Posts Tagged ‘Moving Averages’

Everything you learn about trading is like a tool that is being added to your trader’s toolbox. Your tools will give you a better chance of making good trading decisions when you use the right tool at the right time.

Bollinger Bands.

  • Used to measure the market’s volatility.
  • They act like mini support and resistance levels.

Bollinger Bounce

  • A strategy that relies on the notion that price tends to always return to the middle of the Bollinger bands.
  • You buy when the price hits the lower Bollinger band.
  • You sell when the price hits the upper Bollinger band.
  • Best used in ranging markets.

Bollinger Squeeze

  • A strategy that is used to catch breakouts early.
  • When the Bollinger bands “squeeze”, it means that the market is very quiet, and a breakout is eminent. Once a breakout occurs, we enter a trade on whatever side the price makes its breakout.

MACD

  • Used to catch trends early and can also help us spot trend reversals.
  • It consists of 2 moving averages (1 fast, 1 slow) and vertical lines called a histogram, which measures the distance between the 2 moving averages.
  • Contrary to what many people think, the moving average lines are NOT moving averages of the price. They are moving averages of other moving averages.
  • MACD’s downfall is its lag because it uses so many moving averages.
  • One way to use MACD is to wait for the fast line to “cross over” or “cross under” the slow line and enter the trade accordingly because it signals a new trend.

Parabolic SAR

  • This indicator is made to spot trend reversals, hence the name Parabolic Stop And Reversal (SAR).
  • This is the easiest indicator to interpret because it only gives bullish and bearish signals.
  • When the dots are above the candles, it is a sell signal.
  • When the dots are below the candles, it is a buy signal.
  • These are best used in trending markets that consist of long rallies and downturns.

Stochastic

  • Used to indicate overbought and oversold conditions.
  • When the moving average lines are above 80, it means that the market is overbought and we should look to sell.
  • When the moving average lines are below 20, it means that the market is oversold and we should look to buy

    Relative Strength Index (RSI)

    • Similar to the stochastic in that it indicates overbought and oversold conditions.
    • When RSI is above 70, it means that the market is overbought and we should look to sell.
    • When RSI is below 30, it means that the market is oversold and we should look to buy.
    • RSI can also be used to confirm trend formations. If you think a trend is forming, wait for RSI to go above or below 50 (depending on if you’re looking at an uptrend or downtrend) before you enter a trade.

    Average Directional Index (ADX)

    • The ADX measures how strong a trend is.
    • It fluctuates from 0 to 100, with readings below 20 indicating a weak trend and readings above 50 signaling a strong trend.
    • ADX can be used as confirmation whether the pair could possibly continue in its current trend or not.
    • ADX can also be used to determine when one should close a trade early. For instance, when ADX starts to slide below 50, it indicates that the current trend is losing steam.

    Ichimoku Kinko Hyo

    • Ichimoku Kinko Hyo (IKH) is an indicator that gauges future price momentum and determines future areas of support and resistance.
    • Ichimoku translates to “a glance”, kinko means “equilibrium”, while hyo is Japanese for “chart”. Putting that all together, the phrase ichimoku kinko hyo stands for “a glance at a chart in equilibrium.”
    • If the price is above the Senkou span, the top line serves as the first support level while the bottom line serves as the second support level. If the price is below the Senkou span, the bottom line forms the first resistance level while the top line is the second resistance level.
    • The Kijun Sen acts as an indicator of future price movement. If the price is higher than the blue line, it could continue to climb higher. If the price is below the blue line, it could keep dropping.
    • The Tenkan Sen is an indicator of the market trend. If the red line is moving up or down, it indicates that the market is trending. If it moves horizontally, it signals that the market is ranging.
    • The Chikou Span is the lagging line. If the Chikou line crosses the price in the bottom-up direction, that’s a buy signal. If the green line crosses the price from the top-down, that’s a sell signal.

    Each indicator has its imperfections. This is why traders combine many different indicators to “screen” each other. As you progress through your trading career, you will learn which indicators you like the best and can combine them in a way that fits your trading style.

