The FX Blogs for AE

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2012-12-04T16:39:00.001+07:00

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2012-11-20T11:53:00.001+07:00

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2012-11-13T11:17:00.001+07:00

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How to Read a Candlestick Chart | DailyFX

2012-08-14T23:54:00.001+07:00

How to Read a Candlestick Chart | DailyFX

Support vs Resistance

2011-06-26T21:12:00.000+07:00

Support and Resistance is the most important thing Technical Analysis. Let’s start out our discussion by looking at a chart.

As you can see on the chart above, Support is a price level below which a currency pair has difficulty going and Resistance is a price level above which a pair has difficulty going. Think of the area between support and resistance as being a room. Support is the floor and resistance is the ceiling. The pair will move between those two levels until a “breakout” occurs in one direction or the other.

In theory, support is the price level at which demand (buying power) is strong enough to prevent the price from declining further. The rationale is that, as the price gets closer and closer to support, and becomes cheaper in the process, buyers see a better deal, and are more likely to buy. Sellers become less likely to sell, since they are getting a worse deal. In that scenario, demand (buyers) will overcome supply (sellers) and that will prohibit price from falling below support.

As one might suspect, support does not always hold. When price breaks below support, that indicates that the sellers have won out over the buyers. This breach of support indicates that now the trading mindset is more inclined to sell than buy. After a support level is broken, a trader can expect another level of support to be established at the next point where buyers have established themselves.

Resistance, on the other hand, is the price level at which supply (selling power) is strong enough to prevent the price from rising further. The rationale behind this is that as the price gets closer and closer to resistance, and becomes more expensive in the process, sellers are more likely to sell and buyers become less likely to buy. In that scenario, supply (sellers) will overcome demand (buyers) and that will prohibit price from going above resistance.

Like support, resistance does not always hold and a break above resistance demonstrates that the bulls (buyers) have won out over the bears (sellers). Since resistance has been broken, buyers now have an increased willingness to buy at even higher prices since price has continued to move up, and doesn’t look likely to come back down. Once the former resistance level is broken, a new level of resistance will be formed at a level where sellers have taken a stand.

As a general rule, the longer the time frame of the chart, the stronger the established support and resistance levels will be. In other words, support and resistance levels reflected on a Daily chart will be stronger than those appearing on a 1-hour chart, for example.

There’s an old support/resistance axiom that I would like to share with you. When support is broken it becomes new resistance. When resistance is broken it becomes new support. Let’s go back to the room analogy that was mentioned earlier. Let’s say you are in a two story building and the floor gives way and you fall through it to the lower level. The floor that had been supporting you until it gave way, is now the ceiling that is above you…old support (the former floor) becomes new resistance (the new ceiling). Conversely, if somehow you were able to jump so high that you were to go through the ceiling of a room, you would be standing on the former ceiling which is now the new floor.

Let’s take a look at this concept on a chart.

We can see on the above chat how once the old support line is compromised when the pair trade through it to the downside, it now becomes new resistance. Conversely when resistance is broken through on a chart, it becomes new support.

As seen on the chart below, support and resistance levels can be identified by looking for areas of “congestion” on the charts…areas where the buyers and sellers have been battling over control.

Also, levels can be established by connecting the recent lows for support and recent highs for resistance.

In an uptrend, once the trendline is established, a new long position can be taken when price action trades down to support and respects support so that a candle body does not close below it.

Ideally, for a trendline to be considered valid, we would like to see three “touches” by price action along the line. Until that third touch occurs, there is not enough evidence to say that the trendline is a true trendline.

In a downtrend, once the trendline has been established, a new short position can be taken each time price action trades up to trendline resistance without a candle body closing above the line.

Support and Resistance levels are critical in employing a Range Trading strategy. On the chart below we can see how this AUD/JPY pair continues to trade between established levels of support and resistance. A trader would engage in Range Trading by buying at support and selling at resistance. The trader can do this repeatedly until a breakout occurs.

It is important that a trader be able to identify key support and resistance levels in order to successfully practice technical analysis. Since interpreting charts is not an exact science and it is difficult to establish a precise level, simply being aware that these levels exist and their approximate location on a chart can enhance one’s analytical skills.

In a nutshell, if a pair is closing in on a significant support level, that can signal to a trader to be on the lookout for signs of buying pressure and a potential reversal. On the other hand, if a currency pair is approaching a level of significant resistance, that can signal the trader to be on the lookout for signs of selling pressure and a potential reversal.

Should a support or resistance level be broken, that is a sign that the relationship between supply (sellers) and demand (buyers) has changed. If support is broken, sellers now have the upper hand whereas if resistance is broken the buyers are now in control.

GOLD Price Technical View - ASIAN & EUR Session: 20/10/2010

2010-09-20T06:22:00.001+07:00

Gold hit a record high for a third time in the week on Friday as market remains concerned over FED's plan for further quantitative easing. some disappointing data from U.S also supported Gold price but a round of profit taking pulled the price back which ended marginally lower for the day.

Today's recommendation: Gold price trading between 1271-1281, could attempt to break 1282-1291 resistance. BEARISH Traders are recommended to SELL High at 1279 and Take Profit below 1270 or around 1265 during the ASIAN and EUR Sessions.

TODAY Pick: Slightly BULLISH (>1274)

Good Luck,

KEN

GFG88's Analyst

015 333390

ken@gfg88.com

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At GFG88, advanced trading tools, 24-hour customer support, and a secure online trading experience are all part of our commitment to offer more to the individual trader. Our service also offers professional charting, expert market research, and a wealth of education and training. Whatever your level of forex trading experience, GFG88.com has tailored resources to help you make the most of the fast moving global currency markets.

Monday, September 20, 2010 - Friday, September 24, 2010

2010-09-20T05:45:00.001+07:00

The Week Ahead updated September 17, 2010

• USD weakness looks suspect

• JPY intervention may be the real deal

• RMB strength unlikely to continue

• Increased speculation on quantitative easing

• Gold advances to new record levels

• Key data and events to watch next week

USD weakness looks suspect

The USD took a hit in the past week as better Chinese data supported global recovery prospects, weakening safe haven dollar demand, and markets responded to talk the Fed may undertake a second round of quantitative easing (QE). The greenback also likely weakened as the Chinese stepped back from dollar-buying intervention and allowed the RMB to strengthen. The Chinese data suggest a soft-landing has been achieved there and that is indeed supportive for the global outlook, and especially for commodity and regional currencies (e.g. AUD in particular) that benefit from Chinese growth. However, the other developments cited above are likely temporary in nature, suggesting potential for the USD to rebound in coming weeks. The talk of additional Fed QE seems premature given the split among FOMC members, with most content to maintain current policy and others openly questioning the effectiveness of QE. While US data has deteriorated, it does not yet reflect the 'appreciably' worse outlook Fed Chair Bernanke has indicated would be the trigger for additional unconventional policy measures. Judging by recent FOMC minutes, the subject of QE has barely been discussed, much less settled, so the prospect for additional asset purchases at this time seems highly remote. As such, USD weakness may dissipate following the FOMC meeting next Tuesday (Sept. 21). USD weakness emanating from China stepping back from managing the Yuan (RMB) seems similarly set to evaporate if they return to pattern (see more below).

