Archive for the ‘Forex Terms’ Category:
Forex Chart Study : More on Indicators
Forex chartists use price charts to identify apparent market trends. But mere identification is not enough. They need to know how strong and lasting the trends are. This is done with the help of indicators.
Moving Averages
Being one of the most widely used indicators, these lines laid out on charts average out short term fluctuations enabling one to observe long term trends.
Simple moving averages average all price points over the whole period, like a normal average. Weighted moving averages also smoothen out the price curve, but emphasise on recent price changes more than past ones. The third type are exponential moving averages and are different from the other two in that they multiply a certain percentage of the latest price with previous averages to obtain the average curve.
It can take some time to find what combination of moving average and period length works best for the currency pair you’re targeting. Once you find the right combo, you will be able to trace patterns easier, and hence keep track of your trades accordingly.
Stochastics
These are studies that indicate trend sustainability and price reversals. %K and % D are the two types used in stochastics, measured on scale of 0 to 100; %D is a slow, long term indicator while %K is the faster more responsive indicator. These studies serve no useful purpose in a choppy sideways market.
Relative Strength Index (RSI)
The RSI also measures price movements on a 0 to 100 scale. It is advisable to confirm RSI signals with other indicators. RSI will vary according to the time frame used. Short term RSI fluctuates more and is suitable for day traders while long-term position traders will benefit more using a longer time frame.
Moving Average Convergence Divergence (MACD)
Mac-dee charts the differences between exponential moving averages (26 day and 12 day). A 9 day moving average is used as the trigger line, which when crossed by MACD gives a bullish or bearish signal (going higher than or lower than the trigger line respectively).
There are other indicators like Bollinger bands and Fibonacci retracements which are also used, but the above mentioned indicators are the most commonly used ones.
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Analysing Indicators and Spotting Trends
We are now aware of the various technical indicators that are used in technical analysis in the forex market. In this article we will see how indicators and trends are related. One of the best things to do during technical analysis is to use more than one indicator to get a fairly good idea of the how strong a potential trend is and how long it is likely to last.
A trend, from a trader’s viewpoint is basically a predictable movement of prices at support and resistance levels. If prices break either of these levels, it is a strong indicator of the trend’s staying power. Identifying trends on historical charts is not a difficult job; it can be done with near perfection. But accurately predicting and identifying price moves while the trend is still developing is a harder task. Draw trendlines over longer time frames, and gradually move down to shorter intervals (of the order of hours). This way you will not miss the long-term trend in trying to identify the short-term ones.
The Directional Movement Indicator (DMI) is a valuable tool that reduces guesswork and enables us to confirm our trendline analysis. It has two parts:
- Average Directional Movement Index (ADX): A higher ADX indicates a stronger trend. A reading of over 20 usually indicates a lasting trend. A sudden drop in ADX signals exit time, until a fresh signal is obtained from DI lines.
- DI Lines (DI+ and DI-): When the + reaches and crosses – levels, it is a buy sign, and vice versa.
A number of traders also refer to what is called the parabolic indicator to confirm ADX signals.
These methods can be used for the short term, even in a sideways seemingly trendless market. But as an obvious precaution, keep in mind the larger trends. Playing on a short term trend totally against the larger one is stupidity.
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The Forex Trend-Line Analysis - Understanding the forex trends
It is basically the overall direction prices that might be moving Up, Down or Flat.
A trend may comprise of many other smaller trends that sum up to make the entire trend. The direction in which the trend is pointing is very important when it comes to trading and surveying the market. Trends in Forex can be understood as the response, which you can predict on the basis of analysis, to the price at its very own level of opposition or support over a span of time. To illustrate a little, prices are recovered when they are in the proximity of the apex in an upward trend. However the case is just the opposite with the downward trend – prices increase when they come nearer to the opposition levels. A trend is identified in such a manner. This is called, what is referred to as the ‘Trade-line examination’.
Trend-line examination is often underrated. In the view of some analysts, there is a lot of subjectivity used in it that it is a little retrospective. Though such analysts cannot be held completely wrong but they also overlook that trend-lines help concentration when it comes to essential price designs thus pulling out the redundant factors which are there in the market. So it can be said that the Trend-line analysis should be your very first process in determining the existence of a trend. If you continue to follow the same and it does not show any existence of a trend, then you can be sure that there isn’t any.
