow the bulls to penetrate the line of resistance, at which time the bulls quickly conquer new territory by taking the stock to higher prices.

By recognizing the consolidation pattern the trader is able to buy the stock just after the stock breaks the line of resistance, and profit from the sharp move upward.

The cause of the rally is fueled by the emotions of the traders watching for the outcome of the battle.

Additional traders who jump in to buy the stock now that its strength has been confirmed fuel the sharp upward move.

Traders who are currently short the stock in the area of consolidation waiting in hope of a breakdown, are now scrambling to cover their short positions.

This buying action also fuels the fire pushing the stock to higher prices.

The Bearish Reversal Consolidation Pattern

Several strong bullish candlesticks precede the Bearish Reversal Continuation pattern where the bulls are clearly in control (Figure 14).

Figure 14

The bears and bulls then begin to battle by pushing the stock up and down in price in a tightly formed consolidation zone.

The narrowing size of the candlesticks toward a line of support indicates that the bears are winning the battle.

The bulls finally weaken and allow the bears to penetrate through the line of support, at which time the bears quickly conquer new territory by taking the stock to lower prices.

By recognizing the consolidation pattern the trader is able to sell short the stock just after the stock breaks the line of support, and profit from the sharp spike downward.

Additional traders who jump in to short the stock now that its weakness has been confirmed fuel the sharp sell off.

Traders, who are currently long the stock in the area of consolidation waiting in hope of a breakdown, are now scrambling to sell their long positions.

This selling action also fuels the fire pushing the stock to lower prices.

The Bullish Continuation Consolidation Pattern

Several strong bullish candlesticks precede the Bullish Continuation Consolidation Pattern where the bulls are clearly in control (Figure 15).

Figure 15

The bears and bulls then begin to battle by pushing the stock up and down in price in a tightly formed consolidation zone.

The narrowing size of the candlesticks toward a line of resistance indicates that the bulls are winning the battle.

The bears finally weaken and allow the bulls to penetrate the line of resistance, at which time the bulls quickly conquer new territory by taking the stock to higher prices.

By recognizing the consolidation pattern the trader is able to buy the stock just after the stock breaks the line of resistance, and profit from the sharp move upward.

The cause of the sharp sell off is fueled by the emotions of the traders watching for the outcome of the battle.

Traders, who shorted the stock in the area of consolidation in hope of a sell off in the area of consolidation, are now scrambling to exit their losing positions.

Traders who are long from the period before the area of consolidation are realizing that their original entries were correct and are adding to their winning positions.

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The Western bar chart is made up of four parts components, open, high, low, and close. The vertical bar depicts the high and low of the session, while the left horizontal line represents the open and the right horizontal line represents the close.




Figure 1

The Japanese Candlestick Line (Figure 2) uses the same data (open, high, low, and close) to create a much more visual graphic to depict what is going on with the stock. The thick part of the candlestick line is called the real body. It represents the range between the session’s opening and closing prices. If the real body is red, it means that the close of the session was lower than the open. If the real body is green, it means that the close was higher than the open. The lines above and below the body are the shadows. The shadows represent the session’s price extremes. The shadow above the real body is called the upper shadow and the shadow below the real body is called the lower shadow. The top of the upper shadow is the high of the day, and the bottom of the lower shadow is the low of the day.




Figure 2

One of the main differences between the Western Line and the Japanese Candlestick line is the relationship between open and closing prices. The Westerner places the greatest importance on the closing price of a stock in relation to the prior periods close. The Japanese place the highest importance on the close as it relates to the open of the same day. You can see why the Candlestick Line and its highly graphical representation of the open to close relationship is such an indispensable tool for the Japanese trader. To illustrate the difference, compare the daily chart plotted with Western Lines (Figure 3) with the exact same chart plotted with Japanese Candlestick lines (Figure 4). In the Western bar chart as with the Japanese Candlestick chart, it is easy to interpret the overall trend of the stock, but note how much easier it is to interpret change in sentiment on a day to day basis by viewing the change in real body color in the Japanese Candlestick chart.




Figure 3

Figure 4

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There are two types of ways to analysis the price of a stock, fundamental analysis, and technical analysis. Fundamental analysis is used to gauge the price of a stock based on the fundamental attributes of the stock, such as price/earnings ratio, Return on invest, and associated economic statistics.

Technical analysis deals more with the psychological component of trading a stock, and is influenced for the most part on emotionalism.

The technical analyst is seeking to answer the question "how are other traders viewing this stock, and how will that effect the price in the immediate future".

As you will see, the candlestick chart is the most effective way to gauge the sentiments of other traders.

The Japanese were the first to use technical analysis to trade one of the world's first rice futures markets in the 1600s. A Japanese man by the name of Homma who traded the futures markets in the 1700s discovered that although there was link between supply and demand of the rice, the markets were also strongly influenced by the emotions of the traders.

Homma realized that he could benefit from understanding the emotions to help predict the future prices. He understood that there could be a vast difference between value and price of rice.

This difference between value and price is as valid today with stocks, as it was with rice in Japan centuries ago.

The principles established by Homma in measuring market emotions in a stock are the basis for the Candlestick Chart analysis, which we will present in this seminar.