To gauge the potential for a USD rebound, we will closely monitor the 1.2920/50 support level in EUR/USD, which was the recent range high and the break-level for recent EUR gains, and upside potential remains while price holds above. Keep in mind the German ZEW economic sentiment gauge has plunged from +53.0 in April to -4.3 in September, an indication of deteriorating 6-month outlooks. If EUR/USD does drop back below the range break at 1.2920/50, we would anticipate a test of prior range lows around 1.2590/2620 at the minimum, and very likely a break below toward 1.2450/80 initially. Convincing strength above 1.3150/60 will be needed to mount a challenge to recent 1.3330 highs and test the psychological 1.3500 level next.

JPY intervention may be the real deal

Fresh off a victory in an intra-party election, Japanese PM Kan ordered the MOF to take action to counter the strong JPY, according to comments on Friday from Fin. Min. Noda. The resulting BOJ intervention caught many market players off-guard and the reported size of the intervention, estimated at between 10-20 bio USD worth, would be unprecedented for a single day's salvo. Also, in contrast to prior interventions, the JPY being sold are not being sterilized, meaning the BOJ is not selling short-term finance bills and is leaving JPY in the market. Additionally, BOJ Gov. Shirakawa has indicated the BOJ is cooperating at the direction of the MOF on the overall intervention effort, suggesting the two institutions are in agreement on the need to weaken the JPY, in contrast to prior interventions when they worked at cross-purposes. As well, the BOJ has indicated it will provide virtually unlimited liquidity, meaning the MOF has nearly unlimited resources for intervention. Taken together, it appears the Japanese government is firmly committed to countering JPY-strength and we would not underestimate their ability to prevent renewed JPY-gains. As such, we would not expect to see USD/JPY much below 84 any time soon and the risk is for further gains to the 90.00 area, once above the 86.00/50 area. In the JPY-crosses, with USD/JPY downside likely limited by intervention, any major JPY-cross selling on risk aversion seems likely to disproportionately affect the non-JPY dollar pairs (e.g. AUD/USD would likely fall more than USD/JPY if AUD/JPY is being sold).

Increased speculation on quantitative easing

Speculation that the Fed could embark on a further stage of quantitative easing stepped up a gear earlier this week when the Wall Street Journal reported that a well-known investment house expects the Fed to announce new asset purchases as early as November, earlier than the market expects.

Whether this will happen remains to be seen. There are still major hurdles the Fed has to pass before they could embark on more monetary stimulus. Firstly, it was reported that at its August meeting seven of the 17 officials at the Fed either expressed reservation or disagreed with the plan to maintain the size of the Fed's balance sheet and reinvest the proceeds of maturing mortgage-backed assets. This suggests that the Fed is unlikely to come to an agreement on more QE in the near-term. On top of that, the tone of economic data has been somewhat stronger in September. The ISM rebounded and retail sales were also stronger in August after contracting in July. The trigger to further QE is going to be the labor market. If growth doesn't pick up enough to see a drop in the unemployment rate, currently at 9.6 per cent, then the chances of more QE are likely.

The UK is also pondering a further round of QE. This week Bank of England governor Mervyn King said the Bank remains ready to act if necessary. Speaking at the annual Trade Union Congress in Manchester, King said that monetary policy remains the best tool for managing the recovery in the short term, however if the recovery proves to be slower than the Bank expected the BOE can "react". Adam Posen, MPC member, speaking at a conference in Washington, said the BOE's back-up plan should be heavy duty purchases of private assets. Up until now the Bank has only bought government debt such as gilts, however Posen argues if further policy action is deemed necessary then it shouldn't be QE 2. Instead the Bank should adopt a form of credit easing and buy private-sector assets directly from the market.

Although inflation has proven to be stickier than many expected - the headline rate moved back up to 3.1 per cent in August – this is unlikely to get in the way of another round of monetary stimulus. The Bank remains of the view that the large amount of spare capacity in the economy should have a downward impact on inflation in the medium term. Overall, it is unlikely that further stimulus will be implemented in the UK until there is a clear view on the impact of impending budget cuts on economic growth.

Renminbi strength unlikely to continue:

In what is being seen as a gesture to US authorities eager to label China a currency manipulator, Beijing allowed the renminbi (aka RMB or yuan) to strengthen nearly 1% against the dollar this week. The move came prior to the testimony of Treasury Secretary Geithner at congressional hearings on China's FX policy. As China reduced its massive purchases of dollars, typically in excess of $1bn a day, the greenback experienced broad-based weakness against the major currencies.

But China's overture did little to stem Washington's anger over what it sees as China's unreasonable behavior, especially since signs of a slowdown in growth in the emerging market powerhouse have receded in recent weeks. Geithner stepped up his rhetoric, saying China had substantially undervalued its currency, which puts US exporters at a disadvantage. However, he stopped short of calling for direct action, and made it clear to the committees that calling China a currency manipulator would essentially be useless.

Beijing responded in typical fashion, saying that it would not respond to pressure to revalue its currency. Later, the People's Bank of China (PBOC), the Chinese central bank, said swings in the value of the dollar may threaten the global recovery and defended the benefits of currency stability. This suggests that China could resume its purchases of dollars in the near-term, causing the yuan to drift lower in the coming weeks. The next focal point will be mid-October when the US Treasury is scheduled to release its report on currency manipulation.

Gold advances to new record levels

The yellow metal has shined this past week, outperforming the usual safe havens (USD, CHF, and JPY). Government and central bank actions this week have diminished the demand for the safe haven currencies resulting in higher gold prices as investors seek safety amid economic uncertainty. To recap, Tuesday saw XAU/USD gain +1.83% as the greenback declined on speculation of another round of asset purchases by the Fed as early as November. The prospect of another $1 trillion in quantitative easing coupled with the highest price of the yuan since 1993 (reportedly due to fears of trade sanctions) sent the buck plummeting. The softening dollar aided higher gold prices as gold usually moves inversely to the U.S. currency.

Gold extended gains as the Bank of Japan intervened in the currency markets to stem the strengthening yen and as the Swiss National Bank held rates steady and issued a surprisingly dovish statement. As key central banks effectively weakened their currencies, safe haven flows favored gold pushing prices to new record levels of nearly $1,283.

While the central banks and governments continue their campaigns to be 'competitive' in the area of exports by actively depreciating their currencies, the true safe haven emerges in the form of a yellow metal. There is no central bank acting to depreciate the value of gold and it cannot be printed as many governments may do with their currency. This is why we have seen gold continue to break records levels. We would be reluctant to establish longs at current levels however. We expect to see a short term pause or correction as a result of profit taking and remain on the sidelines for now. A near term pull back in XAU/USD is likely to find support on its 21-day sma around 1247/48; below here may see the next key support level around 1217/18 where the 55 and 100-day sma's converge. While the bias remains higher, the upside is likely to see profit taking ahead of the key $1300 level. A sustained break above this level should see gains extend.

Key data and events to watch next week

U.S. economic data kicks off the week on Monday with NAHB Housing Market index for September. Tuesday sees August housing starts, building permits, and the FOMC rate decision and statement. Wednesday has the House Price index for July and Thursday sees weekly jobless claims, August existing home sales and leading indicators. Friday wraps the week up with durable goods orders and new home sales for August as well as speeches by the Fed's Lacker and Fed Chairman Ben Bernanke.

