Forex RoadMap

Volume and Reversals

2009-06-28T10:42:00.001-05:00

To understand the nature of spike in volume before a trend reversal, traders need to know how the data for volume indicator is gathered in Forex.
Forex volume cannot be measured precisely as it is done, for example, in Equity market, where every share traded equals 1 volume, and selling 200 shares means 200 in volume. Forex by nature cannot count how many contracts and what sizes of contracts were traded at any given time, because the market is wide and decentralized. Therefore to count volume in Forex the number of ticks/changes in price is used. 1 tick measures 1 volume. As it moves up and down volume adds up.

When volume rises, it means lots of participants are actively selling and buying currencies. When volume spikes at certain price level, traders know that there was lots of interest shown by traders to that price level. If there is a lot of interest, it means the level is an important one.
This simple observation of a volume indicator allows identify important Support and Resistance levels, which would certainly play significant role in the future.

Where Volume spikes are distinctively extreme (larger than any historical spikes around) — Climax Volume — traders should look for clues from the price itself. Candles that have a narrow range, spinning tops/bottoms, dojies, stars, other candles with extremely large tails have highest chances to become the price turning points.

Single volume spikes only bring price to a halt. A lot of stand-alone average volume spikes occur during fundamental economic announcements on daily basis. News can cause spike in volume for a single day and then volume disappears again.

Reversals, however, happen not over one day but a series of days. If higher than average volume stays on the market for several to many days a huge volume spike — volume climax — will crown a point of market reversal.

Trading Calls 5/21

2009-05-21T02:30:00.001-05:00

Opened a LONG on USDCHF at 1.1000. TP at 1.1100 (2/8th level).

Trading Calls 05/20

2009-05-20T13:28:00.002-05:00

Now GBPUSD is ready to be sold. RSX 14 is overbought and we touched +1/8th Murrey's Level. In my opinion in the worst case we could touch +2/8th level.
Entry 1.5749, TP at 1.5500, but probably we could arrive to 1.5300!

Pivot Point applied to Forex Market

2009-05-20T05:34:00.001-05:00

Forex Pivot Point Trading are used today by Forex Traders and are calculated on the previous days move and trades are entered when the market hits a support or resistance line of the pivot point providing your OB/OS indicator is in agreement. All the support and resist lines are put in place 1st thing in the morning. then you wait for the market to hit those entry Points.

Contrary to what some might believe, trading Forex with Pivot Points are probably the most popular method used in trading the financial markets today. Long before the invention of computers this was the method used by the traders in the pits to determine hidden support and resistance levels.

The Pivot Point is still used by experienced floor traders and technical analysts alike. The major advantage now is that we now have computers and can calculate our points well in advance. Many charting packages can calculate them for you automatically, thus enhancing the use of Pivot Points.

Whilst there is a lot more to Pivot Point Trading in Forex Trading than we will be mentioned in this article, the purpose of this exercise is to introduce you to the concept of trading Forex with Pivot Points.

Remember the market can only go up, down, or sideways. It is like an elastic band that has been stretched, sooner or later it will rebound to an equilibrium point where the market is in balance, and then stretch the opposite way only to rebound and reach another balance point. Then some fundamental announcement or happening will drive the market in a new direction and so on day after day. Pivot Points can aid us in determining how far that elastic can stretch before it rebounds.

Whilst there are many time frames that can be used for calculating Pivots, for the purpose of this exercise lets concentrate on the daily time frame (i.e.: 24hr) Pivot Points are calculated using the previous days, Open, High, Low, and Close figures. There are many Pivot Point calculators available on the web so you don't have to waste your time doing the calculations manually. Also bear in mind the longer the time frame you are using the longer you must be prepared to stay in the market or wait for the next entry point.

Pivot points unlike many other indicators are an objective tool. Because they are mathematically calculated, there can only be one answer for a specific time period.

Many subjective indicators like Fibonacci retracements, (and I am a great fib fan) Elliot waves etc. can have different people trading in different directions at the same time due to individual interpretation..

The PP's can help you to predict the next day's highs and lows in advance. PP's can give you anything from 4 to 8 support and resistance levels. However you still have to be able to identify the trend to be a successful PP trader. Pivot Points also work best in a trending market.
Entry and exit points

Pivot Points can give you exact entry and exit points, rather than enter markets that are in the middle of a run, or about to turn the other way. Here is where we use other indicators to assist on the entry or exit. If the market stalls at a Pivot Point level, and you have an overbought or oversold indicator that will be a good time to get in or out. Or if a Fibonacci level coincides with a Pivot Point level it can make a strong case to enter or exit a trade. If the market is bullish and your favourite indicator is not near overbought, when it hits the first resistance level then you probably have a good case to stay in the market and make your profit target the next Pivot Point resistance line. The breakout above the 1st resistance level can then become your new stop or stop reverse.

Obviously the reverse is true of the support level as well. By combining the Pivot Points with your favourite indicator you can develop your own trading system that no one else uses.
Trading for the day will probably remain between the 1st support (S1) and resistance (R1) levels as the floor traders make their markets. Once one of these levels is penetrated other traders will be attracted to the market, and should the second level be breached, the longer term traders are attracted to the market.

Knowledge of where the floor traders are expecting support or resistance can be a distinct advantage especially when there is no outside influence in the market. Provided no significant market news has occurred between yesterdays close and today's opening, the local floor traders and market makers tend to move the market between the Pivot Point (P) and the first support line (S1) and resistance (R1) If one of these levels is breached then expect the market to test the next levels (S2) and ( S3) or (R2) and (R3).

You can download a Pivot Point indicator for Metatrader at this link.

Trading Calls 05/18

2009-05-18T05:59:00.004-05:00

SHORT USDCHF TP 1.1170. We are looking for few pips because we are in the low zone of Murrey Lines.

TP hit with +57 pips.

%R – William’s Percent Range

2009-05-17T07:30:00.001-05:00

Williams’ Percent Range Technical Indicator shows the position of today’s closing price within the range of prices for a time period. The indicator shows the percent the closing price has been retraced by, from the highest price during the period. When you look at a chart, the price range is the vertical distance between the highest at the lowest price that is a hypothetical price bar chart.

Today’s close price is nearer to the highest price for the period than to the lowest one, this means that the percent R value is closer to zero than 100%. Since the security’s closing price is at a high level relative to that of the previous prices in the period considered here, the William’s Percent Range Technical Indicator would be near, if not inside, the overbought area. As buying power is getting weaker, a sell signal would be generated when prices start falling. Usually prices fall a few days after the indicator moves closer towards zero.

On the other hand, the William’s Percent Range Technical Indicator takes a value near 100 when the closing price is the same with the lowest price for the period observed. Since the security’s close is at the low end of the price range for the period, the indicator is in the oversold area. in general, buy signals are given after the William’s Percent Range Technical Indicator enters the area between 80 and 100% and when prices start rising.

RVI – Relative Vigor Index

2009-05-17T07:28:00.002-05:00

The basic idea of the Relative vigor index technical indicator is that prices tend to close higher than they open in bull markets and tend to close lower than they open in down markets. The establishment of the vigor movement helps in showing the existing price at the end of the day. To normalize the index to the daily trading range, you need to change the price divided by the maximum range of prices for the day. For easy calculation simple moving average is used. The 10-period is the best period. To avoid possible ambiguity, you need to build a signal line, which is a 4-period weighted symmetrically average movement of relative vigor index values. The line of concurrence serves as a signal to buy or to sell.

PSAR – Parabolic Sar

2009-05-17T07:26:00.003-05:00

Parabolic SAR technical indicator has been developed to analyze the trending markets and this indicator has been constructed on the price chart. This indicator is same as the moving average technical indicator, with only the dissimilarity being that parabolic SAR moves with higher acceleration and it may change the position in terms of the price. In case of bull market, the indicator is below the prices and when it is bearish (down trend), it is above the prices.

Suppose if the price crosses parabolic SAR lines, further values are situated on the other side of the price the indicator turns. When such an indicator turn does take place, the minimum or the maximum price for the previous period would serve as the starting point. When the indicator makes a turn, the trend end gives a signal of its turn.

For providing exit points the parabolic SAR is an outstanding indicator. When the price sinks below the SAR line, long positions should be closed. When the price rises above the SAR line, the short positions should be closed. Frequently the case of the indicator serves as an irregular stop line.

If the price is above the SAR line i.e. if the long position is open, the parabolic SAR line will go upwards, and in short the length of the SAR line movement depends on the scale of the price movement.

MFI – Market Facilitation Index

2009-05-17T07:23:00.002-05:00

The market facilitation index (MFI), is created by Bill Williams, and attempts to determine the efficiency of price movement by quantifying the price movement per unit of volume. This is done by taking the day’s range high minus low and dividing it by the total volume.

When the market facilitation index increases and volume increases:

a) The number of players coming into the market as well as volume increases.

b) Once there is a movement and its pick up has happened to speed things up, therefore as the new players start to open positions, the direction of bar then begins to develop.

When the market facilitation index and volume decreases, this means that the market participants are not interested any more.
When the market facilitation index increases its volume decreases. This means that it’s most likely that the market is not supported with the volume from clients and the price is changing due to traders’ that is dealers and brokers on the floor speculations.
When the market facilitation index decreases, the volume also increases then there is a clash between bulls and bears. These are characterized by a large sell and buy volume, but the no considerable change in the price, since the forces are equal. Any one of the contending parties that is buyers or sellers will eventually win the battle. The break of such a bar lets you know that if this bar determines the trend annuls or the continuation of the trend, such bar is known as curtsying and Bill Williams was the person to name it.

OBV – On Balance Volume

2009-05-17T07:21:00.003-05:00

ON BALANCE VOLUME is another technical indicator which is used to relate the volume to the change in price. This indicator was brought in by Joseph Granville and is a very simple one. When security finishes off with a value that is higher than its previous closure then it is considered an up-volume for the whole of the day. When the situation is reversed i.e.: the present value of closure is lower than its previous value, then the situation termed as down-volume.

It is understood that the change in on balance volume is ahead of price changes. It is noted that with a rise in on balance volume there is an inflow of smart money.

A situation of “Non confirmation” occurs when the movement in price goes ahead of on balance volume movement. Non confirmation can happen during bullish markets (earlier rise in security than OBV) or bearish markets (earlier fall in security than OBV).

The rising trend of OBV is noted when there is every new growth reaches a mark above its previous growth and every new reduction is more than the previous reduction. In the same way the falling trend of OBV is noted when every high is lower tan its previous high and every low is lower than it previous low. If the movement of OBV is sideways with no significant growth or reduction, then the trend is said to be doubtful.

A trend once formed, cannot be altered until and unless it is broken. To break the trend of OBV , two ways have to be followed, the first being the change in trend from high to low or from low to high. The second way is if by any chance the trend becomes doubtful and stays as long as 3 days. Therefore, it can be noted that if the trend is doubtful and it lasts for 2 days and then shifts to a rising trend on the third day, it is assumed that the trend was ever rising.

Changes in OBV, from a rising to a falling trend might cause a “breakout”. As OBV breakouts tend to go ahead of price breakouts, it is better to buy when there is an upside OBV breakout and sell off when there is a downside OBV breakout. Investors must hold on to the position until there is a change in trend.

MFI - Money Flow Index

2009-05-16T07:14:00.003-05:00

Money Flow Index (MFI) is the technical indicator, which indicates the rate at which money is invested into a security and then withdrawn from it. Construction and interpretation of the indicator is similar to Relative Strength Index with the only difference that volume is important to MFI.

When analyzing the money flow index one needs to take into consideration the following points:

divergences between the indicator and price movement. If prices grow while MFI falls (or vice versa), there is a great probability of a price turn;
Money Flow Index value, which is over 80 or under 20, signals correspondingly of a potential peak or bottom of the market.

ADX - Average Directional Index

2009-05-16T06:45:00.002-05:00

Developed by J. Welles Wilder Jr., Average Directional Index (ADX) is one of the most trusted ways to evaluate the strength of the current market trend, be it upwards or downwards. Measured in an oscillator that fluctuates between 0 and 100, readings above 60 are considered comparatively rare. While a weak trend is marked for low readings below 20, a strong trend is indicated with high readings above 40, it is important to determine whether the market is trending or trading (moving sideways).

When ADX begins to reinforce from below 20 and moves above 20, it indicates that the trading range is ending and a trend is emerging. Conversely, an ADX decline from above 40 might signal that the current trend is weakening and a trading range is developing. Although the indicator does not grade the trend as bullish, it however, evaluates the strength of the current trend.

After all, ADX is one of the most recommended endeavors to measure the strength of the direction the security is moving in, and to recognize impending changes in a market from trending to non-trending. You must always remember that ADX must always be 30 or more, or else no action is taken unless the ADX has achieved this reading. Also, it is important for an investor entering the market to have a firm stop on the primary entry, based on the most recent high or most recent, low depending on direction.

Average Directional Index is derived from two indicators prior developed by Wilder, known as Positive Directional Indicator (+DI) and the Negative Directional Indicator (-DI). While +DI measures the force of the upward movement and -DI measures the force of the downward movement over a given period, the default setting is 14 periods. However, users can amend these settings according to their individual penchant.

The ADX can merge +DI with –DI and then level the data with a moving average to offer a dimension of trend strength. However, since ADX uses both +DI and -DI, it shows only strength and no indication of any trend direction.

The importance and usability of ADX is that buy and sell signals act on crossings +DI/-DI. When -DI crosses +DI from top, a sale signal occurs and when +DI crosses -DI from below, buy signal occurs. At the same time, it is important for an investor to observe a trend at an early stage of development to gain the highest benefit from his deals.

One of the few limitations of ADX is that, the input signal submitted by crossing of +DI and -DI in many cases might be false if the currency pair remains in a trading range. An example of ADX calculation indicates that ADX is a DX, leveled by the exponential moving average for "the n periods"

ADX = MA (DX, n, E).

While DX is a distinction between + DI and -DI, it is calculated according to this fact and provides the value with directed movement. The sum of -DI and +DI gives the value of total amount of directed movement during this period.

Trading Calls 05/15

2009-05-15T15:50:00.003-05:00

The USDCHF LONG reached the TP with 193 pips. I'm waiting for a new signal.