     

    Source: http://www.babypips.com/school/summary-common-chart-indicators.html

     

Advertisements

Now that you know how some of the most common chart indicators work, you’re ready to get down and dirty with some examples. Better yet, let’s combine some of these indicators and see how their trade signals pan out.

In a perfect world, we could take just one of these indicators and trade strictly by what that indicator told us. The problem is that we DON’T live in a perfect world, and each of these indicators has imperfections.

That is why many traders combine different indicators together so that they can “screen” each other. They might have 3 different indicators and they won’t trade unless all 3 indicators give them the same signal.

In this first example, we’ve got the Bollinger bands and the Stochastic on EUR/USD’s 4-hour chart. Since the market seems to be ranging or moving sideways, we’d better watch out for the Bollinger bounce.

Check out that those sell signals from the Bollinger bands and the Stochastic. EUR/USD climbed until the top of the band, which usually acts as a resistance level.

At the same time, the Stochastic reached the overbought area, suggesting that the price could drop down soon.

And what happened next?

EUR/USD fell by around 300 pips and you would’ve made a hefty profit if you took that short trade.

Later on, the price made contact with the bottom of the band, which usually serves as a support level. This means that the pair could bounce up from there. With the Stochastic in the oversold area, it means we should go long.

If you took that trade, you would have gotten around 400 pips! Not bad!

Here’s another example, with the RSI and the MACD this time.

When the RSI reached the overbought area and gave a sell signal, the MACD soon followed with a downward crossover, which is also a sell signal. And, as you can see, the price did move downhill from there.

Hooray for our indicators!

Later on, the RSI dipped to the oversold region and gave a buy signal. A few hours after, the MACD made an upward crossover, which is also a buy signal. From there, the price made a steady climb. More pips for us, yipee!

You probably noticed in this example that the RSI gives signals ahead of the MACD. Because of the various properties and magic formulas for the technical indicators, some really do give early signals while others are a bit delayed.

You’ll learn more about this in sixth grade.

As you continue your journey as a trader, you will discover which indicators work best for you. We can tell you that we like using MACD, the Stochastic, and RSI, but you might have a different preference.

Every trader out there has tried to find the “magic combination” of indicators that will give them the right signals all the time, but the truth is that there is no such thing.

We urge you to study each indicator on its own until you know the tendencies of how it behaves relative to price movement, and then come up with your own combination that you understand and that fits your trading style.

Later on in the course, we will show you an example of a system that combines different indicators to give you an idea of how they can complement each other.

 

Source: http://www.babypips.com/school/putting-it-all-together.html

 

Yes, you’re still in the right place. You’re still in the School of Pipsology and not in some Japanese pop fan girl site (although Huck may disagree with the rest of the FX-Men on that). No, “Ichimoku Kinko Hyo” ain’t Japanese for “May the pips be with you,” but it can help you grab those pips nonetheless.

Ichimoku Kinko Hyo (IKH) is an indicator that gauges future price momentum and determines future areas of support and resistance. Now that’s 3-in-1 for y’all! Also know that this indicator is mainly used on JPY pairs.

To add to your Japanese vocab, the word ichimoku translates to “a glance”, kinko means “equilibrium”, while hyo is Japanese for “chart.” Putting that all together, the phrase ichimoku kinko hyo stands for “a glance at a chart in equilibrium.” Huh, what does all that mean?

A chart might make things easier to explain…

Whoops. That didn’t help. A few more lines and this’ll resemble a seismograph.

Before you go off and call this gibberish, let’s try to find out what each of the lines is for.

Kijun Sen (blue line): Also called standard line or base line, this is calculated by averaging the highest high and the lowest low for the past 26 periods.

Tenkan Sen (red line): This is also known as the turning line and is derived by averaging the highest high and the lowest low for the past nine periods.

Chikou Span (green line): This is called the lagging line. It is today’s closing price plotted 26 periods behind.