The Eurozone starts the action off on Tuesday as German Chancellor Angela Merkel and Luxembourg PM Jean-Claude Juncker are scheduled to speak. Wednesday will see Eurozone industrial new orders for July and EZ consumer confidence for September. French September business confidence and production outlook indicators are on deck for Thursday. Also due out Thursday is preliminary manufacturing and services PMI for France, Germany, and the Eurozone. Friday sees Germany's August import price index and September IFO survey results.

U.K. data begins on Monday with the September Rightmove House prices figures, August preliminary M4 money supply and mortgage approvals for August. The Bank of England's Andrew Sentence will speak in London on Monday. Tuesday's data includes August public finances and public sector net borrowing and a speech by the BOE's Andrew Bailey. On deck for Wednesday is the Bank of England minutes and a speech by the BOE's Spencer Dale. Thursday finishes the week with August BBA loans for house purchase.

Japan begins the week with the release of its July final coincident and leading index numbers as well as August final machine orders on Tuesday. Wednesday finishes the week with the July All Industry Activity index and August supermarket sales as well as a speech by Bank of Japan Board Member Miyao.

Canada's economic data starts with Monday's international securities transactions and wholesale sales for July. Tuesday sees August CPI numbers and Canadian Finance Minister Jim Flaherty speaking in Ottawa. Wednesday finishes up with August leading indicators and July retail sales.

The calendar down under starts on Monday with a speech by RBA Governor Glenn Stevens, New Zealand's August Performance Services index, and the September ANZ consumer confidence index. Tuesday's data includes NZ August credit card spending and the RBA's September minutes. Wednesday sees the July Westpac Leading index, NZ current account balance. New Zealand's 2Q GDP figures are out on Thursday.

Be on the lookout for important China data as well. Friday will see the MNI Business Conditions survey for September.

Leverage and Margin

2010-06-26T21:15:00.001+07:00

Leverage and margin is a very important concept to understand, because leverage can get you in trouble pretty quickly if not used properly. That being said, if leverage is applied properly, it can increase the profitability of your trading strategies.

“Leverage” and “margin” refer to the same concept, just from a slightly different angle. When a trader opens a position, they are required to put up a fraction of that position’s value “in good faith”. In this case, the trader is said to be “leveraged”. The amount that is required to be put up is known as the “Margin Requirement”. The margin requirement is often referred to as a “good faith deposit”, because the trader generally gets all of that that amount back when they close the position out. I say “generally” here because it may not be the case in the event of a Margin Call, which will be described in more detail later.

Just to be clear: margin deposits are a requirement for trading, not a cost of trading.

A major benefit to the FX market is that it offers some of the lowest margin requirements of any tradable financial instrument. This means that the purchasing power of your account is much higher than that of an equities trading account or bond trading account of the same size.

Let’s go through an example of leverage and margin.

Suppose a trader opens up a position of 1 10k lot in the USD/JPY pair. The trader wouldn’t have to put up $10,000. They would only have to put up $50 or maybe $100. (exactly how much would depend on what level they had their account set at.) Our Demo accounts default to 200:1 leverage so a 10k position would only require $50 in margin requirement (which is 0.5% of 10,000). If the trader opened a two 10k lot positions, their total position would be 20,000 and the margin requirement would now be $100.

One important note here is that the margin requirement is not the maximum you can lose on the position. It is simply what the broker requires you to put up in order to open a position. You’ll always want to keep in mind the actual size of your position because your profit and loss will be based on the size of the position, not on the amount of margin required.

The table below will provide some additional examples.

A trader should always keep in mind that leverage is a double edged sword: while high leverage can magnify gains as a position moves in your favor, it will also magnify losses as a position moves against you.

For that reason it is important not to overleverage your account by either placing too much of the account value at risk and/or opening too many positions relative to the size of the account.

Exactly how much is too much is up to each trader. Short term traders are generally comfortable using more leverage because they know that the position won’t be open very long. Longer term traders will want to use less leverage so that small fluctuations don’t wipe them out. We suggest trying different leverage amounts with your trading strategy on a demo account to find what works best for your trading style. Remember, just because you have access to a great deal of leverage doesn’t mean you should always use it.

To make things very easy for traders, FXCM posts the Minimum Margin Requirement (MMR) for each pair in the Simple Dealing Rates Window.

This table will show you the dollar amount required in margin to open one lot of that pair.

I also want to draw your attention to the Accounts window.

In this window the platform will display the Usd Mr which stands for “Used Margin”. This is the amount that is currently set aside as the “good faith deposit” for your existing positions. The column to the right of Usd Mr is Usbl Mr. Usbl Mr stands for “Usable Margin”. This is how much you have left to support your current open positions, or how much you have available to open additional positions if you’d like. Next to that is Usbl Mr %. This shows you the percent of your account equity that is Usable Margin. If Usbl Mr, % ever goes to 0%, a Margin Call will be triggered on the account. A margin call means that the equity of the account is not enough to meet the minimum margin requirement for the positions that are open. When this happens all open positions are immediately closed at the current market rates.

FXCM guarantees that no account can go into negative territory. If the market moves so quickly in the wrong direction that an account is left with negative equity, FXCM will make an adjustment to the accout to bring it back to Zero. No FXCM client can lose more then what they have deposited into their account.

That being said, we never want a Margin Call triggered on our account. It is often a very serious blow to your trading confidence, as well as likely being very expensive! So it is important keep an eye on our Usbl Mr, % column to make sure it never falls to zero, and to be careful not to overleverage your account.

As I’ve said, leverage can help maginify gains as well as losses. Using leverage apporpriately can help make sure it is more of the former and less of the latter.

Chart Patterns | Bullish Butterfly Pattern | Forex | FX360®

2010-06-17T15:48:00.000+07:00

Chart Patterns | Bullish Butterfly Pattern | Forex | FX360®

Chart Patterns | Bearish Abcd Pattern | Forex | FX360®

2010-06-17T15:21:00.000+07:00

Chart Patterns | Bearish Abcd Pattern | Forex | FX360®

19. How toTrade Moving Averages Like a Pro Part 2

2010-06-15T14:46:00.000+07:00

18. How to Trade Moving Averages Like a Pro Part 1

2010-06-15T14:45:00.000+07:00

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Forex Trading Academy Technical Indicators Simple Moving Averages Filter

2010-06-15T14:43:00.001+07:00

Trading with us at http://www.gfg88.com/

Trends & The Simple Moving Average (SMA)

2010-06-15T14:43:00.000+07:00

Trading with us at http://www.gfg88.com/

Simple Moving Average

2010-06-15T11:01:00.005+07:00

HOW TO CALCULATE THE SIMPLE MOVING AVERAGE

The simple moving average (SMA) is the most basic of the moving averages used for trading. The simple moving average formula is calculated by taking the average closing price of a stock over the last "x" periods.

Let's take a look at a simple moving average example with MSFT. The last five closing prices for MSFT are:

28.93+28.48+28.44+28.91+28.48 = 143.24

To calculate the simple moving average formula you divide the total of the closing prices and divide it by the number of periods.

5-day SMA = 143.24/5 = 28.65

HOW TO MAKE MONEY TRADING WITH THE SMA

Most traders will tell you to trade simple moving average crossovers of and the profits will fall from the heavens. Well, unfortunately this is not accurate. Often time's stocks will tick over or under moving averages to only continue in the primary direction. This will leave you on the wrong side of the market and down on your positions. Below are a few ways to make money trading the SMA.