MultiTimeframe Indicators for Metatrader

2009-05-15T04:42:00.001-05:00

Many strategies use Multi Timeframe indicators. Many others use their divergences.
Here you can download many multi timeframe indicators for Metatrader 4.

#MTF_AO_Awesome_Oscillator.mq4
#MTF Bollinger Bands.mq4
#MTF CCI.mq4
#MTF MACD.mq4
#MTF Moving Average.mq4
#MTF PSAR.mq4
#MTF RSI.mq4
#MTF Stochastic.mq4

Trading Calls 05/14

2009-05-14T05:56:00.003-05:00

The short on GBPJPY has reached the TP with 163 pips.

Trading divergences

2009-05-13T04:29:00.000-05:00

It's about higher highs and lower lows. If you find them in price, but not in the oscillator, you have regular divergence. If you find them in the oscillator, but not in price, then it's hidden divergence.

Higher Highs => Short

Lower Lows => Long

At first this seemed to me like the opposite of common sense, so I had to think about it for a while. I finally got it that it means when higher highs or lower lows in either price or an oscillator aren't confirmed by the other, then the direction indicated by the extremes, meaning the higher highs or lower lows, is weak and is likely to change.

If the higher highs or lower lows are in price but not the oscillator, then the direction of price is likely to reverse. This is regular, or classic divergence and can be used as a confirming indicator for a reversal entry.

Regular divergence describes a price trend change that will probably happen in the future, albeit shortly. On the other hand, hidden divergence is a confirming indicator of past price direction.

We have hidden divergence when we have higher highs or lower lows in the oscillator but not in price. In this case the direction indicated by higher highs or lower lows in the oscillator is contradicted by the price trend. Unlike regular divergence, where the weakness in price trend is about to lead to a reversal; here the weakness has already led to a little reversal against the trend. The hidden divergence implies that this recent little reversal in price direction will be short-lived and that price will resume moving in the direction of the trend. This is exciting because it can confirm a continuation entry, which is generally much less risky than a reversal entry. What you have here is the opportunity to enter on a pullback of the current trend, which you expect to continue based on this and whatever other indicators you choose. This is trading with the trend, nice and friendly; however, please heed the following warning.

Warning: I consider divergence to be an indicator, not a signal to enter a trade. It would be unwise to enter a trade basely solely on this indicator as too many false signals are given; however, on the other hand, I consider it even more unwise to trade against this indicator.

Regular Divergence:

Higher highs in price and lower highs in the oscillator which indicate a trend reversal from up to down.

Lower lows in price and higher lows in the oscillator which indicate a trend reversal from down to up.

Hidden Divergence:

Lower highs in price and higher highs in the oscillator which indicate a confirmation of the price trend which is down.

Higher lows in price and lower lows in the oscillator which indicate a confirmation of the price trend which is up.

The best VSA book

2009-05-12T15:54:00.004-05:00

Another great reading about VSA....probably this is the best resource you can find...

MASTER THE MARKET - Tom Williams

How to use MetaTrader to find market cycle

2009-05-12T14:12:00.004-05:00

Price movement is a series of tops and bottoms, the price runs from one bottom/top to another is called a cycle and each cycle has the similar length. MetaTrader has an excellent tool to help you identify the market cycles. Now we use EURUSD 4 hours chart to explain how to find the market cycle bottom.

Step 1: Run MetaTrader, look at the EURUSD chart and mark up the important bottoms.

Step 2: Press the “cycle line” button on the tool bar to draw a series of vertical line. Make sure every vertical line is near to the import bottoms.

Knowing the Ins and Outs of Chandelier Exit

2009-05-11T06:36:00.000-05:00

Have you ever heard of a stop placement strategy that trails stop based on previous 'high' points? It is called Chandelier exit as it hangs down from the high point or the ceiling of our trade, just as a chandelier hangs from a room ceiling. The distance, which is usually calculated from the high point to the trailing stop; could also be calculated in dollars or in contract based points. However, the value of this trailing stop moves upward very promptly as higher highs is reached.

The Chandelier Exit, which has a trailing stop from either the highest high of the trade or the highest close of the trade, is best measured in units of Average True Range (ATR). One of the many factors leading to use ATR for measuring the distance from the high to our stop is that, it is pertinent across markets and is adaptive to changes in unpredictability.

The essence of this calculative measure is that, even on expansion and contraction of trading ranges, our stop will automatically adjust and move to the apt level, thereby, constantly staying in tune with changing market conditions. Chandelier Exit is one of the most tried exit methodology used across a varied portfolio of futures markets to generate profitable test results.

It is imperative that the changes in unpredictability can curtail or stretch the distance to the actual stop, since the highs used to hang the Chandelier move only upward. However, in order to witness less fluctuation in the stop distance, you can use a longer moving average to calculate Average True Range. In other ways, shorter moving average is required, in case you want the stop placement to be more adaptive to fluctuating market conditions.

When short averages for the ATR is used; brief periods of small ranges can bring the stops too close, abnormally resulting in premature exit. To avoid this, you can have a short and highly adaptive ATR while calculating a short average and a longer average and using the average that produces the widest stop.

Although Chandelier Exit differs from Channel Exit (which trails a stop based on previous 'low' points), the combination of both, where the trade is initialized by the trailing Channel Exit and then adding the Chandelier Exit, after the price has moved away from the entrance point, will help in making the open trade lucrative. Here the Channel Exit is fastened at a low point and does not move up as new profits are accomplished. At the same time, it is necessary to have the Chandelier Exit at the right position so that the exits are never too far away from the high point of the trade.

The fundamentals behind combining the exit techniques, Channel and Chandelier exit is that, while Channel Exit as a suitable stop that very steadily rises at the commencement of the trade, switching over to Chandelier Exit is necessary to ensure better exit that protects more of our profit. This feature makes Chandelier Exit one of the most sought after rational exits from the profitable trades.

Profit Strategy vs. Protective Stop

2009-05-11T06:35:00.001-05:00

Developing a profit strategy and setting a protective stop is inevitable in every investment. Just as protection of capital or the money you invest is important, so also is necessary the protection of your profits for the money earned. In due analysis of the most effective exit systems, it is found that as the price of stock increases, you can move the stop loss higher. And in case of downtrend, the price will trigger the stop and a sell order will be executed.

However, the basics of successful trading lies in the fact as to how close to the price the stop should be set. While setting the stop loss, care should be taken that stops are not set too close to the current price. Because, there remains a possibility that the variation that takes place in the market can set off a stop, even if not a real downtrend in price.

While people do a lot of research on the kind of investments, they should make and do a lot of work and diligence on when and where to buy; it is exit strategies that most of them give a slip. However, it is one of the fundamentals of investment as it is impossible to plan future investments and trading unless you specifically know how you are going to take your profits and make an exit.

Just as we all know that, stock prices always follow corporate earnings, resulting because of stock investing and buying by traders when companies are making money, thereby propelling stock prices higher. Similarly, in event of companies showing slower earnings growth, stocks fall.

All you need to do for successful exits is to chalk out practical exit strategies for setting stop. A few of the most implemented strategies are defensive market timing, hedging bets and to think globally. While traders are more focused trying to make big profits, the larger issue is however to avert bigger losses.

There are ways to undermine the best time to sell, from using technical analysis techniques like moving averages, etc. You can use defensive market timings by placing defensive stop losses. In this method, your broker can be instructed to sell shares on hitting a predetermined level.

Considering the strategy of hedging bets, it is found difficult to hedge a collection, with a range of arrangements that balance each other out. However, there is always the alternative known as inverse funds, which are designed to rise in value even when the stock market goes down. And in cases even when the funds falls, on the occasion of stock market rise, they can tender security without compelling you to sell your existing positions.

In the most adventurous trading, you can think globally for setting stop and target. In case, stock prices pursue earnings, the best way to defend your stock portfolio is to make sure to go along with companies, whose earnings are on the rise. Similarly, if U.S stocks are not doing well, traders can always look out for options in the Asian Markets and vice versa.

Fibonacci Retracements

2009-05-11T06:33:00.000-05:00

Fibonacci numbers were named after an Italian mathematician called Leonardo Fibonacci. Fibonacci developed the numbers in 1170 when he was carrying out studies on the Egyptian Great Pyramid of Giza. Simply put, Fibonacci numbers are a series of numbers in which the next number in the sequence is obtained by taken a certain number in the sequence and adding to it its predecessor. The number between two numbers in the sequence is the Fibonacci ratio. Such a sequence would look like this: 1, 2, 3, 5, 8, 13, 21, 34, 55 and so on.

The currency market makes frequent use of Fibonacci numbers. We use Fibonacci numbers often to guess the rate trends of assets. Fibonacci studies can be separated into four main groups: time zones, fans, arcs and retracements.

Retracements occur when a given market is rapidly heading in a certain direction. It happens that the market retracts as investors withdraw their earnings. This retraction represents a good time to re-enter the market, since the levels will be very appealing before the market starts growing again.

The magnitude of retracements is usually uniform. Fibonacci ratios of 38.1% and 50% are especially appealing to traders who conduct technical analyses.

We can represent Fibonacci retracements by sketching lines between the low and high peaks, i.e. the highest and lowest points. The trendline is cut through by several horizontal lines at the "fibos" (Fibonacci levels) of 0.0%, 50%, 33.3% with 66.6% or 38.2% with 61.8%, and 100%. When a price increases or decreases considerably, it frequently traces back a large part (or totality) of that increase or decrease. This is called a price retrace and it causes resistance and support levels to appear at the place or close to the levels of Fibonacci retracements.

In addition to price, Fibonacci retracements are also used for time to a lesser extent. The levels of 50%, 38% and 61.8% are the most widely applied in analyses of retracements. At the beginning of a retracement, employing low to high moves, analysts work out and sketch with horizontal lines the three above-mentioned levels. Once the levels of retracements are determined, analysts use them to know where opposing movements will end. A curious fact is that the use of these ratios developed by Fibonacci goes back thousands of years to the time of the Egyptians and the Greeks. In addition to mathematics, they used this ratio, which they called the Golden Mean, in architecture and music.

Measuring Cycle Highs

2009-05-11T06:32:00.000-05:00

Recently I have posted two articles on cycles, the first providing a brief overview of how they work and the second on how to apply cycles. Cycles are generally drawn across cycle lows and indeed, this normally works well in Forex. However, there are some examples where cycles are best drawn across cycle highs.

An example of this is in the Euro, both against the Dollar and the Japanese Yen. Historically the Euro is an offspring of the group of currencies that formed the Euro-zone and prior to January 1st 1999 the European currencies were priced as currency per Dollar. However, on creation of the Euro the quoting method changed to Dollars per Euro.

Thus, when looking at the historical data series including the synthetic history created by measuring a trade weighted contribution by each previous currency pair, clearly the price highs in the Euro used to be price lows when the individual currencies were quoted as currency per Dollar.

This means that the chart has effectively inverted and as such we need a method of applying cycles to math highs. The cycle drawing tool in Dealbook is designed to measure cycle/price lows. What I have done to overcome this is created an "inverted chart" in Chart Studio as an indicator which can then be inserted into a chart. Since it is impossible to create an indicator that looks like a bar I have had to take the close of each bar only. This is done very simply in Chart Studio thus:

Indicator Inverse_Chart ;
Draw LastPrice("Close") ;
Begin
LastPrice := Close * (-1) ;
end.

Following this select "Build" and select "Verify Module" from the top menu bar
You will be prompted to enter a name for this analysis technique. Write in "Inverse Chart".
The Select "Build" again and this time you should see this succeed in the output window at the bottom of the studio.

Then select "Build" again but this time choose "Install Module"
The module will be installed into the User Modules.

You will now be able to access Inverted Chart in the charting application via the "set Up Indicators" icon at the top of the chart.

After applying the indicator to the chart you may find it useful to slip the main bar chart higher so that it occupies only a small area:

This is the daily chart of EURUSD which displays quite solid cycle lows – which actually reflect the price highs in the chart. The next chart is of the weekly chart which also shows the imminent cycle low/price high expected.

Good luck.

Applying Cycles to Charts

2009-05-11T06:31:00.000-05:00

In a recent article I described the influences cycles have on price and how it is possible to identify approximate time areas where the underlying price trend will reverse. Through observing when these reversals are likely to occur in the future it is possible to forecast several months ahead of one of these turning points when they will occur and thus understand the underlying direction for the intervening period.

What we now need to do is understand how these can be applied to the chart.

It is a manual process and not one which you can program to do automatically, but with a degree of trial an error it is normally possible to organize a logical framework of cycles. For this it is important to remember one of the basic principles of cycles – that of synchronicity – which dictates that cycle lows will normally occur at the same time and that two smaller cycles will fit into one larger cycle. This can be seen in the image below:

With the cyclic drawing tool that is available in Dealbook 360 charts it is possible to add these cycles onto charts. The cycle icon can be found in the chart toolbar:

By opening a chart and clicking on the cycle icon it is then a simple matter of clicking on the bottom of the chart to apply the basic cycle:

Once applied the default cycle length of 10 is applied to the chart and almost certainly this will not be the most appropriate length for the chart. By double clicking on the cycles a cycle format window appears and allows you to change the color and cycle length. After clicking on “OK” the new cycle length will appear on the chart.

Now the initial process of applying cycles is a matter of trial and error. The first things to do is “eyeball” the chart to try and identify the larger price lows and the intermediate price lows in between to check they are roughly centrally located between the larger cycle lows.

For example, on the weekly USDJPY we could begin by applying the red cycles and then checking the cycle lows between by reducing the cyclic length by half and sliding the cycles along by the “handle” at the very bottom of the cyclic arcs.

By then adding the smaller cycles we will end up with a clearer picture:

After applying the weekly cycles you can then use the price lows to identify the cycle lows for the daily chart and then halve the length to generate smaller cycles. You should find that in general the price lows will still match cycle lows although accuracy in the daily chart tends to be less than weekly.

This form of analysis will provide you with much greater insight into price direction and timing of key reversals.

How to Determine the Length of Market Cycle

2009-05-11T06:30:00.002-05:00

When determining the length of a cycle, it suffices for us to measure the time from one crest of the wave to the next, or from one bottom of the wave to the next. A perfect model would feature a uniform distance between high points and between low points. In the currency market, however, it is extremely rare to find such a regular pattern, even though the lengths of cycles are very similar. Hence, we actually use the average distance to determine the length of a market cycle.