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In the 1930s, Ralph Nelson Elliott, a corporate accountant by profession, studied price movements in the financial markets and observed that certain patterns repeat themselves. He offered proof of his discovery by making astonishingly accurate stock market forecasts. What appears random and unrelated, Elliott said, will actually trace out a recognizable pattern once you learn what to look for. Elliott called his discovery "The Elliott Wave Principle," and its implications were huge. He had identified the common link that drives the trends in human affairs, from financial markets to fashion, from politics to popular culture.

Robert Prechter, Jr., president of Elliott Wave International, resurrected the Wave Principle from near obscurity in 1976 when he discovered the complete body of R.N. Elliott's work in the New York Library. Robert Prechter, Jr. and A.J. Frost published Elliott Wave Principle in 1978. The book received enthusiastic reviews and became a Wall Street bestseller. In Elliott Wave Principle, Prechter and Frost's forecast called for a roaring bull market in the 1980s, to be followed by a record bear market. Needless to say, knowledge of the Wave Principle among private and professional investors grew dramatically in the 1980s.

When investors and traders first discover the Elliott Wave Principle, there are several reactions:

• Disbelief – that markets are patterned and largely predictable by technical analysis alone
• Joyous "irrational exuberance" – at having found a "crystal ball" to foretell the future
• And finally the correct, and useful response – "Wow, here is a valuable new tool I should learn to use."

Just like any system or structure found in nature, the closer you look at wave patterns, the more structured complexity you see. It is structured, because nature’s patterns build on themselves, creating similar forms at progressively larger sizes. You can see these fractal patterns in botany, geography, physiology, and the things humans create, like roads, residential subdivisions… and – as recent discoveries have confirmed – in market prices.

Natural systems, including Elliott wave patterns in market charts, "grow" through time, and their forms are defined by interruptions to that growth.

Here's what is meant by that. When your hands formed in the womb, they first looked like round paddles growing equally in all directions. Then, in the places between your fingers, cells ceased growing or died, and growth was directed to the five digits. This structured progress and regress is essential to all forms of growth. That this "punctuated growth" appears in market data is only natural – as Robert Prechter, Jr., the world's foremost Elliott wave expert and president of Elliott Wave International, says, "Everything that thrives must have setbacks."

The first step in Elliott wave analysis is identifying patterns in market prices. At their core, wave patterns are simple; there are only two of them: "impulse waves" and "corrective waves."

Impulse waves are composed of five sub-waves and move in the same direction as the trend of the next larger size (labeled as 1, 2, 3, 4, 5). Impulse waves are called so because they powerfully impel the market.

A corrective wave follows, composed of three sub-waves, and it moves against the trend of the next larger size (labeled as a, b, c). Corrective waves accomplish only a partial retracement, or "correction," of the progress achieved by any preceding impulse wave.

As the figure to the right shows, one complete Elliott wave consists of eight waves and two phases: five-wave impulse phase, whose sub-waves are denoted by numbers, and the three-wave corrective phase, whose sub-waves are denoted by letters.

What R.N. Elliott set out to describe using the Elliott Wave Principle was how the market actually behaves. There are a number of specific variations on the underlying theme, which Elliott meticulously described and illustrated. He also noted the important fact that each pattern has identifiable requirements as well as tendencies. From these observations, he was able to formulate numerous rules and guidelines for proper wave identification. A thorough knowledge of such details is necessary to understand what the markets can do, and at least as important, what it does not do.

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The trendline. A trendline is a main initial element for the price chart analysis. While the market moves in any direction not along a straight line but along a zigzag, the mutual placement of upper and bottom points of those zigzags permits to plot a line connecting the significant highs (peaks) or the significant lows (troughs) of an appropriate zigzag using technical tools of the computer program.

To draw a trendline only two points are necessary and the third one is the contact point confirmation. On a bullish trend chart it should be drawn using troughs, on a bearish using peaks. The trendline and a line which is about parallel to it and drawn on the opposite side (through peaks on a bullish trend and through troughs on a bearish) form the trade channel. Both lines are then channel's borders.

Lines of support and resistance. The upper and the bottom borders of trade channels are called accordingly support and resistance lines. The peaks represent the price levels at which the selling pressure exceeds the buying pressure. They are known as resistance levels. The troughs, on the other hand, represent the levels at which the selling pressure succumbs to the buying pressure. They are called support levels. In an uptrend, the consecutive support and resistance levels must exceed each other respectively. The reverse is true in a downtrend. Although minor exceptions are acceptable, these failures should be considered as warning signals for trend changing.

The significance of trends is a function of time and volume. The longer the prices bounce off the support and resistance levels, the more significant the trend becomes. Trading volume is also very important, especially at the critical support and resistance levels. When the currency bounces off these levels under heavy volume, the significance of the trend increases.

The importance of support and resistance levels goes beyond their original functions. If these levels are convincingly penetrated, they tend to turn into just the opposite. A firm support level, once it is penetrated on heavy volume, will likely turn into a strong resistance level. Conversely, a strong resistance turns into a firm support after being penetrated. In general, to evaluate the reliability (that is the possibility of a break) of the trade channel borders taking a decision to close or to save an existing position one should govern himself with following rules:

1. A channel is the more reliable the longer it exists. Hence, the solidity of very old channels (e.g. existing more than 1 year) decreased sharply.
2. A channel is the more reliable the more is his width.
3. The resistance may be broken if it is bounced on the background of a growing volume.
4. A steep channel is less reliable in compare to a gentle one.
5. The support may be broken independent on the volume.