Going with the Primary Trend

Look for stocks that are breaking out up or down strongly
Apply the following SMAs 5,10,20,40,200 to see which setting is containing price the best
Once you have identified the correct SMA, wait for the price to test the SMA successfully and look for price confirmation that the stock is resuming the direction of the primary trend
Enter the trade on the next bar

Fade the Primary Trend Using Two Simple Moving Averages

Locate stocks that are breaking out up or down strongly
Select two simple moving averages to apply to the chart (ex. 5 and 10)
Make sure the price has not been touching the 5 SMA or 10 SMA excessively in the last 10 bars
Wait for the price to close above or below both moving averages in the counter direction of the primary trend on thesame bar
Enter the trade on the next bar

CONS OF USING SIMPLE MOVING AVERAGE

The simple moving average takes the raw average of the last "x" closing prices. The simple moving average formula does not weight recent price movements like its sister the exponential moving average. Hence, the simple moving average will quite often lag the current price and should never be used to make trading decisions independently of other technical analysis indicators.

Japanese Candlestick Charting Explained

2010-06-09T16:13:00.000+07:00

Intro to Candles
Bullish Reversals
Bearish Reversals
Continuation Patterns

View All Bearish Reversal Patterns	View All Continuation Patterns	View All Bullish Reversals Patterns

Candlestick Trading

Candlesticks provide unique visual cues that make reading price action easier. Trading with Japanese Candle Charts allow speculators to better comprehend market sentiment. Offering a greater depth of information than traditional bar charts - where the high and low are emphasized - candlesticks give emphasis to the relationship between close price and open price.

Traders who use candlesticks may more quickly identify different types of price action that tend to predict reversals or continuations in trends - one of the most difficult aspects of trading. Furthermore, combined with other technical analysis tools, candlestick pattern analysis can be a very useful way to select entry and exit points.

The following image represents the design of the typical candlestick.

The body of a candlestick illustrates the difference between the open and closing price. Its color (in this case, red for down and blue for up) shows whether the day's (or week's or year's) market closed up or down.

The wicks (or shadows) point out the extreme low and the extreme high price for the currency that day.

Bar-Chart Side by Side With Candlestick Chart

Because the body of the candle is thicker than the shadow, candlestick charts visually stress how the close price relates to the open price far more than bar charts. Candlestick traders have a saying; the real body is the essence of price movement.

Bar charts on the other hand allow spikes to highs and lows to have prominence when exploring their data, these highs and lows often represent market noise, less significant to good analysis. The power of candles is their ability to visually screen out this static and focus on what the market was able force price to do during a period of trading

Outside of the trading pit, Technical Analysis is really the only way to gauge market emotion. A candlestick alone does not give much information useful to determining market sentiment. Market professionals do however look for specific patterns of candlesticks to gauge future price movements. Many of these candlestick names have eccentric names like Morning Star, Dark Cloud Cover or Engulfing Pattern that are based translations of their Japanese names. The names also tend to reflect market sentiment.

Bearish Reversal Pattern	Continuation Pattern	Bullish Reversal Pattern

Reversal Patterns

One of the most significant goals of technical analysis is to identify changes in direction of price action. Because candlesticks give insight into what the market is thinking, one of the most useful aspects of candlestick analysis is its ability to suggest changes in the sentiment of the market. We call these candle formations Reversal Patterns.

There are a number reversal patterns in western technical analysis, such as Head & Shoulders and Double Tops. Those formations often don't give much insight into what the market is thinking, they simply represent common patterns found in price action that precede a reversal. Reversal patterns in western analysis often take many periods to form. On the other hand Candlestick interpretations concentrate much more on understanding market psychology than anything else. And because the vast majority of Candlesticks formations take one to three time periods, they give traders more of a real time picture of market sentiment.

Important to note is that with candlesticks a reversal pattern does not necessarily suggest a complete reversal in trend, but merely a change or pause in direction. That could mean anything from a slowdown in trend, sideways trading after an established trend, or a full turnaround following a reversal candle pattern.

View All Bullish Reversals Patterns | View All Bearish Reversal Patterns

Continuation Candlestick Patterns

Continuation patterns suggest the market will maintain an established trend. Often the direction of the candlesticks themselves are in the opposite direction of trend in continuance. Continuation patterns help traders differentiate between a price action that is in full reversal and those merely taking a pause. Most traders will tell you there is a time to trade and a time to rest. The formation of continuation candlestick patterns imply consolidation, a time to rest and watch.

View All Continuation Patterns

Using Candlesticks

Candlesticks serve as valuable insight into the market. Most candlestick analysts will tell you though; do not to use them as your sole technical analysis tool. These patterns are often made irrelevant by technical analysis events outside of what candle formations can tell you. The most prominent candlestick analysis proponents in the West use these patterns to confirm traditional western technical or fundamental analysis techniques.

Intro to Candlestick Trading	Bearish Reversal Patterns	Continuation Patterns	Bullish Reversal Patterns

Risk Warning: Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to invest in foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with foreign exchange trading, and seek advice from an independent financial advisor if you have any doubts.

Introduction to Candlesticks

2010-06-09T16:08:00.000+07:00

Introduction to Candlesticks

History

The Japanese began using technical analysis to trade rice in the 17th century. While this early version of technical analysis was different from the US version initiated byCharles Dow around 1900, many of the guiding principles were very similar:

The "what" (price action) is more important than the "why" (news, earnings, and so on).
All known information is reflected in the price.
Buyers and sellers move markets based on expectations and emotions (fear and greed).
Markets fluctuate.
The actual price may not reflect the underlying value.

According to Steve Nison, candlestick charting first appeared sometime after 1850. Much of the credit for candlestick development and charting goes to a legendary rice trader named Homma from the town of Sakata. It is likely that his original ideas were modified and refined over many years of trading eventually resulting in the system of candlestick charting that we use today.

Formation

In order to create a candlestick chart, you must have a data set that contains open, high, low and close values for each time period you want to display. The hollow or filled portion of the candlestick is called "the body" (also referred to as "the real body"). The long thin lines above and below the body represent the high/low range and are called "shadows" (also referred to as "wicks" and "tails"). The high is marked by the top of the upper shadow and the low by the bottom of the lower shadow. If the stock closes higher than its opening price, a hollow candlestick is drawn with the bottom of the body representing the opening price and the top of the body representing the closing price. If the stock closes lower than its opening price, a filled candlestick is drawn with the top of the body representing the opening price and the bottom of the body representing the closing price.

Compared to traditional bar charts, many traders consider candlestick charts more visually appealing and easier to interpret. Each candlestick provides an easy-to-decipher picture of price action. Immediately a trader can see compare the relationship between the open and close as well as the high and low. The relationship between the open and close is considered vital information and forms the essence of candlesticks. Hollow candlesticks, where the close is greater than the open, indicate buying pressure. Filled candlesticks, where the close is less than the open, indicate selling pressure.

Long Versus Short Bodies

Generally speaking, the longer the body is, the more intense the buying or selling pressure. Conversely, short candlesticks indicate little price movement and represent consolidation.

Long white candlesticks show strong buying pressure. The longer the white candlestick is, the further the close is above the open. This indicates that prices advanced significantly from open to close and buyers were aggressive. While long white candlesticks are generally bullish, much depends on their position within the broader technical picture. After extended declines, long white candlesticks can mark a potential turning point or support level. If buying gets too aggressive after a long advance, it can lead to excessive bullishness.