The length of a cycle can be simply calculated as follows:

We first spot out a few evident bottom points with comparable time periods on the chart and measure their length.
Secondly, we work out the average time of the periods.
Finally, to determine whether we have obtained a valid average number, we check to make sure that the maximum difference between the average period and the shortest and longest period is 15% or below. If it is confirmed as a valid average number, we can use it to forecast when the subsequent bottom period of the market cycle will occur.

The same process can be repeated to calculate the high points of a market cycle.

Trading Calls 05/11

2009-05-11T02:22:00.002-05:00

LONG USDCHF, TP 1.1280.

Weekend Analysis 05/10

2009-05-10T05:51:00.001-05:00

Here is USDCHF...as you can see RSX10 (Pink line) is oversold, while RSX14 is going to be oversold...semafor is on and we are under 3/8th MML. My strategy is to open a long 10 pips over 2/8th MML...!
We have to wait and see at wich price market will open....

Forex Cycles - How do they work?

2009-05-10T05:45:00.000-05:00

Regular readers of my reports will probably recognize that I use cycle analysis when trying to work out which direction a currency pair will be moving and when this direction is likely to reverse.

So what do these look like and how do they work?

The following chart shows the cycles I have been using to identify the major cycle low in Dollar-Yen back in August, from which time I have been bullish over the rest of this year.

You can easily see how the blue, red and pink cycle lows all match a major price low and generally generate a significant rally. Having said that, this isn’t true in one instance and that is at the blue cycle low in 2002. The reason is that both red and pink cycles were declining and out weighing the upward influence of the less powerful blue cycle.

Indeed, this is one of the features of cycles that can be used to judge the power of a move. Let’s look at this a little closer.

Cycles should hold to four basic characteristics:

Synchronization
Harmonization
Proportionality
Summation

Synchronicity is the characteristic that dictates that all cycles should find lows as approximately the same time.

Harmonization is the characteristic that dictates that cycles tend to have a relationship of half the frequency of the next larger cycle.

Proportionality is the characteristic that dictates that the “force” or “power” of a cycle is double that of the next smaller cycle.

Summation is the characteristic that dictates that the net impact of the cycles can be determined by adding the individual power of each cycle at any particular time.

The following chart provides a graphical interpretation of synchronicity and proportionality:

Here it can be seen that two smaller cycles will fit into the next larger cycle and as such there will be a pattern of cycle lows where different cycles all find lows at the same time.

Also if the amplitude (height) of one cycle is 1x then the next larger cycle will have an amplitude of 2x, the next larger of 3x. If you can imagine that 1x is a measurement of force, then each larger cycle has a force of double that of the next smaller cycle. Thus by the fourth cycle (red) the force is 8x.

The following chart explains the theory of summation a little better:

At each point I have marked the value of each individual cycle – note how they increase by 2x for each larger cycle. By taking any point it is possible to discover the net impact of all the cycles.

So generally, the larger the cycle, the stronger the force will be. As such, I don’t normally look at any cycles shorter than daily since intraday cycles will be overwhelmed by the weekly and monthly cycles.

So now that we have seen a basic idea of how cyclic forces work, let’s look at one chart to observe the reactions. We’ll make this the weekly chart of Dollar-Yen that was shown above:

I have numbered the major weekly cycle lows where we have seen convergence of at least 3 cycles which basically means at each low of the blue cycle.

1. This is the 79.70 historic low in 1995 where all five cycles found a low – and probably also the next larger cycle. (Imagine a cycle drawn from this low which rises to find a peak at point 5 and is now declining.) The decline into the cycle low was exceptionally rapid – probably the most violent move I have seen in 25 years. On one day just before the eventual low it opened at 83.67, declined to 80.18 and closed back at 84.38. Much of this occurred in approximately one hour in the morning.

This highlights the extreme power of a group of long term cycles. In approximately 3 ½ months Dollar-Yen declined from 101 down to 79.70 and then rallied back up to 101 in around 5 months. This shows that the cycles were as aggressive in the recovery as they were in the decline.

2. The correction was both quite shallow and very brief which is a factor of the combined strength of the pink and red cycles together wit the next (undrawn) cycle described in point 1. This shows how the larger cycles can overwhelm the shorter cycles.

3. Following the peak at 147.63 we saw a much deeper and stronger pullback into the red cycle low. Note that this occurs at the pink cycle high but the combined downward force of the 4 smaller cycles were sufficient to pull price lower in a forceful way. We should realize at this point that since the pink cycle is still high and we are also seeing the 4 smaller cycles rise again that we should see a strong move higher. This occurred with the eventual peak occurring just before the peak of the red cycle.

4. From that peak the decline makes it lower but since the pink cycle is still quite high and the red cycle is at a peak, the decline didn’t fall too far. However, with the effect of a declining pink cycle and now a declining red cycle, the recovery from point 4 failed to make much impact.

5. Since we began to get a reversal lower without much of a recovery from point 4 and the red and pink cycles began to decline we could anticipate a sustained move lower. Here is an interesting point. By the time all 5 cycles make a low at the same time, price fails to move below the low at point 3. Why is that? Well, it would be because the next larger cycle (above the pink cycle) would then be at a cycle high so is pulling price higher and preventing a larger decline. As you should now be able to work out, the reversal higher of 5 cycles generates a strong and sustained rally that finally peaked at 124.13 earlier this year. This is interesting since the peak was seen so close to the end of the blue cycle which demonstrates the upward force of the red and pink cycles along with what is now a declining, but still high, next larger cycle.

6. In August we saw a cycle low of the three smaller cycles. We have a high red cycle, a rising pink cycle but a declining larger cycle. Note how the price low in August was significantly above the low at point 5 which shows the upward force of the longer cycles. By my reckoning it should provide upward strength for the coming year at least. If you consider that the pink cycle is rising and at a similar level (and therefore force) as point 4, but is seeing a declining (but still high) larger cycle we should see strength that should overcome the 124.13 high over the coming year. Whether it can make it to the 135.14 corrective high is debatable and probably unlikely but somewhere in between is a distinct possibility. However, beyond that the red cycle will decline into the end of 2009 which should see a strong decline in that year.

In a later article I shall discuss how to apply cycles to your charts.

How to use Bollinger Bands for Forex trading?

2009-05-10T05:43:00.000-05:00

Discovered by John Bollinger, the Bollinger Bands is a simple moving average based tool that allows people in Forex trading to estimate the instabilities and trend in the Forex market. Let us have a brief look at the concept of Bollinger bands and how you can use it to improve your Forex trading strategy.

What are Bollinger Bands?

Bollinger bands consist of two volatility bands enveloping either sides of a simple moving average. The bands are calculated based on the standard deviation of the price during the same period as the moving averages. This standard deviation is plotted on either sides of the moving average. The distance between the upper and lower Bollinger bands shows the standard deviation of price or the volatility of the currency traded. As this price volatility increases, the outer bands move further away from the longer-term average. If the volatility decreases the bands move closer to the moving average.

Normally, the price increases slowly with time, but sometimes due to nervous or greedy traders, the price will spike suddenly. Such spikes will not last for long and the prices will normally come back to reasonable values (or the moving average of the Bollinger bands). Such instability of the outer bands will give an indication to traders on the volatility of prices and the extent of variation of the price from the normal value.

Using Bollinger Bands in Forex trading:

When the market is secure, there is less volatility in prices. On the other hand, if the market is insecure it reflects in a higher volatility of prices.
You can use the Bollinger Bands as a tool to find out the safest time to employ the trading signal.
During a strong trend, prices will have a tendency to take a plunge to the mid band; this may be the best time to apply the trading signal.
The measure of how far the standard deviations of the outer bands have moved away from the average mean is an indication of how much the price has deviated from normal value.
Whenever you see the bands spread wide out from the mean value, you can take this as a sign to exit the market and lock-in and protect all the hard earned profits from getting wiped out by the instabilities in the market.
You need to be extra careful whenever the bands are showing signs of sudden increase in volatility, as a new trend can soon follow.
Do not depend solely on Bollinger bands for timing the market or to enter trading signals. Instead you can use it in combination with other methods like trend lines and momentum indicators.

Success in Forex trading has a lot to do with how alert and sensitive you are about the currency volatility. Bollinger Bands is a wonderful tool that you can use to make better decisions in your trading. Use this tool the right way and you will surely reap big profits in your Forex trading.

Trading Calls 05/08

2009-05-08T13:22:00.004-05:00

The position on GBPJPY is still open...as you see we had a lot of drawdown! This is because I entered too early (did'nt waiting for next Murrey Level). If I would have follewed my system I should have a 350 pips drawdown. Now I'm waiting for the fall...as you see I have opened 2 more positions with these pair to average my position, and moved the TP to 145.65.

SHORT GBPJPY 145.65
TP 144.00
Profit: pips
Max Drawdown:524 pips
System Profit: 122 pips

The Basics of Swing Trading

2009-05-06T03:16:00.000-05:00

wing trading is a trade method in the gray area between trend following and day trading. A swing trader holds a stock for a small period of time and then will trade the stock when it's in it intra-week or intra-month oscillation. A experience swing trader will generally choose a large-cap stock because of its broadly defined high and low extremes. The trader will ride the stock wave in one direction for a couple of weeks, only to switch to the opposite side of the trade when their particular stock changes direction. A swing trader is best in position to do this when that market is more on the stable side versus it being a bear or bull market. This is because those markets' momentum generally carry stocks in one direction only (and for a long period of time).

The success in swing trading is to be able to identify what type of market is currently being experienced. One of the best ways of doing this is looking at historical data of what was indicative of different markets in the past, particular prime swing markets. If a market is identified as prime for swing trading, but later turns out to be a bear or bull market, a swing trader can find that there are the same up and down oscillations than those that occur in a more stable market. This would ensure that best strategy would be to trade on a long-term directional trend instead of the quicker trends that many of the most experienced swing traders are noted for.

Unlike many stock traders, swing traders are not looking to make it big with one particular trade, but are more concerned with hitting its baseline and confirm its direction. At the profiting level, a swing trader will want to exit the trade as close to the upper or lower channel line without being too close, which can cause a loss in opportunity. In a market where a stock is showing a strong directional trend a swing trader will usually wait for the channel line to be reached before selling, thus when a stock is showing a weaker directional trend, the trader will usually sell before the before it hits the channel line in the event the direction changes and the line does not hit on that particular swing.

Swing trading is a great method for beginning traders, while offering a profit potential to advanced traders. A great trader will be able to know when the stock is ripe and what momentum their particular stock has gained before making a decision. Trend following plays a very important role in swing trading as well knowledge of the physics of the stock market. Like the physics of ocean waves, swings can be unpredictable but when a large wave comes rushing at the shore, then its prime time for swing trading, but remember that swing trading is never as predictable as the swinging of a clock pendulum.

Flag Patterns

2009-05-06T03:08:00.002-05:00

When talking about flag patterns, it probably will remind many traders of wedges and triangles, actually there's no difference among them - they are short-term continuation patterns. For convenience, we'll call all these patterns as flag in the rest of the article. Flag is a sharp, strong rise/fall trend with several bars of sideways price action on much weaker trade followed by a second, sharp move to new highs/lows.

Flags, wedges and triangles can be categorized as continuation patterns. They usually represent only brief pauses in a currency pair. They are typically seen right after a big, quick move. The price then usually takes off again in the same direction. Research has shown that these patterns are some of the most reliable continuation patterns.

Flags are short-term patterns that can last from 1 to 12 bars. There is some debate on the timeframe and some consider 8 bars to be pushing the limits for a reliable pattern. Ideally, these patterns will form between 1 and 4 bars. Once a flag becomes more than 12 bars or more, it would be classified as a rectangle.

A flag is a small rectangle pattern that slopes against the previous trend. For a bullish flag pattern, the flag would slope down; a break above resistance indicates that the previous advance is resumed. For a bearish flag pattern, the flag would slope up, a break below support indicates that the previous decline is resumed.

The biggest difference between flags and other patterns is that, flags (wedge or triangle) are usually too short in duration to have any real impact on highs and lows of the price. The price actions are confined within two parallel trend lines, while other patterns are not.

The following indications are important when identifying flags.

Flag patterns occur when a market makes a very strong up /down trend in prices, followed by a pause or sideways trading for a few price bars; if the distance of the flagpole is limited, flag will be less typical.
Do pay special attention to the slope of flags: if the slop is consistent with the trend, it's highly possible that it is not a continuation patterns, but an exhaustion of current trend, full of risk of reversion.
The duration of flag. If the duration is longer than others in current trend, the trend is very near to the end; discretion is advised.

The Elliott Wave Principle

2009-05-06T03:05:00.000-05:00

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."

Basic Elliott Wave PatternThe 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.

My Trading strategy

2009-05-03T07:34:00.000-05:00

Hi, I would like to share my trading strategy.
I use it with GBPJPY, USDCHF, EURUSD and GBPUSD. With the other pairs it's not well performing.

I use these indicators:

- 5 SMA
- 50 EMA
- Murrey Math Levels
- RSX
- MA of RSX
- Final Draft 3 Semafor Alert

You can find them attached to this post.

5 SME and 50 EMA are used only to spot support/resistance levels where we can have a change in the trend.
RSX is used to identify overbought/oversold situations (using 80 levels). The same fo Final Draft 3 Semafor Alert.

The used timeframe is 4H. Beware of other timeframes, because they are not well performing.
When you have an overbought/oversold situation with RSX, a signal from Final Draft 3 look for the nearest Murrey Math Level to go short/long.

Attached you'll find some picture to understand how this works.

ATTENTION --> To use this system you must take care of money management. We use 4h timeframe, so you could have some drawdown. I use this simple system:

LOTS = EQUITY / 10.000

For example with an equity of 1.000$ I will go short/long with 0.1 lots.

The Head and Shoulders Pattern

2009-05-02T10:21:00.004-05:00

The head and shoulders pattern is a term used in technical analysis that refers to a pattern in which there is one high peak between two lower peaks, thus resembling a head and two shoulders. The lowest limit of both shoulders is called a neckline and it is used to find the crucial time in which buyers and sellers should exit or enter positions.

The head and shoulders pattern is one of the most well known patterns appearing in charts. However, it is not dependable at all times. The pattern is useful when it is considered to be a reversal pattern and it takes place in four stages.