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Learning the basic skills in forex, such as how to read forex charts, is really important.

This is because once you have this vital skill under your belt, it will be a lot easier and quicker when the time comes for you to learn and practice an actual forex trading system.

By the time you finish this article, you'll learn how to read forex charts, as well as know the pitfalls that can occur when reading them, especially if you haven't traded forex before.

Firstly, let's revise the basics of a forex trading as this relates directly to how to reade forex charts.

Each currency pair is always quoted in the same way. For example, the EURUSD currency pair is always as EURUSD, with the EUR being the base currency, and the USD being the terms currency, not the other way round with the USD first. Therefore if the chart of the EURUSD shows that the current price is fluctuating around 1.2155, this means that 1 EURO will buy around 1.2155 US dollars.

And your trade size (face value) is the amount of base currency that you're trading. In this example, if you want to buy 100 000 EURUSD, you're buying 100 000 EUROs.

Now let's have a look at the 5 important steps on how to read a forex chart:

1. If you buy the currency pair, that is, you're long the position, realise that you're looking for the chart of that currency pair to go up, to make a profit on the trade. That is, you want the base currency to strengthen against the terms currency. On the other hand if you sell the currency pair to short the position, then you're looking for the chart of that currency pair to go down, to make a profit. That is, you want the base currency to weaken against the terms currency. Pretty simple so far.
2. Always check the time frame displayed. Many trading systems will use multiple time frames to determine the entry of a trade. For example, a system may use a 4 hour and a 30 minute chart to determine the overall trend of the currency pair by using indicators such as MACD, momentum, or support and resistance lines, and then a 5 minute chart to look for a rise from a temporary dip to determine the actual entry. So ensure that the chart you're looking at has the correct time frame for your analysis. The best way to do this is to set up your charts with the correct time frames and indicators on them for the system you're trading, and to save and reuse this layout.
3. On most forex charts, it is the BID price rather than the ask price that's displayed on the chart. Remember that a price is always quoted with a bid and an ask (or offer). For example, the current price of EURUSD may be 1.2055 bid and 1.2058 ask (or offer). When you buy, you buy at the ask, which is the higher of the 2 prices in the spread, and when you sell, you sell at the bid, which is the lower of the two prices. If you use the chart price to determine an entry or exit, realise that when you place an order to sell when the chart price is say 1.330, then this is the price that you'll sell at assuming no slippage. If on the other hand, you place an order to buy when the chart price is the same price, then you'll actually buy at 1.3333. A forex system will often determine whether your orders will be placed simply according to the chart price or whether you need to add a buffer when buying or selling. Also note that on many platforms, when you're placing stop orders (to buy if the price rises above a certain price, or sell when the price falls below a certain price) you can select either "stop if bid" or "stop if offered".
4. Realise that the times shown on the bottom of forex charts are set to the particular time zone that the forex provider's charts are set to, be it GMT, New York time, or other time zones. It's handy to have a world clock available on your computer desktop in order to convert the different time zones. This is important when you're trading major economic announcements. You'll need to convert the time of an announcement to your local time, and the chart time, so you'll know when the announcement is going to happen, and therefore when you need to trade.
5. Finally, check whether the times on your forex charts corresponds to when the candle opens or when the candle closes. Your charting software may be different to someone else's in this way. The reason I mention this, is that if you need to trade major economic announcements, either by entering a trade based on the movements that happen after the announcement, or to exit a trade before the announcement in avoid getting stopped out during it, then you need to be precise (to the minute!) as these trades are performed according to what happens at the 1 minute immediately after the announcement, not the candle afterwards!

   So there you have it.

You now have the 5 essential keys to how to properly read forex charts, which will help you to avoid the common mistakes which many forex beginners make when looking at charts, and which will speed up your progress when you're looking at forex charting packages, and forex trading systems that you want to trade!

Now that you know this, practice looking at forex charts with each of these 5 points in mind.

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It was mentioned in a past article that Fibonacci forex trading is the basis of many forex trading systems used around the world by profitable forex traders. These systems are all based on the famous Fibonacci ratios (.236, .50, .382, .618, etc.) and each of them can specialize in a particular ratio along with other minor indicators in order to make the pinpointing of the entry and exit levels as accurate and profitable as possible.

One of the widely used Fibonacci ratios is the 0.382 ratio. As it can be easily seen on any forex chart, currency prices are continually changing and they follow an oscillatory pattern with peaks and valleys. The limit of the peak is usually called a resistance level while the valley is usually called a support.

In order to find the 0.382 ratio level what you do is, first; measure the size of the drop or rise over your time of interest. Once you have that value you multiply this by 0.382. Now depending on what you are looking at, a rise or a drop on the price of the particular "currency pair" you are trading, you will add the last value you calculated to the total drop or subtract the value from the total rise.

These operations will give you the 0.382 Fibonacci ratio level, either for a rise or a drop on the chart you are analyzing. Once you have the value you can then start planning the strategy you will follow in order to make a high probability profit from this valuable information. For the 0.382 ratio level calculated for a recent rise in the "currency pair" exchange price, your calculated level will be a highly probable support and for the case of a level calculated for a recent drop of the prices your level will be a highly probable resistance.