Long black candlesticks show strong selling pressure. The longer the black candlestick is, the further the close is below the open. This indicates that prices declined significantly from the open and sellers were aggressive. After a long advance, a long black candlestick can foreshadow a turning point or mark a future resistance level. After a long decline a long black candlestick can indicate panic or capitulation.

Even more potent long candlesticks are the Marubozu brothers, Black and White. Marubozu do not have upper or lower shadows and the high and low are represented by the open or close. A White Marubozu forms when the open equals the low and the close equals the high. This indicates that buyers controlled the price action from the first trade to the last trade. Black Marubozu form when the open equals the high and the close equals the low. This indicates that sellers controlled the price action from the first trade to the last trade.

Long Versus Short Shadows

The upper and lower shadows on candlesticks can provide valuable information about the trading session. Upper shadows represent the session high and lower shadows the session low. Candlesticks with short shadows indicate that most of the trading action was confined near the open and close. Candlestick with long shadows show that traded extended well past the open and close.

Candlesticks with a long upper shadow and short lower shadow indicate that buyers dominated during the session, and bid prices higher. However, sellers later forced prices down from their highs, and the weak close created a long upper shadow. Conversely, candlesticks with long lower shadows and short upper shadows indicate that sellers dominated during the session and drove prices lower. However, buyers later resurfaced to bid prices higher by the end of the session and the strong close created a long lower shadow.

Candlesticks with a long upper shadow, long lower shadow and small real body are called spinning tops. One long shadow represents a reversal of sorts; spinning tops represent indecision. The small real body (whether hollow or filled) shows little movement from open to close, and the shadows indicate that both bulls and bears were active during the session. Even though the session opened and closed with little change, prices moved significantly higher and lower in the meantime. Neither buyers nor sellers could gain the upper hand and the result was a standoff. After a long advance or long white candlestick, a spinning top indicates weakness among the bulls and a potential change or interruption in trend. After a long decline or long black candlestick, a spinning top indicates weakness among the bears and a potential change or interruption in trend.

Doji

Doji are important candlesticks that provide information on their own and as components of in a number of important patterns. Doji form when a security's open and close are virtually equal. The length of the upper and lower shadows can vary and the resulting candlestick looks like a cross, inverted cross or plus sign. Alone, doji are neutral patterns. Any bullish or bearish bias is based on preceding price action and future confirmation. The word "Doji" refers to both the singular and plural form.

Ideally, but not necessarily, the open and close should be equal. While a doji with an equal open and close would be considered more robust, it is more important to capture the essence of the candlestick. Doji convey a sense of indecision or tug-of-war between buyers and sellers. Prices move above and below the opening level during the session, but close at or near the opening level. The result is a standoff. Neither bulls nor bears were able to gain control and a turning point could be developing.

Different securities have different criteria for determining the robustness of a doji. A $20 stock could form a doji with a 1/8 point difference between open and close, while a $200 stock might form one with a 1 1/4 point difference. Determining the robustness of the doji will depend on the price, recent volatility, and previous candlesticks. Relative to previous candlesticks, the doji should have a very small body that appears as a thin line. Steven Nison notes that a doji that forms among other candlesticks with small real bodies would not be considered important. However, a doji that forms among candlesticks with long real bodies would be deemed significant.

Doji and Trend

The relevance of a doji depends on the preceding trend or preceding candlesticks. After an advance, or long white candlestick, a doji signals that the buying pressure is starting to weaken. After a decline, or long black candlestick, a doji signals that selling pressure is starting to diminish. Doji indicate that the forces of supply and demand are becoming more evenly matched and a change in trend may be near. Doji alone are not enough to mark a reversal and further confirmation may be warranted.

After an advance or long white candlestick, a doji signals that buying pressure may be diminishing and the uptrend could be nearing an end. Whereas a security can decline simply from a lack of buyers, continued buying pressure is required to sustain an uptrend. Therefore, a doji may be more significant after an uptrend or long white candlestick. Even after the doji forms, further downside is required for bearish confirmation. This may come as a gap down, long black candlestick, or decline below the long white candlestick's open. After a long white candlestick and doji, traders should be on the alert for a potential evening doji star.

After a decline or long black candlestick, a doji indicates that selling pressure may be diminishing and the downtrend could be nearing an end. Even though the bears are starting to lose control of the decline, further strength is required to confirm any reversal. Bullish confirmation could come from a gap up, long white candlestick or advance above the long black candlestick's open. After a long black candlestick and doji, traders should be on the alert for a potential morning doji star.

Long-Legged Doji

Long-legged doji have long upper and lower shadows that are almost equal in length. These doji reflect a great amount of indecision in the market. Long-legged doji indicate that prices traded well above and below the session's opening level, but closed virtually even with the open. After a whole lot of yelling and screaming, the end result showed little change from the initial open.

Dragon Fly and Gravestone Doji

Dragon Fly Doji

Dragon fly doji form when the open, high and close are equal and the low creates a long lower shadow. The resulting candlestick looks like a "T" with a long lower shadow and no upper shadow. Dragon fly doji indicate that sellers dominated trading and drove prices lower during the session. By the end of the session, buyers resurfaced and pushed prices back to the opening level and the session high.

The reversal implications of a dragon fly doji depend on previous price action and future confirmation. The long lower shadow provides evidence of buying pressure, but the low indicates that plenty of sellers still loom. After a long downtrend, long black candlestick, or at support, a dragon fly doji could signal a potential bullish reversal or bottom. After a long uptrend, long white candlestick or at resistance, the long lower shadow could foreshadow a potential bearish reversal or top. Bearish or bullish confirmation is required for both situations.

Gravestone Doji

Gravestone doji form when the open, low and close are equal and the high creates a long upper shadow. The resulting candlestick looks like an upside down "T" with a long upper shadow and no lower shadow. Gravestone doji indicate that buyers dominated trading and drove prices higher during the session. However, by the end of the session, sellers resurfaced and pushed prices back to the opening level and the session low.

As with the dragon fly doji and other candlesticks, the reversal implications of gravestone doji depend on previous price action and future confirmation. Even though the long upper shadow indicates a failed rally, the intraday high provides evidence of some buying pressure. After a long downtrend, long black candlestick, or at support, focus turns to the evidence of buying pressure and a potential bullish reversal. After a long uptrend, long white candlestick or at resistance, focus turns to the failed rally and a potential bearish reversal. Bearish or bullish confirmation is required for both situations.

Before turning to the single and multiple candlestick patterns, there are a few general guidelines to cover.

Bulls Versus Bears

A candlestick depicts the battle between Bulls (buyers) and Bears (sellers) over a given period of time. An analogy to this battle can be made between two football teams, which we can also call the Bulls and the Bears. The bottom (intra-session low) of the candlestick represents a touchdown for the Bears and the top (intra-session high) a touchdown for the Bulls. The closer the close is to the high, the closer the Bulls are to a touchdown. The closer the close is to the low, the closer the Bears are to a touchdown. While there are many variations, I have narrowed the field to 6 types of games (or candlesticks):

Long white candlesticks indicate that the Bulls controlled the ball (trading) for most of the game.
Long black candlesticks indicate that the Bears controlled the ball (trading) for most of the game.
Small candlesticks indicate that neither team could move the ball and prices finished about where they started.
A long lower shadow indicates that the Bears controlled the ball for part of the game, but lost control by the end and the Bulls made an impressive comeback.
A long upper shadow indicates that the Bulls controlled the ball for part of the game, but lost control by the end and the Bears made an impressive comeback.
A long upper and lower shadow indicates that the both the Bears and the Bulls had their moments during the game, but neither could put the other away, resulting in a standoff.