During the first stage, a small peak appears. It is here identified as point A and represents the left hand shoulder. This is followed by a reverse movement. Subsequently, more active buying takes place, giving shape to the head (point C). Another reverse movement takes place after the head, probing the neckline, or support. Then a recovery is attempted, thus creating another peak (point E), which will be lower than the head. Yet another reverse movement occurs subsequently and probes the support.

B and D on the chart represent local minima points.

Head and shoulders is considered to be a reversal pattern where a break in the support is anticipated, which is supposed to be approximately the same as the movement from the head to the support.

The movement is not dependable because the ultimate probe of the support does not as a rule have the outcome of a break and the movement goes on as earlier. Hence, you should always wait for an explicit break of the support, which should about around 15 to 25 pips, prior to taking any steps. The impetus of the movement should be taken into account, i.e. it is supposed to be higher at the time of the creation of the shoulder on the left hand side than the shoulder on the right hand side. This is how we can verify whether the pattern is occurring and whether buying pressure is dropping.

The reverse head and shoulders pattern needs no explanation since it is formed in a similar way. The only difference is that it is flipped upside down.

How to Trade During Unstable Markets

2009-05-02T10:20:00.001-05:00

Many buyers and sellers consider unstable markets to be a time of favorable conditions for trading. While large market variations can represent a great chance for profit, they can also mean losing a lot of money if you are not properly prepared. Unstable markets require traders to modify their approach. In this article, we will look at some important points to consider during volatile markets.

Since unstable markets offer more occasions for trading, buyers and sellers are lured into trading more. This is a mistake because unstable markets also yield greater losses. You should choose your trades wisely, always evaluating risk levels beforehand.

Another important point to consider is the amount of leverage used. Since unstable markets call for a higher average trading range, you need to take into account to what extent leverage will influence your trading. When the margin is 1 % or ½ %, traders must consider what amount of leverage or which position can influence their list of assets. When the market is stable, if you are seeking to gain around fifty to one hundred pips, a two lot position will work well. However, under unstable conditions where you could lose one hundred to two hundred pips, this position is no longer profitable in terms of risk. The solution is to adopt smaller positions, i.e. one lot instead of the average two lot.

Strict compliance with your strategy is a must, irrespective of the situation. This includes times of volatility in which moderation is essential. Risk management benchmarks, set stops and contingency plans have to be followed rigorously. You will benefit from this by being able to determine the amount of risk assumed if price movements get out of control. Failing to do this could lose you a lot of money.

Another mistake that traders make is to refuse to set lower stops in unstable times. By setting lower stops, you can benefit from good risk management during very volatile markets. Let us say that you are trading EURUSD. Instead of protecting your position by using an one hundred pip stop, you should contemplate a fifty to sixty pip stop, which will guarantee that your position is protected and take you out before the trend goes on downwards and increases your losses.

Last but not least, traders should study the root causes of the given market instability so as to be able to anticipate future events. This will help the trader modify his or her strategy to the overall conditions of the market, rather than simply focusing on a couple of currencies. For example, a trader should examine market emotions, i.e. whether the market is going down due to fright or going up because of an upsurge in buyer confidence. When traders overreact, this has a tendency to force a market to full targets and thus bring about instability. In addition to emotions, market instability may also arise from economic occurrences, erratic momentum and panic. The latter is especially critical because it leads traders to focus on quick profits and renounce their trading strategy.

If you adhere to this simple advice, you can reap great advantages during volatile markets.

Developing a Trading Style

2009-05-01T18:44:00.001-05:00

Master Traders develop a style that is a reflection of their education and character. Most individual trading styles are either positional or combinational and, rarely, a synthesis of both. However, there are other styles.

Positional traders take x amount of positions within a specific price area where the market is thought to be favorable to their trading strategy. This may occur on short term weakness when the longer trends are bullish. A known risk is assumed for a specific profit taking area. Positions remain until the losses or profits are taken or the price action analysis negates the trading strategy.

Combinational traders do not have the patience of positional traders, and want immediate profitable results or will exit the market quickly. These traders add additional orders as the market moves their way, building up large positions for fast two- to six-day price moves, then take profits and exit the market.

A third type of trader is a system trader, who adheres to a trading system discipline.

A fourth type of trader is the method trader. Methods differ from systems in that a method can be traded either as a system with no discretion, or traded with discretionary intervention. A method allows for a trader to be able to change parameters. A method gives full-disclosure of all its parameters and the logic behind the method. It should be realized that both systems and methods are based not so much upon a rationale as they are upon pure statistics, i.e., when a certain setup or pattern occurs, and you behave in a certain way, the result is statistically in accordance with the probable outcome.

The complete trader is able to combine all or parts of the above approaches with his own style. Trading mastery combines observation, scientific knowledge, good judgment, intuition, and creative instincts with decisive action.

Dealing with Fear

2009-05-01T18:43:00.002-05:00

There are two kinds of fear in this world: legitimate fear and illegitimate fear. Legitimate fear is the kind of fear that is based on the fact that there is real danger. Illegitimate fear is based on perceived danger when none actually exists. Illegitimate fear can also co-exist with legitimate fear.

Fear in trading is both legitimate and illegitimate. Illegitimate fear is any fear that is not based on fact. It is fear based on a misunderstanding of the facts, over- exaggeration of the facts, or misperception of what the facts are or are not. The most common source for illegitimate fear is lack of knowledge. Take, for example, my incident with ghost stories. A bunch of us college-age guys sat in a room over a morgue, in the dark, telling ghost and horror stories that we had read. We scared each other so badly that none of us could move until daylight. We were literally frozen in our tracks — I mean complete physical paralysis. It was one of the longest nights of my life. Deep down inside, I knew what we had done, but I allowed my emotions to override any rational thought — actually, any thought whatsoever.

It is amazing how similar fear in trading really can be. For example, have you ever been involved in a trade risking a few hundred dollars where, as soon as it started to go against you, your heart rate increased and your palms became sweaty? Why is that? It is only a few hundred bucks! If you aren't willing to risk a few hundred bucks, why are you trading? It isn't about the few hundred bucks, it is about over-exaggerating the situation. The emotions are given more attention than they deserve.

Conversely, there is a very real fear concerning the overall ultimate outcome of any trading venture. The statistics back this up. It is a battle to balance the fear involved with trading against the expectation of making profits. On a single trade, the fear should not exist. But the fear from the probability of long-term success is lingering in the background, and causes many traders to try to change those probabilities one trade at a time. In the process of trying to avoid failure, they bring it on faster.

The first step to overcoming fear is to determine which kind it is. Kids are fearful of many things until they learn to understand that the fear is unfounded. Knowledge is the best weapon to fight the negative affects of fear in your trading. The more you know, the more you understand, the less fear will have a negative affect on your trading.

The knowledge you need can be acquired by experience, mentoring, or both. Experience can be a hard teacher. Many traders and investors (in fact, most) lose money and are defeated long before they can acquire the necessary experience. If you are to become successful in the markets, it may be a lot easier to invest in yourself through proper mentoring than to quickly lose more money than it would ever cost to learn the tricks of the trade from an experienced trader.

Does volume figure into your trading?

2009-05-01T18:39:00.002-05:00

It didn’t in the past because volume was a day late and a dollar short, when trading the daily charts. But these days, where volume is live, it does count.

Here’s a simple idea that works well for indexes. Most people ignore volume as an indicator. I think it’s overlooked and I will show you here how to use it to figure out possible turns in the market. The concept is that of a volume spike. If you will look at just about any weekly chart of the S&P 500, you will see what I'm talking about. Note the volume spikes that occur at the turning points in the market. This occurs when large numbers of contracts change hands. Usually it happens when the smaller trader gives up and sells his contracts. If enough traders do this at once and the price is right the professionals will come in and snatch up those contracts.

Therefore you have this large volume that occurs right at the bottom of a decline as the market is churning. The contracts move from the weak hands (the man on the street) to the strong hands (professionals).You need to look for volume that is larger than the last 10 bars volume. This is not cast in stone but is generally a good average to go by. You might decide that 8 bars are enough. It also helps if the volume is substantially larger than the previous volume and is accompanied by a large downward move in price. I wouldn’t necessarily trade this as a standalone indicator but use it as a general warning of a possible change in Market direction. Does this work with intraday charts?

Absolutely. Volume is important.

Self control

2009-05-01T18:38:00.001-05:00

To become a truly successful trader you must become a truly committed trader. How do you get yourself to be in control?

Statistics and society may predict, but you alone determine whether you will succeed or fail. You alone are in control. You alone must take responsibility for your performance and your life. There are always tremendous opportunities in the markets. It is not what happens; it is what you do with what happens that makes the difference between profit and loss.

Many eventually successful traders move from trading method to trading method until they find one that suits them… one that is comfortable to run, and tests well first by back-testing, then forward testing and finally by real testing.

Some traders never stop looking for the “right” way to trade. THAT is a problem. There are many ways to trade that can generate nice profits over time. To settle on a right way for you to trade:

• First, you have to believe in the process which leads to the generation of your entry signals. Does that process make sense to you?
Maybe you’re a visual sort of person and you are drawn to Candlestick charting. Take the time to understand why the patters mean “reversal” and not just accept the “picture”. Go deep.
Choose a guru to follow. Maybe you learn best from mentoring. Choose wisely.

• Second, back-test and forward-test the method you decide to go with. In today’s modern world of software, there’s no excuse not to run all the back data you can through your method and see what the results would have been. Then forward-test to see how the method works out as each price bar appears on your chart. Be sure to use a statistically valid sample of trades for doing this.

• Third, THINK about the process you are choosing and why it’s right for you. THINK about the results you get from your back-testing and real-time testing of your system.

• Fourth, BE A MACHINE (DON’T THINK) when you are trading your method.
This is why I am a huge proponent of mental training for traders. Unless you can control yourself, you can never control your trading. In order to control yourself and your emotions, you have to believe totally in the way you trade. Do the work. Do your thinking before you trade. Then don’t think—just follow your plan.

Day trading is like a guerrilla warfare

2009-05-01T18:31:00.004-05:00

There are only two kinds of day traders, the quick and the dead. Day trading is like guerrilla warfare. The quick seize opportunities immediately, move their stops to break even as soon as possible and capture as much money as is possible in the shortest amount of time. The dead are never quite sure when and how to enter a market or where to get out. These dead turn into “Three Month Wonders,” because after three months, successful traders wonder where they are. So do their brokers. I have spoken with brokers who have never had a day trading customer who was actually a winner. There are three kinds of trader with relationships to markets: those who know what is going on and take action, those who know what is going on and do nothing, and those who don’t know what is going on and can do nothing. These last ones are suffering from an inability to pull the trigger on their trading rifle. Sadly, that includes far more aspiring traders than you would care to imagine. These people have been badly burned, burned too often, or both, that when they finally do know what to do they are unable to execute. Generally, this inability to act stems from the person not willing to risk the pain any longer. The dread of pain for them is stronger than the hope of winning. In many cases, due to consistent trading losses, they have inculcated into their psyche the notion that they are losers. Once a person accepts the idea that he/she is a loser, it is extremely difficult to bring that person back to the idea that they can win. Hope has been lost to the extent that they begin to look for a miracle way to trade. Any confidence in themselves is gone.

What are Candlesticks and Candlesticks Patterns

2009-05-01T13:53:00.002-05:00

Candlestick charts shows information about the price action and the movement of the currency price over a specified period of time. It contains the market’s open, closing, low and high of that specific time frame.

On a daily chart, each candle represents a 24 hours period. It contains information of the daily open and daily closing price, the highest and lowest price during that day. On an hourly chart, each candle represents an hour and so on. Since the forex market is a 24 hours market, there is no real daily open or closing price. The chart provider will decide a time, 5pm EST for instance, as the daily open and closing time. Different chart providers may have different choices for the open and closing time. Traders may find the charts from different providers are slightly different to each other.

What are candlestick patterns?

Technical analysts found that, by observing the candlesticks, there are recurring patterns on the candlestick charts. Such patterns are like recurring pictures on the candlestick charts and they tend to occur when a trend is about to end or reverse its direction. The patterns are very good visual representation of the price movements and give traders a good grasp of what is going on in the market.

Why are candlestick patterns so important?

It is because they are the best gauge of what is going on in the market at the present time. If a candlestick is very short, it implies that the range for the trading day was very tight. If this candle appears after a strong up-trend, it may suggest that sellers have now begun to enter the market more aggressively, and thus the price may be on its way back down.

Eventually, candlesticks patterns can easily be used to identify potential reversals of trends in the market - especially when used in conjunction with other indicators. By observing the candlestick patterns, traders can speculate potential reversals of trends and entering the market with strong reference to the patterns.

The following are key patterns to watch out for:

Piercing Line

Bullish reversal patterns which shows sellers are losing their dominance.

Dark Cloud Cover

Bearish pattern showing slower buying momentum.

Shooting Star

Reversal patterns that occurs after gaps. Buyers make new high but are fail to sustain then.

Harami

Harami shows a trend that is losing its momentum and may reverse. Bullish or bearish depends on the existing trend.

Evening Star

Reversal pattern shows trend has changed direction after making new highs.

Morning Star

Similar to evening star, reversal pattern shows trend has changed direction after making new lows.

Hammer/Hanging Man

Good reversal pattern after a severe trend. Signifies weakening market sentiment. Pattern is considered a hammer after a down trend and a hanging man after an up trend.

Bullish Engulfing

Usually occurs after dramatic down trends. Good indication that downside momentum is lost as a large candle is completely reversed at next time frame.

Bearish Engulfing

Common pattern after strong up trends. Signifies that buyers are losing control.

Doji/ Double Doji

Pattern implies indecision in the marketplace as the price has a big range but does not going anywhere.

What is a Graph

2009-05-01T13:50:00.004-05:00

A chart is the most important tool for understanding the total sum of what is going on in the market. Almost all traders today, particularly those who trade actively, use their favourite types of charts to analyse the market. In the end, a chart is a visualised representation of the price movements, a reflection of the psychology of the market and a visualization of the interaction between buyers and sellers in the market. Because it is a reflection of all the activity that has taken place for a particular traded instrument, a chart also shows how the market values a particular asset based on all the information available. And because a chart has the potential to offer such insight and to accurately reflect the entire perspective of the market, it is an indispensable tool in the arsenal of any trader.

