How to use Indicators in Forex

 How to use Indicators in Forex

Using Indicators to Identify Trends

You've probably heard the expression "the trend is your friend" - but what does it mean? If your trend takes a sudden counter-move and your trailing stop activates at a loss, it's natural to ask yourself: how can you be sure the next trend will be more friendly?

Confirm the trend is real

Using technical indicators in combination can help ensure a potential trend has staying power - a good habit for all kinds of technical trading, but especially in forex. Currencies tend to move in trends naturally due to long-term macroeconomic factors and short-term international capital flows. All of this makes it that much harder to see a trade-able trend that will last.

Trendlines

From a trader's perspective, a trend is a predictable price response at levels of support or resistance that change over time. Trendlines mark these levels, with support acting as the "floor" and resistance as the "ceiling". When prices break through either of these levels, that signals a trend for that movement to continue.

It's easy to draw perfect trendlines on historical charts - but harder to be right when the trend is still developing. Still trendlines help focus your attention on finding support and resistance levels, the first step to identifying a new trend.

Start by drawing trendlines over longer timeframes (daily or weekly charts) and then carry them forward into shorter timeframes (hourly or 4-hourly). That way you'll highlight the most important support and resistance levels first and not lose the major trend development by chasing a short-term, minor one.

Directional Movement Indicator (DMI)

Developed by J. Welles Wilder, the DMI minimizes the guesswork in spotting trends and helps confirm trendline analysis.

The DMI system has two parts:

•ADX (average directional movement index). If the ADX reading is above 20, that indicates a "real" or sustainable trend. The ADX also measures the trend's strength: the higher the ADX, the stronger the trend.

•The ADX also provides an early indicator of a trend's end. When it drops from its highest level, it may be time to exit the position and wait for a fresh signal from the the DI+/DI-.

•DI+ and DI- lines. When DI+ crosses up through DI-, that's considered a buy sign. When the opposite happens, that's usually a sell sign.

Wilder recommends following the "extreme point rule" to confirm the signals. Note the extreme point for that period in the direction of the crossover (the high if DI+ crosses up over DI-; the low if DI- crosses up over DI+). Only if that extreme point is breached in the subsequent period is a trade signal confirmed.

Many traders use the parabolic indicator along with the ADX to identify a trend's end. The parabolic indicator follows the price action but accelerates its own rate of increase over time and in response to the trend. The parabolic continually closes in on the price, and only a steadily accelerating price rise (the essence of a trend) will prevent the price from falling below the parabolic, signaling an end to the trend.

Trading short-term

The methods above can be used for short-term decision making, even in markets that are trading sideways - a "trendless" market.

However, if you're trading short-term, don't ignore the big picture entirely. There's no point in trying to ride a short-term trend that is counter to the larger trend.

How can I be professional in Technical Analysis in Forex

How can I  be professional in Technical Analysis in Forex

Technical analysis attempts to forecast future price movements by examining past market data.

Most traders use technical analysis to get a "big picture" on an investment's price history. Even fundamental traders will glance at a chart to see if they're buying at a fair price, selling at a cyclical top or entering a choppy, sideways market.

Most technical analysts make a few key assumptions:

• All market fundamentals are reflected in price data. Moods, differing opinions, and other market fundamentals need not be studied.
• History can repeat itself, often in regular, fairly predictable patterns. These patterns, generated by price movements, are called signals. A technical analyst's goal is to uncover a current market's signals by examining past market signals.
• Prices move in trends. Technical analysts believe price fluctuations are not random and unpredictable. Once an up, down or sideways trend has been established, it usually will continue for a period.

Get in and get out - at the right time

Traders rely on price charts, volume charts and other mathematical representations of market data (called studies) to find the ideal entry and exit points for a trade. Some studies help identify a trend, while others help determine the strength and sustainability of that trend over time.

Technical analysis can add discipline and minimize emotion in your trading plan. It can be hard to screen out fundamental impressions and stick with your entry and exit points as planned. While no system is perfect, technical analysis helps you see your trading plan more objectively and dispassionately.

Price chart types

Bar charts

The most common type of chart showing price action. Each bar represents a period of time - a "period" as short as 1 minute or as long as several years. Over time, bar charts can show distinct price patterns.

Candlestick Charts

Instead of a simple bar, each candlestick shows the high, low, opening and closing price for that period of time it represents. Candlestick patterns provide greater visual detail as they develop.

Point & Figure Charts

Point & figure patterns resemble bar chart patterns, except Xs and Os are used to mark changes in price direction. Point & figure charts make no use of time scale to associate a certain day with a certain price action.