Knowing this ahead of the market and having the proper secondary indicators, will give you a huge advantage over most forex traders, and that's something any trader would like they could count on. That's why Fibonacci trading is so widely accepted over the world, and of course, why it's so profitable and successful.

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It is useful to have a map and be able to see where the price is relative to previous market action. This way we can see how is the sentiment of traders and investors at any given moment, it also gives us a general idea of where the market is heading during the day. This information can help us decide which way to trade. Pivot points, a technique developed by floor traders, help us see where the price is relative to previous market action. As a definition, a pivot point is a turning point or condition. The same applies to the Forex market, the pivot point is a level in which the sentiment of the market changes from "bull" to "bear" or vice versa. If the market breaks this level up, then the sentiment is said to be a bull market and it is likely to continue its way up, on the other hand, if the market breaks this level down, then the sentiment is bear, and it is expected to continue its way down. Also at this level, the market is expected to have some kind of support/resistance, and if price can't break the pivot point, a possible bounce from it is plausible. Pivot points work best on highly liquid markets, like the spot currency market, but they can also be used in other markets as well.

Pivot Points

In a few words, pivot point is a level in which the sentiment of traders and investors changes from bull to bear or vice versa.

Why PP work?

They work simply because many individual traders and investors use and trust them, as well as bank and institutional traders. It is known to every trader that the pivot point is an important measure of strength and weakness of any market.

Calculating Pivot Points

There are several ways to arrive to the Pivot point. The method we found to have the most accurate results is calculated by taking the average of the high, low and close of a previous period (or session).

Pivot point (PP) = (High + Low + Close) / 3

Take for instance the following EUR/USD information from the previous session:

Open : 1.2386
High : 1.2474
Low  : 1.2376
Close: 1.2458

The PP would be,

PP = (1.2474 + 1.2376 + 1.2458) / 3 = 1.2439

What does this number tell us?

It simply tells us that if the market is trading above 1.2439, Bulls are winning the battle pushing the prices higher. And if the market is trading below this 1.2439 the bears are winning the battle pulling prices lower. On both cases this condition is likely to sustain until the next session. Since the Forex market is a 24hr market (no close or open from day to day) there is a eternal battle on deciding at white time we should take the open, close, high and low from each session. From our point of view, the times that produce more accurate predictions is taking the open at 00:00 GMT and the close at 23:59 GMT. Besides the calculation of the PP, there are other support and resistance levels that are calculated taking the PP as a reference.

Support 1    (S1) = (PP * 2) — H
Resistance 1 (R1) = (PP * 2) — L
Support 2    (S2) = PP — (R1 — S1)
Resistance 2 (R2) = PP + (R1 — S1)

Where, H is the High of the previous period and L is the low of the previous period. Continuing with the example above, PP = 1.2439

S1 = (1.2439 * 2) — 1.2474 = 1.2404
R1 = (1.2439 * 2) — 1.2376 = 1.2502
R2 = 1.2439 + (1.2636 — 1.2537) = 1.2537
S2 = 1.2439 — (1.2636 — 1.2537) = 1.2537

These levels are supposed to mark support and resistance levels for the current session. On the example above, the PP was calculated using information of the previous session (previous day.) This way we could see possible intraday resistance and support levels. But it can also be calculated using the previous weekly or monthly data to determine such levels. By doing so we are able to see the sentiment over longer periods of time. Also we can see possible levels that might offer support and resistance throughout the week or month. Calculating the Pivot point in a weekly or monthly basis is mostly used by long term traders, but it can also be used by short time traders, it gives us a good idea about the longer term trend. S1, S2, R1 AND R2...? An Objective Alternative As already stated, the pivot point zone is a well-known technique and it works simply because many traders and investors use and trust it. But what about the other support and resistance zones (S1, S2, R1 and R2,) to forecast a support or resistance level with some mathematical formula is somehow subjective. It is hard to rely on them blindly just because the formula popped out that level. For this reason, we have created an alternative way to map our time frame, simpler but more objective and effective. We calculate the pivot point as showed before. But our support and resistance levels are drawn in a different way. We take the previous session high and low, and draw those levels on today's chart. The same is done with the session before the previous session. So, we will have our PP and four more important levels drawn in our chart.

LOPS1, low of the previous session.
HOPS1, high of the previous session.
LOPS2, low of the session before the previous session.
HOPS2, high of the session before the previous session.
PP, pivot point.

These levels will tell us the strength of the market at any given moment. If the market is trading above the PP, then the market is considered in a possible uptrend. If the market is trading above HOPS1 or HOPS2, then the market is in an uptrend, and we only take long positions. If the market is trading below the PP then the market is considered in a possible downtrend. If the market is trading below LOPS1 or LOPS2, then the market is in a downtrend, and we should only consider short trades.

The psychology behind this approach is simple. We know that for some reason the market stopped there from going higher/lower the previous session, or the session before that. We don't know the reason, and we don't need to know it. We only know the fact: the market reversed at that level. We also know that traders and investors have memories, they do remember that the price stopped there before, and the odds are that the market reverses from there again (maybe because the same reason, and maybe not) or at least find some support or resistance at these levels.

What is important about his approach is that support and resistance levels are measured objectively; they aren't just a level derived from a mathematical formula, the price reversed there before so these levels have a higher probability of being effective. Our mapping method works on both market conditions, when trending and on sideways conditions. In a trending market, it helps us determine the strength of the trend and trade off important levels. On sideways markets it shows us possible reversal levels.