There are three major kinds of charts: bar charts, candlestick charts, and line charts. These charts are described below. We will use primarily candlestick charts, because they are the most commonly used charts amongst active traders.

1. Bar Charts

Bar charts provide traders with four key pieces of information for a given time frame: the opening price during that time frame; the closing price; the high price; and the low price. Bar charts can be applied to all time frames, and hence a single bar can summarize price activity over the past minute or over the past month. Different traders use time frames in various manners, although a good rule of thumb is that the longer the time frame, the more significant it is as it will account for more data — and hence will be a better reflection of the market’s psychology.

2. Candlestick Charts

The candlestick charts were invented by the Japanese in the 1700s. Just like a bar chart, a candlestick contains the market’s open, closing, low and high price of a specific time frame. The main difference is the candlestick’s body part, which represents the range between the opening price and the closing price of that particular time frame. When the body part is filled with red (or black), it means the closing is lower than the opening. When the body part is filled with blue (or white), it means the closing is higher than the opening. While the bar charts put more emphasis on the progression of closing price from the last bar to the next, while the candlestick charts put more emphasis on the relationship between the opening and the closing price within the same time frame. Above and below the candlestick’s body are the wicks, while the wick on the top is the highest price and the wick at the bottom is the lowest price of that period. Candlestick charts are more popular than the bar charts and the line charts, because they tend to be more visually appealing.

3. Line Charts

Unlike bar and candlestick charts, line charts present much less information; they only show the closing price for a series of periods. As a result, line charts serve best to measure the overall direction of long-term trends, and hence are of limited used for most traders.

Forex Spread

2009-05-01T13:28:00.000-05:00

What is spread? In margin forex trading, there are two prices for each currency pair, a “bid” (or sell) price and an “ask” (or buy) price. The bid price is the rate at which traders can sell to the executing firm, while the ask price is the rate at which traders can buy from the executing firm.

For example, when you see the price quote of EUR/USD is 1.2881/1.2884 as in the above picture, the bid is 1.2881 whereas the ask is 1.2884. That means traders looking to sell must do so at 1.2881, those looking to buy must do so at 1.2884.

The difference between the bid and ask price is the spread, which constitutes the cost of the trade. In fact, all traded instruments - stocks, futures, currencies, bonds, etc. - have spread. If a trader buys at 1.2884 and then sells immediately, there is a 3-point loss incurred. The trader will need to wait for the market to move 3 points in favour of his/her position in order to break even. If the market moves 4 points in your favour, he/she starts to profit.

Many online trading firms like to promote margin forex trading as an almost cost-free instrument - commission free, no service charge, no hidden cost, etc. Traders should know that spread is the cost of trading, and in fact, it also represents the main source of revenue for the market maker, i.e. the forex trading company. The spread may appear to be a minuscule expense, but once you add up the cost of all of the trades, you will find it can eat away quite a portion of your account or your profit. If you check the price tag of a T-shirt before you buy it, do the same thing when you trade forex, look into the spread before you decide to trade. Your trade needs to surmount the spread (the cost) before it profits.

Spread is the cost to a trader. On the other hand, it is a revenue source of the firm who executes the trade. In the foreign exchange market, the spread can vary a lot depending on the executing firm and the parties involve. Inter-bank foreign exchange can have spread as tight as 1-2 pips, while the bank can widen the spread to 30-40 pips when dealing with individual customers. If you check out the spread of those small exchange shops nearby the tourists’ sights, you may find the spread can go up to 400 to 600 pips.

Thanks to keen market competition, the spread of online forex trading is getting tighter in the past few years. For major online forex companies, their spreads are essentially the same. The table shows the typical spread of four major currencies of online forex trading at the time being:

It is important for a trader to find the tightest spread as possible, but anything that is far lower than the typical spread is skeptical. The spread is the main source of revenue of a forex trading firm, if the firm cannot earn enough from the spread, there maybe some other hidden cost in the transaction.

Another point to note is that many market makers often widen the spread when market conditions become more volatile, thus increasing the cost of trading. For instance, if an economic number comes out that is off expectations, thereby creating a flood of buyers or sellers, the market maker may often widen the spread to restore the balance between buyers and sellers. As a result, traders should inquire about the execution practices of their clearing firm; firms with poor execution of orders and a tendency to widen spreads will ultimately result in higher trading costs for the end user.

Trading Calls 05/01

2009-05-01T04:33:00.004-05:00

GBPJPY is more and more overbought. We are really near to the retracement, and so to the Take Profit.
Remember, today most of European Banks are closed, so the volatility is really low. If you don't have open position it's better not to open one.

SHORT GBPJPY 145.65
TP 144.00
Profit: pips
Max Drawdown: pips
System Profit: 122 pips

Trading Calls 04/30

2009-04-30T03:37:00.006-05:00

Ok, it's time for a trade on GBPJPY. SHORT at 145,63 with TP at 144.

What is Margin in Forex

2009-04-30T03:33:00.003-05:00

Margin is the amount of equity that must be maintained in a trading account to keep a position open. It acts as a good faith deposit by the trader to ensure against trading losses. A margin account allows customers to open positions with higher value than the amount of funds they have deposited in their account.

Trading a margin account is also described as trading on a leveraged basis. Most online forex broker offer up to 200 times leverage on a mini contract account. The mini contract size is usually 10,000 currency unit, 1/200th of 10,000 equals to 50 currency unit, meaning only 0.5% margin is required for open positions. Compare to future contracts, which require 10% margin for most contracts, and equities require 50% margin to the average investor and 10% margin to the professional equity traders, foreign exchange market offers the highest leverage among the other trading instruments.

The equity in excess of the margin requirement in a trading account acts as a cushion for the trader. If the trader loses on a position to the point that equity is below the minimum margin requirement, meaning the cushion has completely worn out, then a margin call will result. Generally, in online forex the trader must deposit more funds before the margin call or the position will be closed. Since no calls are issued before the liquidation, the margin call is better known as margin out in this case. The account will be margined out, meaning all the positions will be closed, once the equity falls below the margin requirement.

Example:

Account	A
Account Equity	500USD
Contract Size	10,000
Currency	EUR/USD
Spread	3 pips
Margin Requirement	50USD
Leverage	1,000:50 = 200:1
Pips to margin out (1 lot)	447

Consider Account A, the margin requirement for 1 lot of position is 50USD. The free usable margin is Account Equity - (Margin Requirement + Spread) = 500 - (50 + 3) = 447. The account will be margined out if EUR/USD moves 447 pips against the position.

Why Margin Requirement Matters?
Leverage is a double-edged sword. With proper usage, it can enhance customers’ funds to generate quick returns and increase the potential return of an investment. However, without proper risk management, it can lead to quick and large losses. Consider the following example:

Account	A	B
Account Equity	500USD	500USD
Contract Size	10,000	10,000
Currency	EUR/USD	EUR/USD
Spread	3 pips	3 pips
Margin Requirement	50USD	200USD
Leverage	1,000:50 = 200:1	1,000:200 = 50:1
Pips to margin out (1 lot)	447	297
Max no. of lots at one time	9	2
Pips to margin out (max lots)	3	47

The initial conditions of the accounts are the same, except for account A, the margin requirement per lot is 50USD and account B is 200USD.

Free usable margin = Account Equity - (Margin Requirement + Spread)*no. of lots

Maximum number of lots open at one time = Account Equity / (margin requirement + spread)

In account A, for 1 lot of position, the free usable margin is 500 - (50+3) = 447, which means the account will be margined out if EUR/USD moves 447 pips against the position. The max number of lots open at one time = (500/(50+3)) = 9 lots, with 500 - (50+3)*9 = 23USD free usable margin left for 9 lots. Once EUR/USD moves 23/9 = 3 pips against the positions, there would be not enough usable margin and account A will be margined out.

In account B, the free usable margin for 1 lot is 500 - (200+3) = 297, which means the account will be margined out if EUR/USD moves 297 pips against the position. The max number of lots open at one time = (500/(200+3)) =2 lots, with 500 - (200+3)*2 = 94USD free usable margin for 2 lots. If EUR/USD moves 94/2 = 47 pips against the positions, account B would be margined out.

With 1 lot of open position, account A has 447USD usable margin as cushion before being margined out, while account B only as 297USD. However, with more usable margin, account A has higher probability of being over traded. As shown in the above example, the more open positions, the easier is the account to get margin out.

Order Types

2009-04-28T18:52:00.004-05:00

With Metatrader you can use 3 kind of orders:

1) Market price;
2)Buy Stop, Sell Limit: an order to buy or sell at a price higher than market price;
3) Buy Limit, Sell Stop: an order to buy or sell at a price lower than market price.

VSA - Volume Spread Analysis PDF Guide

2009-04-28T13:55:00.004-05:00

VSA (Volume Spread Analysis) is the study of a market based on the analysis of volum and spread (the difference of price open close). This is the most used technique from Forex gurus, often combined with price action.
Personally I prefer to use oscillators and technical analysis, but just in case you are interested here is a nice guide on Volume Sprea Analysis....Download Pdf

Trading Calls 04/28

2009-04-28T02:31:00.003-05:00

GBPJPY is near oversold area. I'm waiting for a signal and then...here we go!!! Be aware of the uptrend on USDCHF is more then possible a retracement!

Trading Calls 04/27

2009-04-27T06:37:00.002-05:00

I'm waiting for a clear signal on GBPJPY or GBPUSD....meanwhile the open position on USDCHF is in green (with a max drawdown of 64 pips).

How to Locate Support and Resistance

2009-04-26T14:28:00.000-05:00

How do you locate areas of high resistance and support ? This is a question on many traders minds and several traders find this very difficult to understand as well as locate. One way of looking at SR regions is that it is a price range where the buyers and sellers are almost equal and the entity or the pair that is being traded is getting exchanged between the buyers and the sellers within a narrow price range. Why does this happen ? If and when we are in an uptrend, it simply means that the demand is more than the supply. The buyers easily outnumber the sellers and hence price increases without any major opposition from the sellers. But during this, there will be a price range where the sellers will be waiting and when price approaches this range, the buyers are met with lot of sellers. So the buyers keep buying but the sellers also keep selling whatever and howmuchever the buyer wants and hence the price does not move much at all. This is the place of SR (Support/Resistance).

How do you locate this ? Open any chart with any time frame.Please note that SR regions can be seen in any TF right from 1 minute to a monthly chart. So, open any chart in any TF and look for places in the chart where there is stalling of price. As pointed above, when buyers and sellers are equal, the price does not change and so the price ranges where you see that the price is stalling would be the SR regions. You can see that in all pairs and all charts easily. Of course, you can find those using Fibs and MM as well but even without any of these, just by having a look at the charts, you should be easily be able to find SR regions.

VSA - Volume Spread Analysis

2009-04-26T14:23:00.001-05:00

Most traders are aware of the two widely known approaches used to analyze a market, fundamental analysis and technical analysis. Many different methods can be used in each approach, but generally speaking fundamental analysis is concerned with the question of why something in the market will happen, and technical analysis attempts to answer the question of when something will happen.

There is, however, a third approach to analyzing a market. It combines the best of both fundamental and technical analysis into a singular approach that answers both questions of “why” and “when” simultaneously; this methodology is called volume spread analysis. The focus of this article is to introduce this methodology to the trading community, to outline its history, to define the markets and timeframes it works in, and to describe why it works so well.

What is Volume Spread Analysis?
Volume spread analysis (VSA) seeks to establish the cause of price movements. The “cause” is quite simply the imbalance between supply and demand in the market, which is created by the activity of professional operators (smart money). Who are these professional operators? In any business where there is money involved and profits to make, there are professionals. There are professional car dealers, diamond merchants and art dealers as well as many others in unrelated industries. All of these professionals have one thing in mind; they need to make a profit from a price difference to stay in business. The financial markets are no different. Doctors are collectively known as professionals, but they specialize in certain areas of medicine; the financial markets have professionals that specialize in certain instruments as well: stocks, grains, forex, etc.

The activity of these professional operators, and more important, their true intentions, are clearly shown on a price chart if the trader knows how to read them. VSA looks at the interrelationship between three variables on the chart in order to determine the balance of supply and demand as well as the probable near term direction of the market. These variables are the amount of volume on a price bar, the price spread or range of that bar (do not confuse this with the bid/ask spread), and the closing price on the spread of that bar (see Figure 1).

With these three pieces of information a properly trained trader will clearly see if the market is in one of four market phases: accumulation (think of it as professional buying at wholesale prices), mark-up, distribution (professional selling at retail prices) or mark-down. The significance and importance of volume appears little understood by most non-professional traders. Perhaps this is because there is very little information and limited teaching available on this vital part of chart analysis. To interpret a price chart without volume is similar to buying an automobile without a gasoline tank. For the correct analysis of volume, one needs to realize that the recorded volume information contains only half of the meaning required to arrive at a correct analysis. The other half of the meaning is found in the price spread (range).

Volume always indicates the amount of activity going on, and the corresponding price spread shows the price movement on that volume. Some technical indicators attempt to combine volume and price movements together, but this approach has its limitations; at times the market will go up on high volume, but it can do exactly the same thing on low volume. Prices can suddenly go sideways, or even fall off, on exactly the same volume! So there are obviously other factors at work on a price chart. One is the law of supply and demand. This is what VSA identifies so clearly on a chart: An imbalance of supply and the market has to fall; an imbalance of demand and the market has to rise.

A Long and Proven Pedigree
VSA is the improvement upon the original teaching of Richard D. Wyckoff, who started as a stock runner at the age of 15 in 1888. By 1911, Wyckoff was publishing his weekly forecasts, and at the height of his popularity, it was rumored that he had over 200,000 subscribers. In 1931 he published his correspondence course, which is still available today. In fact, the Wyckoff method is offered as part of the graduate level curriculum at the Golden Gate University in San Francisco. Wyckoff is said to have disagreed with market analysts who traded from chart formations that would signal whether to buy or sell. He estimated that mechanical or mathematical analysis techniques had no chance of competing with good training and practiced judgment.
Tom Williams, a former syndicate trader (professional operator in the stock market) for 15 years in the 1960s-1970s, enhanced the work started by Wyckoff. Williams further developed the importance of the price spread and its relationship to both the volume and the close. Williams was in a unique situation that allowed him to develop his methodology. He was able to monitor the effects of the syndicate’s trading activity on the price chart. As a result, he was able to discern which resulting price gyrations derived from the syndicate’s action on the various stocks they were buying and selling. In 1993, Williams made his work available to the public when he published his methodology in a book titled Master the Markets.