The Trend-line analysis is made the best use of when you are using it for a longer period of time for eg. Daily to weekly. With the passage of time we can move to hourly timeframes as well where levels of opposition and support may be found out. This methodology has proved quite beneficial because it lets you give more importance to those aspects in trends which are more significant than the others rather than to the less important ones. Also by making use of this method, traders reduce the risk of following a not so permanent leg up that might have come in the trend. It also ensures that you don’t miss an important long-term upward trend.
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Doing the Technical Analysis in Forex
All markets require careful and detailed analysis to result in profitable trades. Technical analysis is one of the ways of analyzing the forex market. It basically involves studying past market trends.
Technical analysts follow certain assumptions for their analysis:
- Price data reflects all market fundamentals, and nothing else needs to be studied.
- The market does follow trends. The key is to figure out the trend. Once a trend is established, it will in all likeliness continue for some time.
- Previous market trends repeat. One just needs to look for the signals, and identify the trend and the repetition.
Technical analysis sticks to stats and stats only. No emotion, no rumours, no news. It deals objectively, and helps you go through with your planned entry and exit without getting distracted. Technical analysis uses various indicators to study the market. They include:
- Moving Averages which are further divided into:
- Simple Moving Average
- Weighted Moving Average
- Exponential Moving Average
- Stochastics
- Relative Strength Index (RSI)
- Bollinger Bands
- Moving Average Convergence Divergence (MACD – one of the most widely used)
- Fibonacci Retracements
Price charts are also of different types including the common bar charts, candlestick charts and point & figure charts.
Forex trading is a game of odds. If you can trade the odds, you stand a higher chance of winning. Do not bother with what is making the trends. Bother with the trend itself. The price is changing, and that’s it. Why that is happening doesn’t matter as long as you study the price change accurately. Be objective, be disciplined, and follow the rules. If you can’t follow the rules of your system, you cannot be a forex trader. You won’t fail because your methods were wrong, you would fail because your discipline was poor.
You can compare technical analysts with ship captains who study charts to get from their source to their destination through an ocean that can support them, or drown them. Technical analysis if used correctly can provide you unbelievable income in no time. But you need time to satisfy the pre-requisite of using it correctly.
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Forex Trading Training : Things that u need to know beforehand
At this point, you probably know the basics of how the forex market functions, from symbols and terminology, to slightly advanced concepts involving leverage, that actually let you control huge sums with just a small fraction of the amount. In short, you know quite a bit. But there are some things that you will probably not be told by your broker unless you specifically ask.
The first of these things is regarding rollovers. Even though USD might be the dominant currency in forex, most Spot forex is traded through London in Great Britain. Say the end of a business day is 10 pm London time. At that point, if you have any open trades, most brokers will automatically rollover your trade to the next day, unless specifically instructed that you wish to take delivery. It is worth noting that if you’re using a leveraged account, you probably don’t have enough capital to complete the transaction as it is. This is why most brokers automatically rollover any open trades at the end of the day. What is of importance here is the way they rollover. What they do is close the trade, and open another equal one at almost the same instant.
Assuming you were long (bought) 1 lot of Euro against USD at 0.99550, and the rate at the end of the day is 0.99570. The broker will close the trade at this rate and open another one at a rate of 0.99571. The 1 pip difference is the interest difference between the two currencies. In operating a lot of $100,000 with just $1,000, you have in essence taken a loan from the broker, and on this loan he charges interest as mentioned above.
The good part is that, simply put, if the currency you’ve bought has a higher overnight interest rate than the one you’ve paid with, you will in fact gain the interest differential; and vice-versa.
Another point worth note is that if you’ve purchased say, Euro for USD, and made a profit; your profit is in Euros and not Dollars until you convert the sum back to the original currency paid with. This can be good or bad, depending on the exchange rate at the time that you convert the profit to your currency, NOT at the time of closing trade. You may instruct your broker to convert your profit/loss as soon as you close trade.
Last but not the least, know that in countries where forex is still not regulated, brokers often don’t segregate their own and their clients’ funds while trading, which can lead to complications at the time of closing trade. Talk to your broker about this regardless of whether forex is regulated in your country or not, and make sure he does the needful.
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