What Candlesticks Don't Tell You

Candlesticks do not reflect the sequence of events between the open and close, only the relationship between the open and the close. The high and the low are obvious and indisputable, but candlesticks (and bar charts) cannot tell us which came first.

With a long white candlestick, the assumption is that prices advanced most of the session. However, based on the high/low sequence, the session could have been more volatile. The example above depicts two possible high/low sequences that would form the same candlestick. The first sequence shows two small moves and one large move: a small decline off the open to form the low, a sharp advance to form the high, and a small decline to form the close. The second sequence shows three rather sharp moves: a sharp advance off the open to form the high, a sharp decline to form the low, and a sharp advance to form the close. The first sequence portrays strong, sustained buying pressure, and would be considered more bullish. The second sequence reflects more volatility and some selling pressure. These are just two examples, and there are hundreds of potential combinations that could result in the same candlestick. Candlesticks still offer valuable information on the relative positions of the open, high, low and close. However, the trading activity that forms a particular candlestick can vary.

Prior Trend

In his book, Candlestick Charting Explained, Greg Morris notes that for a pattern to qualify as a reversal pattern, there should be a prior trend to reverse. Bullish reversals require a preceding downtrend and bearish reversals require a prior uptrend. The direction of the trend can be determined using trend lines, moving averages, peak/trough analysis or other aspects of technical analysis. A downtrend might exist as long as the security was trading below its down trend line, below its previousreaction high or below a specific moving average. The length and duration will depend on individual preferences. However, because candlesticks are short-term in nature, it is usually best to consider the last 1-4 weeks of price action.

Candlestick Positioning

Star Position

A candlestick that gaps away from the previous candlestick is said to be in star position. The first candlestick usually has a large real body, but not always, and the second candlestick in star position has a small real body. Depending on the previous candlestick, the star position candlestick gaps up or down and appears isolated from previous price action. The two candlesticks can be any combination of white and black. Doji, hammers, shooting stars and spinning tops have small real bodies, and can form in the star position. Later we will examine 2- and 3-candlestick patterns that utilize the star position.

Harami Position

A candlestick that forms within the real body of the previous candlestick is in Harami position. Harami means pregnant in Japanese and the second candlestick is nestled inside the first. The first candlestick usually has a large real body and the second a smaller real body than the first. The shadows (high/low) of the second candlestick do not have to be contained within the first, though it's preferable if they are. Doji and spinning tops have small real bodies, and can form in the harami position as well. Later we will examine candlestick patterns that utilize the harami position.

Long Shadow Reversals

There are two pairs of single candlestick reversal patterns made up of a small real body, one long shadow and one short or non-existent shadow. Generally, the long shadow should be at least twice the length of the real body, which can be either black or white. The location of the long shadow and preceding price action determine the classification.

The first pair, Hammer and Hanging Man, consists of identical candlesticks with small bodies and long lower shadows. The second pair, Shooting Star and Inverted Hammer, also contains identical candlesticks, except, in this case, they have small bodies and long upper shadows. Only preceding price action and further confirmation determine the bullish or bearish nature of these candlesticks. The Hammer and Inverted Hammer form after a decline and are bullish reversal patterns, while the Shooting Star and Hanging Man form after an advance and are bearish reversal patterns.

Hammer and Hanging Man

The Hammer and Hanging Man look exactly alike, but have different implications based on the preceding price action. Both have small real bodies (black or white), long lower shadows and short or non-existent upper shadows. As with most single and double candlestick formations, the Hammer and Hanging Man require confirmation before action.

The Hammer is a bullish reversal pattern that forms after a decline. In addition to a potential trend reversal, hammers can mark bottoms or support levels. After a decline, hammers signal a bullish revival. The low of the long lower shadow implies that sellers drove prices lower during the session. However, the strong finish indicates that buyers regained their footing to end the session on a strong note. While this may seem enough to act on, hammers require further bullish confirmation. The low of the hammer shows that plenty of sellers remain. Further buying pressure, and preferably on expanding volume, is needed before acting. Such confirmation could come from a gap up or long white candlestick. Hammers are similar to selling climaxes, and heavy volume can serve to reinforce the validity of the reversal.

The Hanging Man is a bearish reversal pattern that can also mark a top or resistance level. Forming after an advance, a Hanging Man signals that selling pressure is starting to increase. The low of the long lower shadow confirms that sellers pushed prices lower during the session. Even though the bulls regained their footing and drove prices higher by the finish, the appearance of selling pressure raises the yellow flag. As with the Hammer, a Hanging Man requires bearish confirmation before action. Such confirmation can come as a gap down or long black candlestick on heavy volume.

Inverted Hammer and Shooting Star

The Inverted Hammer and Shooting Star look exactly alike, but have different implications based on previous price action. Both candlesticks have small real bodies (black or white), long upper shadows and small or nonexistent lower shadows. These candlesticks mark potential trend reversals, but require confirmation before action.

The Shooting Star is a bearish reversal pattern that forms after an advance and in the star position, hence its name. A Shooting Star can mark a potential trend reversal or resistance level. The candlestick forms when prices gap higher on the open, advance during the session and close well off their highs. The resulting candlestick has a long upper shadow and small black or white body. After a large advance (the upper shadow), the ability of the bears to force prices down raises the yellow flag. To indicate a substantial reversal, the upper shadow should relatively long and at least 2 times the length of the body. Bearish confirmation is required after the Shooting Star and can take the form of a gap down or long black candlestick on heavy volume.

The Inverted Hammer looks exactly like a Shooting Star, but forms after a decline or downtrend. Inverted Hammers represent a potential trend reversal or support levels. After a decline, the long upper shadow indicates buying pressure during the session. However, the bulls were not able to sustain this buying pressure and prices closed well off of their highs to create the long upper shadow. Because of this failure, bullish confirmation is required before action. An Inverted Hammer followed by a gap up or long white candlestick with heavy volume could act as bullish confirmation.

Blending Candlesticks

Candlestick patterns are made up of one or more candlesticks and these can be blended together to form one candlestick. This blended candlestick captures the essence of the pattern and can be formed using the following:

The open of first candlestick
The close of the last candlestick
The high and low of the pattern

By using the open of the first candlestick, close of the second candlestick, and high/low of the pattern, a Bullish Engulfing Pattern or Piercing Pattern blends into a Hammer. The long lower shadow of the Hammer signals a potential bullish reversal. As with the Hammer, both the Bullish Engulfing Pattern and the Piercing Pattern require bullish confirmation.

Blending the candlesticks of a Bearish Engulfing Pattern or Dark Cloud Cover Pattern creates a Shooting Star. The long, upper shadow of the Shooting Star indicates a potential bearish reversal. As with the Shooting Star, Bearish Engulfing, and Dark Cloud Cover Patterns require bearish confirmation.

More than two candlesticks can be blended using the same guidelines: open from the first, close from the last and high/low of the pattern. Blending Three White Soldiers creates a long white candlestick and blending Three Black Crows creates a long black candlestick.

For a comprehensive list of chart patterns, see the StockCharts Candlestick Dictionary.