A Universal Approach
Just as Wyckoff’s approach was universal in its application to all markets, the same is true of VSA. It works in all markets and in all timeframes, as long as the trader can get a volume histogram on the chart. In some markets this will be actual traded volume, as it is with individual stocks, yet in other markets the trader will need access to tick-based volume, as is the case with forex. Because the forex market does not trade from a centralized exchange, true traded volume figures are not available, but this does not mean that the trader cannot analyze volume in the forex market, it simply requires that tick-based volume be used instead.

Think of volume as the amount of activity on each individual bar. If there is a lot of activity on that price bar, then the trader objectively knows that the professional operator is heavily involved; if there is little activity then the professional is withdrawing from the move. Each scenario can have implications to the supply/demand balance on the chart and can help the trader determine the direction the market is likely to move in the short to medium term. A forex example will be shown later in this article. Just as VSA is a universal approach to all markets, this methodology works equally well in all time frames. It makes no difference if the trader is looking at a 3-minute chart, or if daily or weekly charts are being analyzed—the principles involved remain the same. Obviously, if supply is present on a 3-minute chart, the resulting downward move will be of a lesser magnitude than supply showing itself on a weekly chart, but the result of excess supply on a chart is the same in both instances; if there is too much supply, then the market must fall.

Why it Works
Every market moves on supply and demand: Supply from professional operators and demand from professional operators. If there is more buying than selling then the market will move up. If there is more selling than buying, the market will move down. Before anyone gets the impression that the markets are this easy to read, however, there is much more going on in the background than this simple logic. This is the important part of which most non-professional traders are unaware! The underlying principle stated above is correct; however, supply and demand actually work in the markets quite differently. For a market to trend up, there must be more buying than selling, but the buying is not the most important part of the equation as the price rises. For a true uptrend to take place, there has to be an absence of major selling (supply) hitting the market. Since there is no substantial selling to stop the up move, the market can continue up.

What most traders are completely unaware of is that the substantial buying has already taken place at lower levels as part of the accumulation phase. And the substantial buying from the professional operators actually appears on the chart as a down bar/s with a volume spike. VSA teaches that strength in a market is shown on down bars and weakness is shown on up bars. This is the opposite of what most traders think they know as the truth of the market. For a true downtrend to occur, there must be a lack of substantial buying (demand) to support the price. The only traders that can provide this level of buying are the professional operators, but they have sold at higher price levels earlier on the chart during the distribution phase of the market. The professional selling is shown on the price chart during an up bar/s with a volume spike, weakness appears on up bars. Since there is now very little buying occurring, the market continues to fall until the mark down phase is over. The professional operator buys into the selling that is almost always created by the release of bad news; this bad news will encourage the mass public (herd) to sell (almost always for a loss). This professional buying happens on down bars. This activity has been going on for well over 100 years, yet most retail traders have remained uninformed about it—until now.

VSA at Work
Let’s now look at a clear example of supply entering a market as the professional operators are selling into a rising market. Please see Figure 2 as we look at the U.S. dollar/Swiss franc spot forex market on a 30-minute price chart. This market was in the mark-up phase until the bar labeled 1; notice the massive volume spike as an ultra wide spread, up bar, appears with the price closing in the middle of the bar. This is a telltale sign of professional selling entering the market; a trader must look at this bar and realize that if all the activity shown on the volume histogram represented buying, we could not possibly have the price close on the middle of the bar. Because professional operators trade with very large size, they have to sell into up bars when the herd is buying; this is how they unload their large size onto the unsuspecting public. Many times, these types of bars are created from news reports that appear very bullish to retail traders and invite their participation on the long side of the market. When this occurs, it creates the opportunity for professional operators to systematically sell their holdings and short the market, without driving the price down against their own selling.

A properly trained trader understands instantly that when the bar closes in the middle like this, with massive volume, it signifies a transfer of ownership from the professionals to what VSA refers to as “weak holders,” traders that will soon be on the wrong side of the trade. Think of the analogy used earlier in this article; this is the professional operators “selling at retail” (distribution) when earlier they established their positions by “buying at wholesale” (accumulation). On the bar labeled 2, again we have more selling from the professionals as they complete the transfer of ownership to weak hands. The trained trader can see this as the bar labeled 3 is now closing lower, confirming that there was a large block of selling on the previous bar.

Don’t Be Part of the Herd
Let’s review what just happened on the price chart here. The professional money has sold their holdings to the mass public called the “herd” or “weak holders.” The professionals sold short and the new buyers are locked into a poor position. How can price continue higher when the professional money won’t support higher prices and there are no other buyers left to buy? With no buyers left to support the price, the price falls as the chart continues on into the mark down process (see Figure 3). To explain why prices fall in any market, let’s refer to a previous statement: “For a true downtrend to occur, there must be a lack of substantial buying (demand) to support the price. The only traders that can provide this level of buying are the professional operators, but they have sold at higher price levels earlier on the chart, during the distribution phase of the market.”

When the price falls far enough, the professional operator will now enter the market and buy (at wholesale levels) from the “weak holders,” who are forced to sell at a substantial loss, and the cycle will repeat itself over and over again. This is the way all markets work! Because professional operators specialize in many different markets and many different time frames, this same sequence of events unfold on price charts of all durations. We reviewed a 30-minute chart in this article, but it could just as easily have been a weekly chart. The market we looked at was forex, but volume spread analysis works just as well in stocks, futures and commodities. VSA is a market analysis methodology that alerts the trader to the two most important questions that they must know the answers to in order to trade successfully — why and when. Why markets move is based on the supply and demand from professional operators, and when they move can be expanded upon once the trader has a more thorough understanding of volume spread analysis.

Murrey Math Trading Lines

2009-04-26T13:37:00.000-05:00

Murrey Math is a trading system for all equities. This includes stocks, bonds, futures (index, commodities, and currencies), and options.

The main assumption in Murrey Math is that all markets behave in the same manner (i.e. All markets are traded by a mob and hence have similar characteristics.). The Murrey Math trading system is primarily based upon the observations made by W.D. Gann in the first half of the 20'th century. While Gann was purported to be a brilliant trader in any market his techniques have been regarded as complex and difficult to implement. The great contribution of Murrey Math (T. H. Murrey) was the creation of a system of geometry that can be used to describe market price movements in time. This geometry facilitates the use of Gann's trading techniques.

The Murrey Math trading system is composed of two main components; the geometry used to gauge the price movements of a given market and a set of rules that are based upon Gann and Japanese candlestick formations. The Murrey Math system is not a crystal ball, but when implemented properly, it can have predictive capabilities. Because the Murrey Math rules are tied to the Murrey Math geometry, a trader can expect certain pre-defined behaviors in price movement. By recognizing these behaviors, a trader has greatly improved odds of being on the correct side of a trade. The overiding principle of the Murrey Math trading system is to recognize the trend of a market, trade with the trend, and exit the trade quickly with a profit (since trends are fleeting). In short, "No one ever went broke taking a profit".

The Murrey Math geometry mentioned above is "elegant in its simplicity".

Murrey describes it by saying, "This is a perfect mathematical fractal trading system". An understanding of the concept of a fractal is important in understanding the foundation of Murrey Math. For readers interested in knowing more about fractals I would recommend the first 100 pages of the book,"The Science of Fractal Images" edited by Heinz-Otto Peitgen and Dietmar Saupe. The book was published by Springer-Verlag, copyright 1988. An in depth understanding of fractals requires more than "8'th grade math", but an in depth understanding is not necessary (just looking at the diagrams can be useful).

The size (scale) of basic geometric shapes are characterized by one or two parameters.

The scale of a circle is specified by its diameter, the scale of a square is given by the length of one of its sides, and the scale of a triangle is specified by the length of its three sides. In contrast, a fractal is a self similar shape that is independent of scale or scaling. Fractals are constructed by repeating a process over and over. Consider the following example depicted in Figure 1.

Suppose some super being could shrink a person down so that their height was equal to the distance between the points O and P.

Suppose also that this super being drew the large rectangle shown in Figure 1 and sub-divided the large rectangle into four smaller sub-rectangles using the lines PQ and RS. This super being then places our shrunken observer at point O. Our observer would look down and see that he/she is surrounded by four identical rectangles. Now, suppose our super being repeats the process. Our observer is further shrunk to a height equal to the distance between the points O' and P'. The super being then sub-divides the quarter rectangle into four smaller sub-rectangles using the lines P'Q' and R'S'. Our shrunken observer is then moved to the point O'. Our observer looks down and sees that he/she is surrounded by four identical rectangles. The view that is seen from the point O' is the same as the view that was seen from the point O. In fact, to the observer, the two scenes observed from the points O and O' are indistinguishable from each other. If the super being repeated the process using the points O'', P'', Q'', R'' and S'' the result would be the same. This process could be repeated ad-infinitum, each time producing the same results. This collection of sub-divided rectangles is a fractal. The geometry appears the same at all scales.

P'' P' P

----------------------------------------------------------------

| | | | |

|R'' |O'' |S'' | |

|-----|-----| | |

| | | | |

|R' |Q'' | |S' |

|-----------|------------| |

| |O' | |

| | | |

|R |Q' |O |S

|-----------------------|----------------------|

| | |

| |Q |

----------------------------------------------------------------

FIGURE 1

The next question, of course is, "What does a fractal have to do with trading in equity markets?"

Imagine if someone presented you with a collection of price-time charts of many different equities and indices from many different markets. Each of these charts have been drawn using different time scales. Some are intraday, some are daily, and some are weekly. None of these charts, however, is labeled. Without labels, could you or anyone else distinguish a daily chart of the Dow from a weekly chart of IBM, or from an intraday chart of wheat prices. Not very likely. All of these charts, while not identical, appear to have the same general appearance. Within a given time period the price moves some amount, then reverses direction and retraces some of its prior movement. So, no matter what price-time scales we use for our charts they all look pretty much the same (just like a fractal). The "sameness" of these various charts can be formally characterized mathematically (but this requires more that 8'th grade math and is left as an exercise to the interested reader).

Gann was a proponent of "the squaring of price and time", and the use of trend lines and various geometric angles to study price-time behavior.

Gann also divided price action into eighths. Gann then assigned certain importance to markets moving along trendlines of some given angle. Gann also assigned importance to price retracements that were some multiple of one eigth of some prior price movement. For example, Gann referred to movement along the 45 degree line on a price-time chart as being significant. He also assigned great significance to 50% retracements in the price of a commodity. The question is, "A 45 degree angle measured relative to what?" "A 50% retracement relative to what prior price?"

These angle or retracement measurements are made relative to Gann's square of price and time.

Gann's square acted as a coordinate system or reference frame from which price movement could be measured. The problem is that as the price of a commodity changes in time, so must the reference frame we are using to gauge it. How should the square of price and time (the reference frame) be changed so that angles and retracements are measured consistently? This question is one of the key frustrations in trying to implement Gann's methods. One could argue that Gann recognized the fractal nature of market prices changing in time. Gann's squaring of price and time, however, did not provide an objective way of quantifying these market price movements.

If one could construct a consistent reference frame that allowed price movement to be measured objectively at all price-time scales, then one could implement Gann's methods more effectively. This is exactly what Murrey Math has accomplished.

The following discussions assume that one has access to the Murrey Math book.

Squares

As mentioned above, Murrey Math has identified a system of reference frames (coordinate systems) that can be used to objectively gauge price movement at all price-time scales. Taken collectively, these reference frames or "squares in time" constitute a fractal. Each square in time can be thought of as being a part of (1/4) a larger square in time. Recall the simple example of the fractal described in the introduction of this paper. Each set of four squares was created by subdividing a larger square. Unlike a mathematically ideal fractal, we cannot have infinitely large or small squares in time since we do not get price data over infinitely large or small time frames. But for all practical purposes, the Murrey Math squares in time are a fractal.

Fractals are created by recursiveley (repeatedly) executing a set of steps or instructions. This is also true of Murrey Math "squares in time".

The first step in constructing a square in time for a particular entity (NOTE: The word "entity" will be used as a shorthand to refer to any traded equity or derivative such as stocks, commodities, indices, etc.) is identifying the scale of the smallest square that "controls" the price movement of that entity. Murrey refers to this as "setting the rhythm". Murrey defines several scales.

Let's use the symbol SR to represent the possible values of these scales (rhythms). SR may take on the values shown below in TABLE 1:

A larger value of SR could be generated by multiplying the largest value by 10.

Hence, 10 x 100,000 = 1,000,000 would be the next larger scale factor.

The choice of SR for a particular entity is dictated by the maximum value of that entity during the timeframe in question.

TABLE 1 defines the possible choices of SR.

TABLE 1:

IF (the max value of AND (the max value of THEN (SR is)

the entity is less the entity is

than or equal to) greater than)

250,000 25,000 100,000

25,000 2,500 10,000

2,500 250 1,000

250 25 100

25 12.5 12.5

12.5 6.25 12.5

6.25 3.125 6.25

3.125 1.5625 3.125

1.5625 0.390625 1.5625

0.390625 0.0 0.1953125

The value of SR that is chosen is the smallest value of SR that "controls" the maximum value of the entity being studied.

The word "controls" in this last statement needs clarification. Consider two examples.

EXAMPLE 1)

Suppose the entity being studied is a stock. During the timeframe being considered the maximum value that this stock traded at was 75.00. In this case, the value of SR to be used is 100. (Refer to TABLE 1)

EXAMPLE 2)

Suppose the entity being studied is a stock. During the timeframe being considered the maximum value that this stock traded at was 240.00. In this case, the value of SR to be used is also 100. (Refer to TABLE 1)

In EXAMPLE 2, even though the maximum price of the stock exceeds the value of SR, the stock will still behave as though it is being "controlled" by the SR value of 100. This is because an entity does not take on the characteristics of a larger SR value until the entity's maximum value exceeds 0.25 x the larger SR value. So, in EXAMPLE 2, the lower SR value is 100 and the larger SR value is 1000. Since the price of the stock is 240 the "controlling" SR value is 100 because 240 is less than (.25 x 1000) 250. If the price of the stock was 251 then the value of SR would be 1000. TABLE 1 shows some exceptions to this ".25 rule" for entities priced between 12.5 and 0.0. TABLE 1 takes these exceptions into account.