How we use our mapping method?

We use the mapping method in three different ways: as a trend identification (measure of the strength of the trend), a trading system using important levels with price behavior as a trading signal and to set the risk reward ratio (RR) of any given trade based on where the is the market relative to the previous session.

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Price is the primary tool of technical analysis because it reflects everyfactor affecting the value of a market. However, price doesn't produce justtrend lines and basic chart patterns. Analysts have expanded their research farbeyond those basic elements to develop a number of technical indicators thatprovide more insight into price action than what you see on the surface. Youmay be able to see that a market is "extended" (overbought or oversold) just bylooking at a bar chart, but an indicator can put a number to it and confirmyour thinking.

First, a warning about indicators in general. Most analysts do not rely ononly one indicator but often use several indicators together to help make atrading decision because of the misleading information one indicator mightprovide. An oscillator indicator is not a trading system but only provideshelpful insights in certain market conditions.

Oscillators tend not to work well in markets that are in a strong trend.They can show a market at either an overbought or oversold reading for anextended period while the market continues to trend strongly. Another exampleof oscillators not working well is when a market trades into the upper boundaryof a congestion area on the chart and then breaks out on the upside of thecongestion area. At that point, it's likely that an oscillator would show themarket as being overbought and possibly generate a sell signal when, in fact,the market is just beginning to show its real upside power.

Strength and Sentiment Indicators

Although most technical indicators are based on price data and variousmanipulations of that data, a few are based on other market activity. Forexample, when prices make a move, how many traders are participating and whoare they? Volume and open interest are indicators that reflect some basicnumbers about how traders are driving the market, and Commitments of Tradersreports reveal the caliber of participants involved.

Volume and open interest - In and of themselves, volume and open interestdata may not be that valuable other than to indicate the liquidity of a market.But used in conjunction with price action, these numbers serve as a strengthindicator that can provide some meaningful verification about the significanceof a price move.

Volume is the number of transactions in a futures oroptions on futures contract made during a specified period of time, usually onetrading session. One buy and one sell equals a volume of one.

Open interest is the total number of futures or options onfutures contracts that have not yet been offset or fulfilled by delivery. It isan indicator of the depth or liquidity of a futures market, which influencesthe ability to buy or sell at or near a given price.

Open interest can be a little confusing. If a new buyer (a long) and newseller (a short) enter a trade, their orders are matched and open interestincreases by one. However, if a trader who has a long position sells to a newtrader who wants to initiate a long position, open interest does not change asthe number of open contracts remains the same. If a trader holding a longposition sells to a trader wanting to get rid of his existing short position,open interest decreases by one as there is one less open contract.

Volume and open interest are "secondary" technical indicators that helpconfirm other technical signals on the charts. If an upside price breakout isaccompanied by heavy volume, that is a strong signal that the market may wantto continue to move higher because it indicates more traders jumped on therising prices. On the other hand, a big upside move or a move to a new highthat is accompanied by light volume makes the move suspect and indicates a topor bottom may be near or in place. Also, if volume increases on price movesagainst the existing trend, then that trend may be nearing an end.

To validate an uptrend, volume should be heavier on up days and lighter ondown days within the trend. In a downtrend, volume should be heavier on downdays and lighter on up days. A general trading rule is that if both volume andopen interest are increasing, then the trend will probably continue in itspresent direction. If volume and open interest are declining, this can beinterpreted as a signal that the current trend may be about to end.

Changes in open interest can help a trader gauge how much new money isflowing into a market or if money is flowing out of a market, a valuableinsight in evaluating a trending market. Open interest does have seasonaltendencies - that is, it is higher at some times of the year and lower atothers in many markets. Look at the seasonal average (five-year average) ofopen interest in your analysis.

If prices are rising in an uptrend and total open interest is increasingmore than its seasonal average, it suggests new money is flowing into themarket, indicating aggressive new buying, and that is bullish. However, ifprices are rising and open interest is falling by more than its seasonalaverage, the rally is the result of holders of losing short positionsliquidating their contracts (short covering) and money is leaving the market.This is usually bearish, as the rally will likely fizzle.

Here are two more rules for open interest:

• Very high open interest at market tops can cause a steep and quick price downturn.
• Open interest that is building up during a consolidation, or "basing" period, can strengthen the price breakout when it happens.

Commitments of Traders Reports - Open interest can be takenone step further by examining the Commitments of Traders (COT) report issuedevery Friday afternoon by the Commodity Futures Trading Commission (CFTC).

COT reports provide a breakdown of the preceding Tuesday's open interest formarkets in which 20 or more traders or hedgers hold positions equal to, orabove, reporting levels established by the CFTC.

The report breaks down open interest for large trader positions into"commercial" and "non-commercial" categories. Commercial traders are requiredto register with the CFTC by showing a related cash business for which futuresare used as a hedge. The non-commercial category is comprised of largespeculators, mainly commodity funds. The balance of open interest is qualifiedunder the "non-reportable" classification that includes both small commercialhedgers and small speculators.

To derive the net trader position for each category, subtract the shortcontracts from the long contracts. A positive result indicates a net longposition (more longs than shorts). A negative result indicates a net shortposition (more shorts than longs). The results may mean different things indifferent markets, so it usually takes some experience with COT numbers beforeyou can see their value in trading.