Sharpening Your Trading Skills: The Relative Strength Index (RSI)

2010-06-07T07:10:00.002+07:00

By Jim Wyckoff
Of Kitco News www.kitco.com

One of the more popular computer-generated technical indicators is the Relative Strength Index (RSI) oscillator. (An oscillator, defined in market terms, is a technical study that attempts to measure market price momentum—such as a market being overbought or oversold.)

I’ll define and briefly discuss the RSI, and then I’ll tell you how I use it in my market analysis and trading decisions.

The Relative Strength Index (RSI ) is a J. Welles Wilder, Jr. trading tool. The main purpose of the study is to measure the market's strength or weakness. A high RSI, above 70, suggests an overbought or weakening bull market. Conversely, a low RSI, below 30, implies an oversold market or dying bear market. While you can use the RSI as an overbought and oversold indicator, it works best when a failure swing occurs between the RSI and market prices. For example, the market makes new highs after a bull market setback, but the RSI fails to exceed its previous highs.

Another use of the RSI is divergence. Market prices continue to move higher/lower while the RSI fails to move higher/lower during the same time period. Divergence may occur in a few trading intervals, but true divergence usually requires a lengthy time frame, perhaps as much as 20 to 60 trading intervals.

Selling when the RSI is above 70 or buying when the RSI is below 30 can be an expensive trading system. A move to those levels is a signal that market conditions are ripe for a market top or bottom. But it does not, in itself, indicate a top or a bottom. A failure swing or divergence accompanies the best trading signals.

The RSI exhibits chart formations as well. Common bar chart formations readily appear on the RSI study. They are trendlines, head and shoulders, and double tops and bottoms. In addition, the study can highlight support and resistance zones.

How I employ the RSI

As you just read above, some traders use these oscillators to generate buy and sell signals in markets-—and even as an overall trading system. However, I treat the RSI as just one trading tool in my trading toolbox. I use it in certain situations, but only as a “secondary” tool. I tend to use most computer-generated technical indicators as secondary tools when I am analyzing a market or considering a trade. My “primary” trading tools include chart patterns, fundamental analysis and trend lines.

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

I do look at oscillators when a market has been in a decent trend for a period of time, but not an overly strong trend. I can pretty much tell by looking at a bar chart if a market is “extended” (overbought or oversold), but will employ the RSI to confirm my thinking. I also like to look at the oscillators when a market has been in a longer-term downtrend. If the readings are extreme-—say a reading of 10 or below on the RSI-—that is a good signal the market is well oversold and could be due for at least an upside correction. However, I still would not use an oscillator, under this circumstance, to enter a long-side trade in straight futures, as that would be trying to bottom-pick.

Oscillators are not perfect and are certainly not the “Holy Grail” that some traders continually seek. However, the RSI is a useful tool to employ under certain market conditions.

More information:

Sharpening Your Trading Skills: Using Bollinger Bands

Sharpening Your Trading Skills: The MACD Indicator

Sharpening Your Trading Skills: Moving Averages

By Jim Wyckoff, contributing to Kitco News; jim@jimwyckoff.com

Sharpening Your Trading Skills: The MACD Indicator

2010-06-07T07:10:00.001+07:00

By Jim Wyckoff
Of Kitco News www.kitco.com

The Moving Average Convergence Divergence (MACD) indicator has the past few years become one of the more popular computer-generated technical indicators.

The MACD, developed by Gerald Appel, is both a trend follower and a market momentum indicator (an oscillator). The MACD is the difference between a fast exponential moving average and a slow exponential moving average. An exponential moving average is a weighted moving average that usually assigns a greater weight to more recent price action.

The name “Moving Average Convergence Divergence” originated from the fact that the fast exponential moving average is continually converging toward or diverging away from the slow exponential moving average. A third, dotted exponential moving average of the MACD (the "trigger" or the signal line) is then plotted on top of the MACD.

Parameters:

Mov1: The time period for the first exponential moving average. The default value is usually 12, referring to 12 bars of whatever timeframe plotted on the chart. (This is the fast moving average.)

Mov2: The time period for the subtracted exponential moving average. The default value is usually 26, referring to 26 bars. (This is the slow moving average.)

Trigger: The period of 9 bars for the signal line representing an additional exponential moving average.

(Note: For a graphic example of the MACD indicator, send me an email at jim@jimwyckoff.com and I will email you back with the picture example.)

The MACD study can be interpreted like any other trend-following analysis: One line crossing another indicates either a buy or sell signal. When the MACD crosses above the signal line, an uptrend may be starting, suggesting a buy. Conversely, the crossing below the signal line may indicate a downtrend and a sell signal. The crossover signals are more reliable when applied to weekly charts, though this indicator may be applied to daily charts for short-term trading.

The MACD can signal overbought and oversold trends, if analyzed as an oscillator that fluctuates above and below a zero line. The market is oversold (buy signal) when both lines are below zero, and it is overbought (sell signal) when the two lines are above the zero line.

The MACD can also help identify divergences between the indicator and price activity, which may signal trend reversals or trend losing momentum. A bearish divergence occurs when the MACD is making new lows while prices fail to reach new lows. This can be an early signal of a downtrend losing momentum. A bullish divergence occurs when the MACD is making new highs while prices fail to reach new highs. Both of these signals are most serious when they occur at relatively overbought/oversold levels. Weekly charts are more reliable than daily for divergence analysis with the MACD indicator.

For more details on the MACD, Appel has a book in print, entitled: "The Moving Average Convergence-Divergence Trading Method."

As with most other computer-generated technical indicators, the MACD is a "secondary" indicator in my trading toolbox. It is not as important as my "primary" technical indicators, such as trend lines, chart gaps, chart patterns and fundamental analysis. I use the MACD to help me confirm signals that my primary indicators may be sending.

That's it for now. Next time, we'll examine another important topic on your road to increased trading success.

More information:

Sharpening Your Trading Skills: Using Bollinger Bands

Sharpening Your Trading Skills: Moving Averages

Sharpening Your Trading Skills: The Relative Strength Index (RSI)

By Jim Wyckoff, contributing to Kitco News; jim@jimwyckoff.com

Sharpening Your Trading Skills: Using Bollinger Bands

2010-06-07T07:08:00.000+07:00

By Jim Wyckoff
Of Kitco News www.kitco.com

The Bollinger Bands (B-Bands) technical study was created by John Bollinger, the president of Bollinger Capital Management Inc., based in Manhattan Beach, California. Bollinger is well respected in the futures and equities industries.

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

B-Bands are lines plotted on a chart at an interval around a moving average. They consist of a moving average and two standard deviations charted as one line above and one line below the moving average. The line above is two standard deviations added to the moving average. The line below is two standard deviations subtracted from the moving average.

Some traders use B-Bands in conjunction with another indicator, such as the Relative Strength Index (RSI). If the market price touches the upper B-band and the RSI does not confirm the upward move (i.e. there is divergence between the indicators), a sell signal is generated. If the indicator confirms the upward move, no sell signal is generated, and in fact, a buy signal may be indicated.

If the price touches the lower B-band and the RSI does not confirm the downward move, a buy signal is generated. If the indicator confirms the downward move, no buy signal is generated, and in fact, a sell signal may be indicated.

Another strategy uses the Bollinger Bands without another indicator. In this approach, a chart top occurring above the upper band followed by a top below the upper band generates a sell signal. Likewise, a chart bottom occurring below the lower band followed by a bottom above the lower band generates a buy signal.