Murrey Math Lines

Let us now continue constructing the square in time for our entity. The selection of the correct scale factor SR "sets the rhythm" (as Murrey would say) for our entity.

Remember, Gann believed that after an entity has a price movement, that price movement will be retraced in multiples of 1/8's (i.e. 1/8, 2/8, 3/8, 4/8, 5/8, 6/8, 7/8, 8/8). So, if a stock moved up 4 points Gann believed the price of the stock would reverse and decline in 1/2 point (4/8) increments (i.e. 1/2, 2/2, 3/2, 4/2, 5/2, 6/2, 7/2, 8/2 ...). Since prices move in 1/8's, Murrey Math divides prices into 1/8 intervals. The advantage of Murrey Math is that a "rhythm" (a scale value SR) for our entity has been identified. Traditional Gann techniques would have required one to constantly chase price movements and to try to figure out which movement was significant. If a significant price movement could be identified then that price movement would be divided into 1/8's. Murrey Math improves upon traditional Gann analysis by providing a constant (non-changing) price range to divide into 1/8's. This constant price range is the value of SR (the "rhythm") that is chosen for each entity.

So, having selected a value for SR, Murrey Math instructs us to divide the value of SR into 1/8's. For the sake of consistency, let's introduce some notation. Murrey refers to major, minor, and baby Murrey Math lines. Murrey abbreviates the term "Murrey Math Lines" using MML. Using the MML abbreviation let;

The symbol: MML be defined as: Any Murrey Math Line

The symbol: MMML be defined as: Major Murrey Math Line

The symbol: mMML be defined as: Minor Murrey Math Line

The symbol: bMML be defined as: Baby Murrey Math Line

and, using the abbreviation MMI to mean "Murrey Math Interval", let;

The symbol: MMI be defined as: Any Murrey Math Interval

The symbol: MMMI be defined as: Major Murrey Math Interval = SR/8

The symbol: mMMI be defined as: Minor Murrey Math Interval = SR/8/8

The symbol: bMMI be defined as: Baby Murrey Math Interval = SR/8/8/8

where the symbol /8/8/8 means that SR is to be divided by 8 three times. For example, if SR = 100 then the Baby Murrey Math Interval bMMI is: 100/8/8/8 = 12.5/8/8 = 1.5625/8 = 0.1953125

Let's also introduce the term octave. An octave consists of a set of 9 Murrey Math Lines (MML's) and the 8 Murrey Math Intervals (MMI's) associated with the 9 MML's. Major, minor, and baby octaves may be constructed. For example, if SR = 100 then the major octave is shown in FIGURE 2. The octave is constructed by first calculating the MMMI. MMMI = SR/8 = 100/8 = 12.5. The major octave is then simply 8 MMMI's added together starting at 0. In this case 0 is the base.

100 -------------------------------------------- 8/8 MMML

87.5 -------------------------------------------- 7/8 MMML

75 -------------------------------------------- 6/8 MMML

62.5 -------------------------------------------- 5/8 MMML

50 -------------------------------------------- 4/8 MMML

37.5 -------------------------------------------- 3/8 MMML

25 -------------------------------------------- 2/8 MMML

12.5 -------------------------------------------- 1/8 MMML

0 -------------------------------------------- 0/8 MMML

FIGURE 2

A minor octave is constructed in a manner similar to the method shown for the major octave. Again, let SR = 100. First calculate the mMMI. mMMI = SR/8/8 = MMMI/8 = 12.5/8 = 1.5625. The minor octave is then simply 8 mMMI's added together starting at the desired base. The base must be a MMML. In this case let the base be the 62.5 MMML. The result is shown in FIGURE 3.

75 -------------------------------------------- 8/8 mMML

73.4375 -------------------------------------------- 7/8 mMML

71.875 -------------------------------------------- 6/8 mMML

70.3125 -------------------------------------------- 5/8 mMML

68.75 -------------------------------------------- 4/8 mMML

67.1875 -------------------------------------------- 3/8 mMML

65.625 -------------------------------------------- 2/8 mMML

64.0625 -------------------------------------------- 1/8 mMML

62.5 -------------------------------------------- 0/8 mMML

FIGURE 3

Naturally, a baby octave would be constructed using the same method used to construct a minor octave. First calculate bMMI (bMMI = mMMI/8). Then add bMMI to the desired mMML 8 times to complete the octave.

Characteristics of MMLs

Since, according to Gann, prices move in 1/8's, these 1/8's act as points of price support and resistance as an entity's price changes in time. Given this 1/8 characteristic of price action, Murrey assigns properties to each of the MML's in an a given octave. These properties are listed here for convenience.

8/8 th's and 0/8 th's Lines (Ultimate Resistance)

These lines are the hardest to penetrate on the way up, and give the greatest support on the way down. (Prices may never make it thru these lines).

7/8 th's Line (Weak, Stall and Reverse)

This line is weak. If prices run up too far too fast, and if they stall at this line they will reverse down fast. If prices do not stall at this line they will move up to the 8/8 th's line.

6/8 th's and 2/8 th's Lines (Pivot, Reverse)

These two lines are second only to the 4/8 th's line in their ability to force prices to reverse. This is true whether prices are moving up or down.

5/8 th's Line (Top of Trading Range)

The prices of all entities will spend 40% of the time moving between the 5/8 th's and 3/8 th's lines. If prices move above the 5/8 th's line and stay above it for 10 to 12 days, the entity is said to be selling at a premium to what one wants to pay for it and prices will tend to stay above this line in the "premium area". If, however, prices fall below the 5/8 th's line then they will tend to fall further looking for support at a lower level.

4/8 th's Line (Major Support/Resistance)

This line provides the greatest amount of support and resistance. This line has the greatest support when prices are above it and the greatest resistance when prices are below it. This price level is the best level to sell and buy against.

3/8 th's Line (Bottom of Trading Range)

If prices are below this line and moving upwards, this line is difficult to penetrate. If prices penetrate above this line and stay above this line for 10 to 12 days then prices will stay above this line and spend 40% of the time moving between this line and the 5/8 th's line.

1/8 th Line (Weak, Stall and Reverse)

This line is weak. If prices run down too far too fast, and if they stall at this line they will reverse up fast. If prices do not stall at this line they will move down to the 0/8 th's line.

Completing the square in time requires the identification of the upper and lower price boundaries of the square. These boundaries must be MML's. The set of all possible MML's that can be used as boundaries for the square were specified with the selection of the scale factor (rhythm) SR. Given SR, all of the possible MMMI's, mMMI's, bMMI's and MMML's, mMML's, and bMML's can be calculated as shown above. The following rules dictate what the lower and upper boundaries of the square in time will be.

Rules and Exceptions

Rule 1:

The lower boundary of the square in time must be an even MML (i.e. 0/8 th's, 2/8 th's, 4/8 th's, 6/8 th's, or 8/8 th's). It may be a MMML, a mMMl, or a bMML. Generally, the lower boundary will be a mMML.

Rule 2:

The MML selected for the bottom of the square in time should be close to the low value of the entity's trading range. The word "close" means that the distance between the square's bottom MML and the low value of the entity should be less than or equal to 4/8 of the next smaller octave.

For example, suppose a stock is trading within a range of 28 1/4 to 34 1/2. In this case the value of SR is 100. The MMMI is 12.5 (i.e. 100/8). The next smaller MMI is a mMMI = 12.5/8 = 1.5625. The MMML closest to 28 1/4 is the 2/8 th's (i.e. 2 x 12.5 = 25). The closest mMML (measured from 25) is also a 2/8 th's MML (i.e. 2 x 1.5625 = 3.125). So, the bottom of the square is 25 + 3.125 = 28.125 (i.e. 28 1/8).

The 28 1/8 MML is the base of the square in time. This MML satisfies rule 1 (it is an even numbered line, 2/8 th's) and it is close to 28 1/4 (28 1/4 - 28 1/8 = 1/8 = .125). The result of .125 is less than 4/8 th's of the next smaller octave which is a "baby" octave (bMMI = 1.5625/8 = .1953125). Specifically .125 is less than .78125 (4 x .1953125 = .781254).

Rule 3:

The height of the square in time must be 2, 4, or 8 MMI's. The type of MMI (major, minor, or baby) must be the same as the type of MML being used for the lower boundary. Generally this will be a mMMI.

NOTE: If the bottom MML of the square in time is an even MML, and the top MML of the square in time is 2, 4, or 8 MMI's above the bottom MML, then the top MML is also an even numbered MML.

Rule 4:

The MML selected for the top of the square in time should be close to the high value of the entity's trading range. The word "close" means that the distance between the square's top MML and the high value of the entity should be less than or equal to 4/8 of the next smaller octave. This is simply rule (2) being applied to the top of the square.

For example, consider the same stock trading within the range 28 1/4 to 34 1/2. The base of the square in time was identified as the 2/8 th's mMML 28.125. In this case the top of the square is the mMML that is 4 mMMI's above the base: 28.125 + (4 x 1.5625) = 34.375. This MML can also be shown to be "close" to the high end of the trading range, since, 34.5 - 34.375 = .125 and .125 is less than .781254 (4 x .1953125 = .781254). Recall that .1953125 is the bMMI (i.e. the next smaller octave).

Exception to Rule 1:

The rule, "The lower boundary of the square in time must be an even MML...", appears to have exceptions. Murrey states, "When a stock is trading in a narrow range rotating near a MMML you may use only 1 line above and below. Since a MMML is always an even MML (a 0 or 8 line for the next smaller octave) then one line above or below would be an odd MML (1 or 7).

An example of this can be seen on Chart #91 in Murrey's book. This is a chart of Chase Manhatten. In this case the bottom and top MML's of the square in time are the 5/8 th's and 7/8 th's MML's respectively. These are obviously odd MML's. Another example of an exception is Chart #83 in Murrey's book. In this case the bottom of the square in time is 37.5 (an odd 3/8 th's line) and the top of the square in time is 62.5 (an odd 5/8 th's line).

Exception to Rules 2, 4:

Rules 2 and 4 address how close the boundaries of the square in time are to the actual trading range of the entity in question. Murrey states;

"Then you simply count up 2, 4, or 8 lines, and include the top of its trading range, as long as it's no higher than a) 19, b) 39, c) 78 cents above the 100% line. (there are exceptions where it will run up a full 12.5, or 25 or 50% line above the 100% line and come back down..."

At this point Murrey leaves us on our own to review the charts. The book is replete with examples in which the bottom and top MML's of the square in time are far from the actual trading ranges (by as much as 2 mMMI's).

Consider the two charts (both are labeled Chart #85) of McDonalds. The lower chart espcially shows McDonalds trading in a range from 28 to 34. Clearly, the set of mMML's that would best fit this trading range are the lines 28.125 (2/8 th's) and 34.375 (6/8 th's). Murrey, however, draws the square from 25 (0/8 th's) to 31.25 (4/8 th's).

Given the above rules and exceptions I have developed a set of "rules of thumb" to assist in the construction of squares in time. Using these "rules of thumb" I have written a simple C program that calculates the top and bottom MMLs for squares in time. This offers a fairly mechanical approach that may prove beneficial to a new Murrey Math practitioner. Once a Murrey Math neophyte becomes experienced using this mechanical system he/she may go on to using intuition and methods that are a little (a lot) less tedious.

I have tested this program against all of the charts in Murrey's book and it seems to work fairly well. There are some exceptions/weaknesses that are discussed below. First, to illustrate the methodology, a few detailed examples are included here.

Momentum

2009-04-25T03:27:00.000-05:00

The Momentum indicator calculates the value of the commodity price shifts during a definite period of time.

The main ways of using this indicator are the following:

Momentum is used as a leading indicator. This tool uses the notion that as a rule the last phase of upward tendency is followed by absolute price increase because everyone is sure that it'll go on. In its turn, the closing of the bears' market is usually followed by absolute decrease in prices because everyone seeks after leaving the market. This is a rather usual situation in the market but it's important to understand that still it is quite a general conclusion.

Like MACD, Momentum is used as an oscillator following the tendency. In this situation of usage, if the indicator makes trough and begins to grow, the signal to purchase is sent; if it comes up to its high and turns downwards the signal to sell is sent. It is worth using its short moving average to determine the indicator's turning points.

Momentum calculates the currency's rate-of-change, being a leading indicator. An oscillator that shifts above and below 100 is formed by the current plot. Bearish and bullish interpretations are found by seeking discrepancies, extreme readings and centerline crossovers.

The momentum can be of either positive or negative values. The prices fall if the current price of closing is less than the price of closing of days back so. Negative values of momentum mean that the current price of closing is higher than the price of closing or days back, and that's why the prices grow if Momentum is of the positive value.

The absolute value of Momentum characterizes the velocity of movement of the prices; the large absolute value of Momentum means fast movement of the prices.

About a zero point the chart of the Momentum shifts. If the chart crosses the zero line, it means changing of direction of shift, which means that the market has lost the moment of movement. The price still can grow, when the Moment already will reach the zero point. After crossing a zero line, the movement below zero is signal to sale, above zero - means a signal to purchase,.

A definite investing or trading style is also characterized by Momentum. The rational is that the hot get hotter and the cold get colder. Bullish momentum players purchase currency pairs or commodities that are popular or that they think are going to be popular. At last, popularity grows, the advance will quicken. Price acceleration resembles an increase in momentum.

CCI - Commodity Channel Index

2009-04-25T03:23:00.001-05:00

First the Commodity Channel Index was developed as the indicator for determining of reversal points in the commodity markets. But then it became rather popular in the share market and in Forex market. CCI was created by Donald Lambert.

The supposition on which the indicator is based consists that all actives move under influence of definite cycles, and maxima and minima appear with definite intervals. CCI corresponds to oscillators, measuring speed of price fluctuations. The index demonstrates a deflection of the ongoing price from its average value. Lambert developed a constant at a level 0.015 that approximately from 70 up to 80 % of CCI values were between levels -100 and +100 -- for the purposes of measurement.