The most important aspect of the COT report for most traders is the changein net positions of the commercial hedgers. The premise of COT analysis is thatcommercials are the "smart money" because they have a strong record inforecasting significant market moves, have the best fundamental supply anddemand information and have the ability to move markets because of the largesize they trade. That's the side of the market where you want to be.

Some traders like to take positions opposite of what the COT report suggeststhat small traders (non-reportable positions) are doing, assuming most smallspeculative traders are usually under-capitalized and/or wrong about themarket.

Trend Indicators

Trend lines are the basic indicator of trend, but they are quite subjective,depending on the eye of the beholder. So analysts have refined technicalindicators such as moving averages or the directional movement index toquantify the data and smooth out day-to-day fluctuations to present an overallview of price direction and the trendiness of the market.

Moving Averages - Perhaps the simplest to understand andmost widely used technical indicator is a moving average, which smoothes pastdata to illustrate existing trends or situations where a trend may be ready tobegin or is about to reverse. A moving average helps you spot market directionover time rather than being caught up in short-term erratic marketfluctuations. There are three main types of moving averages:

• Simple.
  Each price point over the specified period of the moving average is given an equal weight. You just add the prices and divide by the number of prices to get an average. As each new price becomes available, the oldest price is dropped from the calculation.
• Weighted.
  More weight is given to the latest price, which is regarded as more important than older prices. If you used a three-day weighted moving average, for example, the latest price might be multiplied by 3, yesterday's price by 2 and the oldest price three days ago by 1. The sum of these figures is divided by the sum of the weighting factors - 6 in this example. This makes the moving average more responsive to current price changes.
• Exponential.
  An exponential moving average (EMA) is another form of a weighted moving average that gives more importance to the most recent prices. Instead of dropping off the oldest prices in the calculation, however, all past prices are factored into the current average. The current EMA is calculated by subtracting yesterday's EMA from today's price and then adding this result to yesterday's EMA to get today's EMA. An EMA generally produces a smoother line than other forms of moving averages, which can be an important factor in choppy market conditions.

Closing prices for a period are usually used to calculate a moving average,but you can also use the open, high or low or some combination of all of them.Moving averages are often used in crossover trading systems. A buy signaloccurs when the short- or intermediate-term averages cross from below to abovethe longer-term average. Conversely, a sell signal is issued when the short-and intermediate-term averages cross from above to below the longer-termaverage.

Another trading approach is to use the "current price" method. If thecurrent price is above the moving average, you buy. Liquidate that positionwhen the current price crosses below your selected moving average. For a shortposition, sell when the current price falls below the moving average. Liquidatethat position when the current price rises above the average.

Because the moving average changes constantly as the latest market dataarrive, many traders test different "specified" time frames before they come upwith a series of moving averages that are optimal for a particular market.

Some use combinations such as 5-day, 10-day and 20-day moving averages,taking crossovers of the shorter moving average over the longer moving averageas a trading signal. Still others use longer-term moving average lines asanother point of support or resistance.

In short, moving averages have a number of applications and are easy tounderstand, making them a clear indicator choice for many traders.

Moving Average Convergence Divergence (MACD) - MACD is amore detailed method of using moving averages to find trading signals fromprice charts. MACD plots the difference between a longer-term exponentialmoving average and a shorter exponential moving average (the chart below uses21 days and 9 days). Then a 9-day moving average of this difference isgenerally used as a trigger line.

The MACD indicator is used in three ways:

• Crossover signals.
  When the MACD line crosses below the trigger line, it is a bearish signal; when it crosses above it, it's a bullish signal. Another crossover signal occurs when MACD crosses above or below the zero line.
• Overbought-oversold.
  If the shorter moving average pulls away from the longer moving average dramatically, it indicates the market may be coming over-extended and is due for a correction to bring the averages back together.
• Divergence.
  As with other studies, traders look at MACD 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.

With its moving average base, MACD is a lagging indicator and requiresrather strong price movement to generate a signal. Therefore, it works best inmarkets that make broad moves but does perform well in choppy, congestedtrading conditions.

Directional Movement Index - The Directional MovementIndicator (DMI), also called the Directional Movement System, is used todetermine the strength of a market trend. The Average Directional Movementindex, or ADX, is part of the DMI and gauges the trendiness of the market. Whenused with the up and down Directional Indicator (DI) values - Plus DI and MinusDI - you could have a trading system.

The basic rules for a DMI system include establishing a long positionwhenever the Plus DI crosses above the Minus DI. Reverse that position -liquidate the long position and establish a short position - when the Minus DIcrosses below the Plus DI.

The ADX line (green on the chart below) is perhaps the focal point of theDMI for most traders. If the ADX line is trading above 30, then the market isin a strong trend, either up or down. ADX does not indicate the direction ofthe trend. If the ADX line is below 30, it means the trend is not a strong one.If the market is in a solid trend and scoring new highs and the ADX line showsdivergence and turns down, that is a warning signal that the market trend islosing power and a market top or bottom may be close at hand.

Volatility Indicators

Volatility shows how active a market is as reflected by the size of priceranges without specifying a price direction. An indicator such as BollingerBands reveals changes in volatility levels, which often lead changes inprices.