B-Bands also help determine overbought and oversold markets. When prices move closer to the upper band, the market is becoming overbought, and as the prices move closer to the lower band, the market is becoming oversold.

Importantly, the market’s price momentum should also be taken into account. When a market enters an overbought or oversold area, it may become even more so before it reverses. You should always look for evidence of price weakening or strengthening before anticipating a market reversal.

Bollinger Bands can be applied to any type of chart, although this indicator works best with daily and weekly charts. When applied to a weekly chart, the Bands carry more significance for long-term market changes. John Bollinger says periods of less than 10 days do not work well for B-Bands. He says that the optimal period is 20 or 21 days.

Like most computer-generated technical indicators, I use B-Bands as mostly an indicator of overbought and oversold conditions, or for divergence--but not as a specific generator of buy and sell signals for my trading opportunities. It's just one more "secondary" trading tool, as opposed to my "primary" trading tools that include chart patterns and trend lines and fundamental analysis.

More information:

Sharpening Your Trading Skills: The MACD Indicator

Sharpening Your Trading Skills: Moving Averages

Sharpening Your Trading Skills: The Relative Strength Index (RSI)

By Jim Wyckoff, contributing to Kitco News; jim@jimwyckoff.com

Energy Sector vs. Financial Regulation and Dow Recaptures 10,000

2010-06-03T11:29:00.000+07:00

Trading with us at http://www.gfg88.com/

A Pig Table by Ed Stein

2010-05-20T09:13:00.004+07:00

May 2010 Comment:

It's the rare little builder that has made his financial house wholly out of gold, whereas those having none at all is the all-too-common state of affairs down at Old MacDonald's farm.

With just a little gold you could have a solid foundation on which to regroup and rebuild. And with just a little more you might have a complete storm shelter in which to calmly endure the winds of change.

The choice is yours. Choose gold -- the 'bacon' you save may soon be your very own.

Did Gold Really Go Down?

2010-05-19T23:21:00.002+07:00

US Dollar Strength, Weakness, the price of Gold

When the US Dollar gets stronger, it takes fewer dollars to buy any commodity that is priced in $USD. When the US Dollar gets weaker it takes more dollars to purchase the same commodity.

The price of all US Dollar denominated commodities, like gold, will change to reflect the fact that it will take fewer or more dollars to buy that commodity. So it’s quite possible, in fact it’s almost always the case that a portion of the change in the price of gold is really just a reflection of a change in the value of the US Dollar. Sometimes that portion is insignificant. But often the opposite is true where the entire change in the gold price is simply a mathematical recalculation of an ever-changing US Dollar value.

When the dollar gets strong, gold appears to go down, and vice versa. That accounts for part of the fluctuations that we see in the value of gold.

The other part is an actual increase in the supply or demand for gold. If the price is higher when being measured not only in US Dollars, but also in Euros, Pounds Sterling, Japanese Yen, and every other major currency, then we know the gold demand is higher and it has actually increased in value.

Consequently, if gold is higher in US Dollars while at the same time cheaper in every other currency, then we can conclude that the US Dollar has weakened, and that gold has actually lost value in all other currencies. But the price, because it is being quoted in $USD will be higher and give the illusion of gold becoming more valuable. In such a case the devaluation of gold, due to increased supply on the market, is camouflaged by a weakened US Dollar.

Our feature on kitco.com breaks the change of the price of gold into 2 components. One part shows you how much of that change can be attributed to US Dollar strength, or lack of it. The other portion is indicative of how much the price changed as a result of normal trading. Interestingly whatever changes happen to the price of gold as a result of US Dollar strength/weakness also occurs to every other US Dollar denominated commodity by the exact same proportion.

How Forex Brokers Make a Money?

2010-05-18T22:41:00.000+07:00

There are many ins and outs of the foreign exchange trading process. There's so much to make within currency trading, but most people are not aware of its details, how it works, or the art of making smart moves in the world of Forex.

Forex brokers act as consultants when it comes to making decisions in the process and strategies of foreign exchange and are paid for their expertise in such skills and executing the easiest ways to access the market. They are paid a commission (read more about forex broker commission) based on the results of your spread and you rely on their dependency and ability to provide advice and accommodate your trading efforts.

There are some aspects and details of the market and applicable time sensitive economic strategies that you should make sure your broker has the ability to discern and translate. They should be able to help you understand how your investment is being handled and why.

Your forex broker should definitely be accredited with the abilty to make you comfortable with their familiarity with the ever changing rules and terms established by foreign exchange trading authorities. They should also be able to express their competency in communicating the causes and effects of current market conditions, what rates are available, and every detail possible in allowing you to make practical trades.

A proficient and respectable broker also makes it a point to keep your cost for variable commissions in currency trading down to a minimum. You should not be approached with outstanding trading prices if your broker understands the idea of initially trading in small quantities until you have developed a long lasting respectable relationship. You then begin to understand and adopt your broker's hopefully successful and experienced trading skills.

When talking to your broker, be able to determine whether or not he or she remains current with foreign currency news, economic and market trends, and has the ability to regularly and readily report this information to you without or upon your request. A skilled broker should provide you with the necessary dosage of information in order to make successful trades without overwhelming you with too much currency trading minutia.

These are all definitely important characteristics of a skilled forex broker. One that possesses a well rounded combination of all exhibits the reasons why they are paid to do their job and their ability to earn commissions based on the success of your currency trading campaigns you experience with them. Experiencing these qualities first hand, you should be able to better comprehend how a successful broker makes a living.

How to Become a Forex Broker

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It is a fact that you can make money with currency trading on Forex. Indeed, Forex investing is one of the most potentially rewarding types of investments available. Since individual traders and companies have equal chance to expand in Forex trading, we all have the option to becoming a forex trading broker in order to generate more revenue.

In order to help with your trading strategy and transactions, it is recommended that you must find a forex broker if you are new to the FOREX. The forex broker acts as a liaison of the client to the forex market, which provides technical analysis and research of the market situation and guides the client on the methods of trade as well. All of the information he provides is believed to increase the client's profit.

Before I will discuss on how to become a forex broker, here are some reasons why should you become one. As a forex trading broker you provide your customers access to the freedom that comes from actively trading their own money online on secure forex trading platforms. Since you offer your clients some money making opportunities and some investments, you are then greatly improving the scope and reputation of your own business leading to greater client retention levels. Aside from the fact that you are paid a commission you can also take advantage of the explosive growth in the demand for alternative investments by offering your high-net worth clients a managed forex account.

Becoming a forex broker is simple. A currency trading broker in the Forex trading market is like being a realtor in the property market. Here are steps to becoming one. Becoming Licensed and Registered. Sign on to a licensed business or seek appropriate securities license and fill out a registration form with the SEC in order to be a full service broker. Take note that licensing is different depending on which state you live in. If you move from state to state, license is not always acknowledged. You’re ready to start trading once registered.

However, if you want to become a business broker only and not a full service forex broker, you may work at a brokerage house. You may either go to school or try to learn forex trading by yourself in order to get license. Remember, knowledge is power for the successful broker! A successful forex broker is aware of what’s happening in the world. Forex brokers research heavily on all political and economic news from the countries for which they hold currency.

Forex brokers are much like any other broker that act as the middleman for the individual and the market itself. They key to a successful forex broker is to get licensed and educated about how the market works. With this article you now have information on how to become a forex broker. Get licensed and registered and start forex trading. Soon you will just be sitting up in your multi-million dollar offices.