The Commodity Channel Index is moving over and under a zero mark. The percent of Commodity Channel Index values (between +100 and -100) correspond to the number of the periods used for its building. Shorter - with smaller quantity of the periods - CCI will be more inconstant, and if less - its values will be placed in a range section between +100 and-100. Correspondingly, the greater number of periods will be used for CCI measurement, the more values percent of the indicator will be between the points of +100 and -100.

The basic characteristic of the CCI named by the author is one-third of full cycle. For instance, from a minimum up to an upcoming minimum or from a maximum up to an upcoming maximum, or if a market movements' cycle is thirty days, recommended value for CCI is ten days.

Important: The determination of the cycle's length doesn't depend on the Commodity Channel Index and any other tools. It's is a rather many-sided indicator which can cause a wide range of purchase or sell signals. CCI is used both by investors and traders for determining of reversal price points. It is extreme on the price chart and trend force and its results should be used together from the rest of indicators.

Here is the author's advice on the work with the CCI index in case it moves above +100 and below-100 and sends sell or purchase signals. Buy or sell signals happen 20 - 30 % of the time while from 70 up to 80 % of time Commodity Channel Index's value is fluctuating between +100 and -100. It's supposed that if CCI overcomes the level of +100 from below upwards, it means that the currency pair is moving in the direction of the strong ascending trend, thus there is a clear purchase signal. And once CCI goes under +100 the position is supposed to be closed on a return signal. At the same time, it's considered that if Commodity Channel Index moves to -100 point from top to down, it means that the currency pair is meeting a strong descending trend, and there's a sale signal. As soon as CCI again crosses the level of -100 this position is considered closed.

Later CCI started to work for determining if market is overbought or oversold, for definition of reversal points. The currency pair is considered overbought once it overcomes +100 level and is oversold once CCI goes under -100 point. While CCI stays in an overbought position which is above +100, the sale signal appears in case if CCI crosses a level +100 in the opposite direction - from the peak to the bottom. After CCI has entered into an oversold zone which is under -100 level, the purchase signal appears when CCI crosses -100 point in the opposite direction - from the bottom to the peak.

CCI is based on divergence analysis which widens a trading signal. Positive discrepancy less than -100 increases the signal force when the price crosses a level-100 from the bottom to the top. It happens only if there are 2 consecutive minima on CCI when the second minimum is more than the first one on the indicator but below the first one on the chart of prices. Negative divergence over +100 increases the signal force when CCI crosses +100 from top to bottom. The condition for this situation is 2 consecutive maxima on the indicator above +100 when the second maximum is under the first one on the indicator, but above on the chart of prices.

One can treat break of trend lines formed on the indicator as input or output signals from a position. At overbought - above +100 - the break of the trend line downwards is supposed a sale signal and at an oversold level - below-100 - the break of the trend line upwards is supposed a signal to growth of the market. Thus these lines are also based on the connection of consecutive maxima or minima.

The CCI works effectively only in cases when the market is really subject to rather permanent cycles because it was developed definitely for the cyclic markets. That's why it's more problematic to choose an optimum period if Forex cycles are difficultly distinguished in market. Caution: Every, even an irreproachable indicator used wrongly results in a number of false signals and accordingly causes considerable losses in your deal. So before using any indicators on real accounts, first test their work for the demonstration account or check them as trading strategy.

Bollinger Bands

2009-04-25T03:16:00.001-05:00

Indicator of Bollinger borders consists of two lines. They are placed on the equal distance to definite amount of usual discrepancies. While the value of standard deflection depends on the price unsteadiness, the lines automatically control their width. The width increases if the market is more volatile and decreases when the market is not so unsteady.

Here are the features of Bollinger's lines:

- The fluctuations of the prices which begin from one of the line's borders, as a rule, reach the other border. The aforesaid feature can be helpful for forecasting price's orienting points;

- Uncontrolled changing of prices often happens after the line's shortening, which indicates decreasing of unsteadiness;

- If after the rises and falls outside the lines there are rises and falls inside the lines, it's probable that the turn of tendency can occur;

- If the prices go outside the borders, the ongoing tendency is expected to be continued.

The lines of Bollinger resembles the Envelopes Moving Averages indicator. The basic distinction between these indicators is that the borders of envelopes are placed over and under the line of changing average on the certain distance, which is calculated in percents, while the borders of the Bollinger lines are placed on the distances equal to definite number of standard deflections.

Bollinger Bands can help to define if ongoing data field values are behaving normally or breaking out in a new direction. For instance, when the closing price of a Forex market moves over its upper Bollinger Band, it usually increases in that direction. Bollinger Bands also helps to find out when trend reversals may happen. A reversal is usually characterized by new peaks or falls outside of the bands followed by another peak or fall inside the bands.

Bollinger Bands are a pair of values put as an "envelope" around a data field. To measure the values you should take the changing average of the data for a definite period and subtract or add the definite number of standard deflections for the same period from the moving average.

Bollinger Bands resemble Trading Bands and share many of their traits. However trading bands do not differ in width based on inconstancy.

ATR - Average True Range

2009-04-25T03:09:00.000-05:00

The Average True Range is an indicator of volatility. It was developed by J. Welles Wilder in 1978. As well as the many other indicators, first it was created for the commodity markets, which are more unsteady than shares, and for the prices at the end of day. Nowadays it's widely used in Forex market, on other periods too.

First Wilder defines the True range, or TR, determined as maximal of the following 3 values: absolute value of a distinction between ongoing maximum and the previous close price; absolute value of a distinction between ongoing minimum and the previous close price; distinction between an ongoing maximum and an ongoing minimum. If the distinction between a maximum and a minimum is rather little, most likely other two aforesaid methods will be used for TR calculation. If the range changes inside of the period, a distinction between a maximum and a minimum, is rather big, most probably TR will calculate from it.

As a rule ATR with 14 periods is used. It's calculated both on a one-day basis, and on day-time or week and even monthly basis. Extreme values of the indicator often define reversal points or the start of a new fluctuation.

Average True Range can't predict a duration or direction of changes, as well as other volatility indicators. It specifies only an activity level. The indicator's low level points out quiet trade in a little range, and high values point out intensive trade in a wide range. The long period of low ATR points out integration which, most probably, will result in fast continuation of changes or a turn.

High values of ATR usually are the result of quick fluctuations and seldom stay like this for the long period. As ATR indicates absolute volatility value currency pairs on Forex with the low prices will have with other things being equal lower ATR and on the opposite. The main notion of this indicator says "the smaller is the indicator's value the more poor a trend direction is; the higher the indicator's value is, the higher possibility of a turn of a trend is".

The weaknesses: during a long period of ATR can be late, specifying not ongoing but previous inconstancy.

Alligator

2009-04-25T03:05:00.000-05:00

Alligator indicator consists of 3 lines. They are Moving Averages with various parameters. Here they are:

The First line, or the chap of alligator, is a line of balance to the considerable period of time. It's used for the chart constructing - 13 period smoothed shifting average, moved on 8 bars to the future. The Green line, or the lips of alligator, is the line of balance for the considerable period of time, which is one more step less - 5 period smoothed shifting average, moved on 3 bars to the future. The Red line, or the teeth of alligator, is the line of balance for the considerable period of time, which is one step less - 8 period smoothed shifting average, moved on 5 bars to the future.

How to interpret the lines? When all of them are jolloped, it means that the "Alligator" is sleeping, and the more it sleeps the more hungry it gets. Of course, when it wakes up after long sleep, it's very hungry and starts "hunting for food", which is price, till it is glutted. As soon as it happens, it looses interest to the food, which is price, and then the balance lines meet at the same point. It's when you should fix your profit. It's time to close all positions and wait till Alligator awakes up next time.

This indicator's aims are the following:

1. To become an easy for usage indicator to trade only in the current trade

2. To develop a reliable way of saving the money during the moving of the market bounded with the price channel

3. To represent united way for monitoring of the moving of the market

MACD - Moving Average Convergence Divergence

2009-04-25T03:00:00.000-05:00

The sense of MACD, the most well-known indicator, is the basis of average values variety. The idea of the difference between two averages that are smoothed exponentially (EMA) was founded and put into practice by Jerald H. Appler.

Thus, The Moving Average Convergence/Divergence (MACD) is calculated by subtracting the value of a 26-day exponential moving average from the value of a 12-day exponential moving average.

The calculating of The Moving Average Convergence/Divergence (MACD) is carried out by subtracting a 12-day exponential moving average value from a 26-day exponential moving average value.

The MACD value existing at the beginning of a data series is supposed to be equal to zero. The starting values of MACD are thought to include zero as far as it is based on exponential moving averages. Under these circumstances it is possible to omit the values before the 26th value in case the longer moving average has not got any importance yet.

General usage of the MACD, a particular example of a Value Oscillator, is detecting price trends through forex market closing prices. In case of MACD growth the prices go up and they go down while MACD decreases. A 9-day exponential average against which the MACD is generally traded is its signal line. This value is generated by the MACD Signal Line function. MACD increasing over the signal line makes a signal to buy. MACD falling lower the signal line produces a signal to sell.

The curves are varying at the area near zero. Standard oscillator researching methods are used in MACD analyzing. The value crossing the line shows whether to buy or sell. The Divergence is described greatly by this indicator. Zero level crossing signalizes a possibility of trend changing. In case it is crossed up from below, it is a buy signal, otherwise if it is crossed downright it is a sell signal.

The process when a slower line is intersected by a faster one is not senseless either. In case the faster line crosses the slower one up from below it is a buy signal. If the situation is opposite and a slower line is intersected by a faster one downright it is a sell signal. The signal is developed in case of its confirmation, which is a continuing lines motioning in a parallel way towards and crossing the zero point. The basic trend confirmed by such signal is the most reliable and significant.

Stochastic Oscillator

2009-04-25T02:53:00.000-05:00

The Stochastic Oscillator is an indicator of speed of changing or the Impulse of Price.

It demonstrates the moments, when the price reaches the border of its trade diapason within predefined time period. It comprises 2 curve lines - the slow (%D) and the fast (%K).The Stochastic Oscillator also comprises 4 variables.

They are the following:

1) The number of time periods used in the stochastic calculation are called %K Periods.
2) The number of time periods used when calculating the moving average of %K are called %D Periods.
3) The interior smoothing of %K is being controlled by the value. A value of 3 is considered a slow stochastic. And a value of 1 is considered a fast stochastic.4) %D Method helps to measure %D. It can be of different kinds - Simple, Exponential, Time Series, Weighted or Variable Triangular.

One method when trading using the Stochastic Oscillator is to sell when the either line rises above 80 and then falls back below. Vice versa, purchase when either %K or %D decreases below 20 and then again reaches that level. Another way of action is to watch timing trades and to sell when the %K line shifts below the %D line and purchase when the %K line shifts over the %D line.

Besides you should always follow the discrepancies. For instance, if prices start reaching new peaks and the Stochastic Oscillator fails to surpass its previous peaks, the indicator usually demonstrate in which direction prices are moving.
An interval from 0 up to 100conprises all the indicator's possible values. While building an indicator the two control levels are set on the chart where the top level is set at 80 and the low level is set on the 20. If it is crossed by STOCH lines demonstrate the oversell or overbuy situation in the market. The indicator demonstrates oversaturation with sell trades in the market, so the zone of purchases is started if STOCH lines shift below bottom control level. And the indicator demonstrates oversaturation with purchase trades in the market, so the zone of sales is started if the STOCH lines shifts over the top control level. As a rule, they use the following interpretation of the indicator:

- If the curve %K crosses the curve %D from below upward you should purchase.
- If the curve %K crosses a curve %D from top to downward you should sell
- If oscillator - %K or %D - shifts below the line, and then again crosses the bottom level upwards you should purchase.
- If oscillator moves above the line, and then crosses the top level downwards you should sell.
- The presence of discrepancy is the situation when, for instance, the prices have reached new highs, and the values of oscillator turned out to be too weak for reaching new peak values.

RSI - Relative Strenght Index

2009-04-25T02:48:00.000-05:00

In June 1978 Welles Wilder's article introduced the Relative Strength Index (RSI), which is a widespread oscillator. Mr. Wilder's book, "New Concepts in Technical Trading Systems", also provided step-by-step instructions on counting and explaining the RSI. The name "Relative Strength Index" is slightly deceptive, because there is no comparison of the relative strength of two securities in the RSI, but rather the single security's domestic strength. "Internal Strength Index" might be a more suitable name. Two market indices, which are often known as Comparative Relative Strength, are compared by Relative strength scales.

When the RSI was introduced, Wilder advised to use a 14-day RSI, but the 9-day and 25-day RSIs were also popular. Moreover it is a chance to find the period that would be more suitable for you during the experiments with changing the number of time periods in the RSI calculation. (The unsteadiness of the indicator depends on the number of days was used to calculate the RSI - the indicator will be more inconstant, if it was used the fewer days.

The RSI arranges between 0 and 100 and it is also named as a price-following oscillator. The best analysis of the RSI was found out: it is better to find a divergence in which a new high is being made by the security, but the RSI is going down to surpass its previous peak. This divergence means that soon the reversal will come. A "failure swing" completed, when the RSI turns down and decrease below its most recent low.

The fact that the failure swing happened proves the coming reversal. Mr. Wilder's described in his book five uses of the RSI in analyzing commodity charts. You could also use this method as the other security types.

Tops and Bottoms; Before the underlying price chart, the RSI surmounts above 70 and falls below 30 as usual. Chart Formations; chart patterns, such as head and shoulders (page 215) or triangles (page 216) that could or could not be evident on the price chart, are often formed by the RSI. Failure Swings (which is sometimes called support or resistance penetrations or breakouts); the RSI exceeds a previous peak (high) at this moment or falls below a recent trough (low).

Support and Resistance; sometimes more clearly than price themselves, levels of support and resistance are demonstrated by the RSI. Divergences; As it was described earlier, divergences happen when the price goes lower (or higher) and it isn't affirmed by a new high (or low) in the RSI. Prices usually reform and follow the RSI. It would be good to read the Mr. Wilder's book, where you could find additional information.

LONG USDCHF

2009-04-23T18:22:00.001-05:00

And now, waiting for a good opportunity with gbpjpy or gbpusd, my first call.

LONG USDCHF 1.1413

TP 1.1535

Profit: 122 pips

Max drawdown: -64 pips

System profit: 122 pips