Bollinger Bands - Bollinger Bands are volatility curvesused to identify extreme highs or lows in relation to price. They establishtrading parameters, or bands, above and below a moving average at a set numberof standard deviations from this moving average. Both the length of the movingaverage and the number of standard deviations can be modified to fit themarket.

Traders generally use Bollinger Bands to determine overbought and oversoldzones, to confirm divergences between prices and other technical indicators andto project price targets. The wider the bands on a chart, the greater themarket volatility; the narrower the bands, the less market volatility.

Some traders use Bollinger Bands in conjunction with another indicator suchas the Relative Strength Index (RSI). If the price touches the upper band andthe RSI does not confirm the upward move (i.e. there is divergence between theindicators), a sell signal is generated. If the indicator confirms the upwardmove, no sell signal is generated - in fact, a buy signal may be indicated. Ifthe price touches the lower band and the RSI does not confirm the downwardmove, a buy signal is generated. If the indicator confirms the downward move,no buy signal is generated - in fact, a sell signal may be indicated.

Another strategy uses Bollinger Bands without another indicator. In thisapproach, a chart top occurring above the upper band followed by a top belowthe upper band generates a sell signal. Likewise, a chart bottom occurringbelow the lower band followed by a bottom above the lower band generates a buysignal.

Bollinger Bands also help determine overbought and oversold markets. Whenprices move closer to the upper band, the market is becoming overbought; as theprices move closer to the lower band, the market is becoming oversold. Pricemomentum should also be taken into account. You should always look for evidenceof price weakening or strengthening before anticipating a market reversal.

Momentum Indicators

No market can go up or down forever, and momentum indicators reflect when aprice trend may be weakening or strengthening. These indicators are usuallybased on a scale from 0 to 100 and produce "overbought" and "oversold" signals.Although these indicators do not perform well in extended trending markets, oneof their most useful applications is the concept of "divergence" - that is,prices go in one direction and the momentum indicator in another. If pricesmake a new high but the indicator makes a lower high, for example, thedivergence suggests internal weakness that could signal the end of the upmovein prices.

Stochastics - The basic premise of the stochastic indicatordeveloped by George Lane revolves around the position of the close relative tothe high or low of the day. During periods of price decreases, daily closestend to accumulate near the extreme lows of the day. During periods of priceincreases, closes tend to accumulate near the extreme highs of the day. Thestochastic study is an oscillator designed to indicate oversold and overboughtmarket conditions.

Stochastics are measured and represented by two different lines, %K and %D,and are plotted on a scale ranging from 0 to 100. Readings above 80 suggest anoverbought situation; readings below 20 an oversold zone. The %K line is thefaster, more sensitive indicator while the %D line takes more time to turn.When the %K line crosses over the %D line in overbought or oversold territory,this could be an indication that a market is about to reverse course.

Some technical analysts prefer the slow stochastic rather than the normalstochastic. The slow stochastic is simply the normal stochastic smoothed via amoving average technique. The most important signal is divergence between %Dand price, which occurs when the stochastic %D line makes a series of lowerhighs while prices make a series of higher highs (see black lines on chartbelow). This signals an overbought market. An oversold market exhibits a seriesof lower lows while the %D makes a series of higher lows.

When one of the above patterns appears, you should anticipate a marketsignal. You initiate a market position when the %K crosses the %D from theright-hand side. A right-hand crossover is when the %D has bottomed or toppedand is moving higher or lower and the %K crosses the %D line. The most reliabletrades occur with divergence and when the %D is between 10 and 15 for a buysignal and between 85 and 90 for a sell signal.

Relative Strength Index (RSI) - The main purpose of theRelative Strength Index (RSI ) created by J. Welles Wilder Jr. is to measurethe market's strength or weakness. To calculate RSI, you figure out the averageof the up closes and the average of the down closes for the study period(typically 14 days), then divide the average of the up closes by the average ofthe down closes to get a relative strength figure. Then you add 1 to thatrelative strength figure, divide that sum into100 and subtract that result from100. If all that sounds complicated, remember that many analytical softwareprograms do all those calculations for you.

A high RSI reading, above 70, suggests an overbought or weakening bullmarket. Conversely, a low RSI number, below 30, implies an oversold market ordying bear market. However, blindly selling when the RSI is above 70 or buyingwhen the RSI is below 30 can be an expensive trading system. A move to thoselevels is a signal that market conditions are ripe for a market top or bottom,but it does not, in itself, indicate a top or a bottom.

Although you can use the RSI as an overbought and oversold indicator, likemany indicators, it works best when a failure swing occurs between the RSI andmarket prices. For example, the market makes new highs after a bull marketsetback but the RSI fails to exceed its previous highs.

Commodity Channel Index (CCI) - The Commodity Channel Index(CCI) was designed to detect the beginning and ending of market trends bymeasuring the distance between the market price and its moving average,providing a measurement of trend strength and/or intensity. The CCI iscalculated as the difference between the mean price of a market and the averageof the means over a chosen period. This difference is then compared with theaverage difference over the time period.

Values of +100 to -100 indicate a market with no trends. About 70%-80% ofall price fluctuations fall within +100 and -100, as measured by the index. Buyand sell signals occur only when the +100 line (buy) and the -100 (sell) arecrossed. The way this indicator works is almost the opposite of how you woulduse an oscillator (overbought/oversold) such as the Relative Strength Index(RSI) or Slow Stochastics.