Senkou Span (orange lines): The first Senkou line is calculated by averaging the Tenkan Sen and the Kijun Sen and plotted 26 periods ahead. The second Senkou line is determined by averaging the highest high and the lowest low for the past 52 periods and plotted 26 periods ahead.

 Got it? Well, it’s not really necessary for you to memorize how each of the lines is computed. What’s more important is for you to know how to interpret these fancy lines.

How to Trade Using Ichimoku Kinyo Hyo

Let’s take a look at the Senkou span first.

If the price is above the Senkou span, the top line serves as the first support level while the bottom line serves as the second support level.

If the price is below the Senkou span, the bottom line forms the first resistance level while the top line is the second resistance level. Got it?

Meanwhile, the Kijun Sen acts as an indicator of future price movement. If the price is higher than the blue line, it could continue to climb higher. If the price is below the blue line, it could keep dropping.

The Tenkan Sen is an indicator of the market trend. If the red line is moving up or down, it indicates that the market is trending. If it moves horizontally, it signals that the market is ranging.

Lastly, if the Chikou Span or the green line crosses the price in the bottom-up direction, that’s a buy signal. If the green line crosses the price from the top-down, that’s a sell signal.

Here’s that line-filled chart once more, this time with the trade signals:

It sure looks complicated at first but this baby’s got support and resistance levels, crossovers, oscillators, and trend indicators all in one go! Amazing, right?

Okey dokey, we’ve already covered a smorgasbord of indicators. Let’s see how we can put all of what you just learned together…

Source: http://www.babypips.com/school/ichimoku-kinko-hyo.html

The Average Directional Index, or ADX for short, is another example of an oscillator. It fluctuates from 0 to 100, with readings below 20 indicating a weak trend and readings above 50 signaling a strong trend.

Unlike the stochastic, ADX doesn’t determine whether the trend is bullish or bearish. Rather, it merely measures the strength of the current trend. Because of that, ADX is typically used to identify whether the market is ranging or starting a new trend.

Take a look at these neat charts we’ve pulled up:

In this first example, ADX lingered below 20 from late September until early December. As you can see from the chart, EUR/CHF was stuck inside a range during that time. Beginning in January though, ADX started to climb above 50, signaling that a strong trend could be waiting in the wings.

And would you look at that! EUR/CHF broke below the bottom of the range and went on a strong downtrend. Ooh, that’d be around 400 pips in the bag.

Book it, baby!

Now, let’s look at this next example:

Just like in our first example, ADX hovered below 20 for quite a while. At that time, EUR/CHF was also ranging. Soon enough, ADX rose above 50 and EUR/CHF broke above the top of its range.

Tada!

A strong uptrend took place. That’d be 300 pips, signed, sealed, and delivered!

Looks simple enough, right?

If there’s one problem with using ADX, it’s that it doesn’t exactly tell you whether it’s a buy or a sell. What it does tell you is whether it’d be okay to jump in an ongoing trend or not.

Once ADX starts dropping below 50 again, it could mean that the uptrend or downtrend is starting to weaken and that it might be a good time to lock in profits.

How to Trade Using ADX

One way to trade using ADX is to wait for breakouts first before deciding to go long or short. ADX can be used as confirmation whether the pair could possibly continue in its current trend or not.

Another way is to combine ADX with another indicator, particularly one that identifies whether the pair is headed downwards or upwards.

ADX can also be used to determine when one should close a trade early.

For instance, when ADX starts to slide below 50, it indicates that the current trend is losing steam. From then, the pair could possibly move sideways, so you might want to lock in those pips before that happens.

 

Source: http://www.babypips.com/school/average-directional-index.html

 

Relative Strength Index, or RSI, is similar to the stochastic in that it identifies overbought and oversold conditions in the market. It is also scaled from 0 to 100. Typically, readings below 30 indicate oversold, while readings over 70 indicate overbought.

How to Trade Using RSI

RSI can be used just like the stochastic. We can use it to pick potential tops and bottoms depending on whether the market is overbought or oversold.