To trade using CCI, establish a long position when the CCI exceeds +100.Liquidate when the index drops below +100. Your reference point for a shortposition is a value of -100. Any value less than -100 suggests a shortposition, while a rise to -85 tells you to liquidate your short position.

Percent Range - The Percent Range (%R) technical indicator,often associated with Larry Williams and called Williams %R, attempts tomeasure overbought and oversold market conditions. Like other indicators, %Ralways falls between a value of 100 and 0 and measures where the current day'sclosing price falls within the price range for a specified number of days.

The %R study is similar to the Stochastic indicator except that theStochastic has internal smoothing and %R is plotted on an upside-down scale,with 0 at the top and 100 at the bottom. A value of 0 indicates the closingprice is the same as the period high. Conversely, a value of 100 shows that theclosing price is identical to the period low. A reading above 80 indicates anoversold condition; a reading below 20 an overbought situation.

On specifying the length of the interval for the %R study, some techniciansprefer to use a value that corresponds to one-half of the normal cycle length.If you specify a small value for the length of the trading range, the study isquite volatile. Conversely, a large value smoothes the %R and generates fewertrading signals.

As with other indicators, selling just because a %R shows a market to beoverbought (or buying just because it is oversold) may take a trader out of theparticular market long before the price falls (or rises) because %R can remainin an overbought/oversold condition for a long time.

Momentum or Rate of Change - The whole group of momentumoscillators involves the analysis of the rate of price change rather than theprice level. The speed of price movement and the rate at which prices aremoving up or down provide clues to the amount of strength the bulls or bearshave at a given point in time, a key indicator regarding the viability of atrend and whether it is about to end or begin.

Momentum can be calculated by dividing the day's closing price by theclosing price X number of days ago and then multiplying the quotient by 100.The momentum study is an oscillator-type indicator to interpretoverbought/oversold situations. By determining the pace at which price isrising or falling, the indicator shows whether a current trend is gaining orlosing momentum, whether or not a market is overbought or oversold, and whetherthe trend is slowing down.

Momentum is calculated by computing the continuous difference between pricesat fixed intervals. That difference is either a positive or negative valueplotted around a zero line. When momentum is above the zero line and rising,prices are increasing at an increasing rate. If momentum is above the zero line but declining, prices are still increasing but at a decreasing rate.

The opposite is true when momentum falls below the zero line. If momentum is falling and is below the zero line, prices are decreasing at an increasing rate. With momentum below the zero line and rising, prices are still declining but at a decreasing rate.

The normal trading rule is: Buy when the momentum line crosses from below the zero line to above. Sell when the momentum line crosses from above the zero line to below. Another possibility is to establish bands at each extreme of the momentum line. Initiate or change positions when the indicator enters either of those zones. You could modify that rule to enter a position only when the indicator reaches the overbought or oversold zone and then exits that zone.

You can specify the length of the momentum indicator based on your trading needs and methods. Some technicians argue the length of the momentum indicator should equal the normal price cycle, but you can make it more or less aggressive, depending on the market or your trading style.

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When trading in the foreign exchange market, part of the process involves forecasting future price movements in order to determine the best time to buy and sell. One method, called technical analysis, takes a look at the market’s past price movements to determine where the numbers will go in the future. Most investors who employ this type of analysis look mostly at price data, but sometimes information such as volume and open interest in futures contracts are also taken into consideration. If you’re just starting out in forex, the rule of thumb is to keep your methods simple - follow the basics, which have been proven over time, and only when you have gained some experience introduce more difficult techniques into your plans.

Technical analysis is almost always used on some level because price charts provide a good visual representation of the price history of a particular currency. At the very least, they can help you determine ideal entry and exit points for a trade based on the historical data. You can decide whether or not you’re buying at a fair price, selling at the top of a cycle, or entering into a shaky market.

It may seem as if adherents of technical analysis disregard market fundamentals in favor of mounds of charts and data, but they argue that these fundamentals are ingrained in the actual numbers. Something unpredictable may cause the numbers to unexpectedly spike, but you can still analyze the data, and identify patterns that will aid you in forecasting future prices.

Essentially, technical analysis can be summed up in three points. First of all, as mentioned above, technical traders assume that market fundamentals are tied to the price data. This is why factors such as the fear, hope, and mood of market participants are not contemplated directly. Secondly, the idea that history repeats itself is core to this system of analysis. It is possible to look for patterns in price movement (called signals) because the market is predictable. When you look at past market signals you should be able to predict future signals.

Lastly, technicians rely on trends. From this analytical perspective, the market is not irregular or unpredictable. Rather, you can determine, to a high degree of accuracy, what direction a price will take: up, down, or sideways. In addition, trends are expected to continue for a period of time, making it possible to formulate predictions.

But it’s important to understand that technical analysts use more than price charts to determine good entry and exit points. Price charts are used in conjunction with volume charts, and other mathematical representations of market signals. Called studies, these additional pieces of information add another layer of data to the analysis. They let the trader look at the strength and sustainability of trends, in addition to the bare statistics.

Technical analysis is, of course, quite complicated - but for the new trader just starting out in forex, following the basics is a good place to begin. After you gain some experience and learn more about the foreign exchange market, you can delve into more complex research strategies.

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