Below is a 4-hour chart of EUR/USD.

EUR/USD had been dropping the week, falling about 400 pips over the course of two weeks.

On June 7, it was already trading below the 1.2000 handle. However, RSI dropped below 30, signalling that there might be no more sellers left in the market and that the move could be over. Price then reversed and headed back up over the next couple of weeks.

Determining the Trend using RSI

RSI is a very popular tool because it can also be used to confirm trend formations. If you think a trend is forming, take a quick look at the RSI and look at whether it is above or below 50.

If you are looking at a possible uptrend, then make sure the RSI is above 50. If you are looking at a possible downtrend, then make sure the RSI is below 50.

 In the beginning of the chart above, we can see that a possible downtrend was forming. To avoid fake outs, we can wait for RSI to cross below 50 to confirm our trend. Sure enough, as RSI passes below 50, it is a good confirmation that a downtrend has actually formed.

Source: http://www.babypips.com/school/relative-strength-index.html

 

The Stochastic is another indicator that helps us determine where a trend might be ending.

By definition, a Stochastic is an oscillator that measures overbought and oversold conditions in the market. The 2 lines are similar to the MACD lines in the sense that one line is faster than the other.

How to Trade Using the Stochastic

As we said earlier, the Stochastic tells us when the market is overbought or oversold. The Stochastic is scaled from 0 to 100.

When the Stochastic lines are above 80 (the red dotted line in the chart above), then it means the market is overbought. When the Stochastic lines are below 20 (the blue dotted line), then it means that the market is oversold.

As a rule of thumb, we buy when the market is oversold, and we sell when the market is overbought.

 Looking at the chart above, you can see that the Stochastic has been showing overbought conditions for quite some time. Based on this information, can you guess where the price might go?

If you said the price would drop, then you are absolutely correct! Because the market was overbought for such a long period of time, a reversal was bound to happen.

That is the basics of the Stochastic. Many traders use the Stochastic in different ways, but the main purpose of the indicator is to show us where the market conditions could be overbought or oversold.

Over time, you will learn to use the Stochastic to fit your own personal trading style.

Okay, let’s move on to RSI.

Source: http://www.babypips.com/school/stochastic.html

 

Up until now, we’ve looked at indicators that mainly focus on catching the beginning of new trends. Although it is important to be able to identify new trends, it is equally important to be able to identify where a trend ends. After all, what good is a well-timed entry without a well-timed exit?

One indicator that can help us determine where a trend might be ending is the Parabolic SAR (Stop And Reversal). A Parabolic SAR places dots, or points, on a chart that indicate potential reversals in price movement.

From the image above, you can see that the dots shift from being below the candles during the uptrend to above the candles when the trend reverses into a downtrend.

How to Trade Using Parabolic SAR

The nice thing about the Parabolic SAR is that it is really simple to use. We mean REALLY simple.

Basically, when the dots are below the candles, it is a buy signal; and when the dots are above the candles, it is a sell signal.

Simple?

Yes, we thought so.

This is probably the easiest indicator to interpret because it assumes that the price is either going up or down. With that said, this tool is best used in markets that are trending, and that have long rallies and downturns.

You DON’T want to use this tool in a choppy market where the price movement is sideways.

Using Parabolic SAR to exit trades

You can also use Parabolic SAR to help you determine whether you should close your trade or not.

Check out how the Parabolic SAR worked as an exit signal in EUR/USD’s daily chart above.

When EUR/USD started sliding down in late April, it seemed like it would just keep droppin’ like it’s hot. A trader who was able to short this pair has probably wondered how low it can go.

In early June, three dots formed at the bottom of the price, suggesting that the downtrend was over and that it was time to exit those shorts.

If you stubbornly decided to hold on to that trade thinking that EUR/USD would resume its drop, you would’ve probably erased all those winnings since the pair eventually climbed back near 1.3500.

 

Source: http://www.babypips.com/school/parabolic-sar.html