Technical Indicator Types

Trend

Trend indicators smooth price data out, so that a persistent up, down or sideways trend can be easily seen. (Examples: moving averages, trend lines)

Strength

Strength indicators describe the intensity of market opinion on a certain price by examining the market positions taken by various market participants. Volume or open interest are the basic ingredients of strength indicators.

Volatility

"Volatility" refers to the magnitude of day-to-day price fluctuations, whatever their directional trend. Changes in volatility tend to anticipate changes in prices. (Example: Bollinger Bands)

Cycle

Cycle indicators indicate repeating market patterns from recurrent events such as seasons or elections. Cycle indicators determine the timing of a particular market pattern. (Example: Elliott Wave)

Support/Resistance

Support and resistance describes the price levels where markets repeatedly rise or fall and then reverse. This phenomenon is attributed to basic supply and demand. (Example: Trend Lines)

Momentum

Momentum indicators determine the strength or weakness of a trend as it progresses over time. Momentum is highest when a trend starts and lowest when the trend changes.

When price and momentum diverge, it suggests weakness. If price extremes occur with weak momentum, it signals an end of movement in that direction. If momentum is trending strongly and prices are flat, it signals a potential change in price direction. (Example: Stochastic, MACD, RSI) 

Price charts help traders identify trade-able market trends - while technical indicators help them judge a trend's strength and sustainability.

If an indicator suggests a reversal, confirm the shift before you act. That might mean waiting for another period to confirm the same indicator's signal, or checking out another indicator. Patience will help you read the signals accurately and respond accordingly.

Types of Moving Averages

One of the most widely used indicators, moving averages help traders verify existing trends, identify emerging trends, and view overextended trends about to reverse. As the name suggests, these are lines overlaid on a chart that "average out" short-term price fluctuations, so you can see the long-term price trend.

A simple moving average weighs each price point over the specified period equally. The trader defines whether the high, low, or close is used, and these price points are added together and averaged, forming a line.

A weighted moving average gives more emphasis to the latest data. It smoothed out a price curve, while making the average more responsive to recent price changes.

An exponential moving average weighs more recent price data in a different way. An exponential moving average multiplies a percentage of the most recent price by the previous period's average price.

Finding the best moving averages and period for your pair

It can take a while to find the best combination of moving average and period length for your currency pair. The right combo will make the trend you're looking for clearly visible, as it develops. Finding that optimal fit is called curve fitting.

Usually traders start by comparing a few time frames for their moving averages over a historical chart. Then you can compare how well and how early each time frame signaled changes in the price data as they developed, then adjust accordingly.

When you've found a moving average that works well for your currency pair, you can consider this as a line of support for long positions or resistance for short positions. If prices cross this line, that often signals a currency is reversing course. Here's an example:

Longer-term moving averages define a trend, but shorter-term MAs can signal its shift faster. That's why many traders watch moving averages with different time frames at once. If a short-term MA crosses your longer-term MA, it can signal your trend is ending - and time to pare back your position.

Stochastic

Stochastic studies, or oscillators, help monitor a trend's sustainability and signal reversals in prices. Stochastic come in two types, %K and %D, measured on a scale from 0 to 100. %K is the "fast", more sensitive indicator, while %D is "slow" and takes more time to turn.

Stochastic studies aren't useful in choppy, sideways markets. In these conditions %K and %D lines might cross too frequently to signal anything.

Relative Strength Index (RSI)

Like stochastic, RSI measures momentum of price movements on a scale of 0 to 100.

Always confirm RSI signals with other indicators. RSI can remain at lofty or sunken levels for a long time, without prices reversing course. All that means is that a market is quite strong or weak - and likely to stay so for a while.

Adjust your RSI to the right time frame for you. A short-term RSI will be very sensitive and give out many signals, not all of them sustainable; a longer-term RSI will be less choppy. Try to match your RSI time frame to your own trading style: short-term for day traders, longer-term for position traders.

Divergences between prices and RSI may suggest a trend reversal. Of course, make sure you confirm your signals before acting.

Bollinger Bands

Bollinger Bands are volatility curves used to identify extreme highs or lows in price. Bollinger Bands establish "bands" around a currency's moving average, using a set number of standard deviations around the moving average. Creator Jon Bollinger recommends the following:

Touching a high or low band doesn't necessarily mean an immediate trend reversal. Bollinger Bands adjust dynamically as volatility changes, so touching the band just means prices are extremely volatile. Use Bollinger Bands with other indicators to determine the trend's strength.

Fibonacci Retracements

Fibonacci retracement levels are a sequence of numbers discovered by the noted mathematician Leonardo da Pisa in the 12th century. These numbers describe cycles found throughout nature; technical analysts use them to find pullbacks in the currency market.

After a significant price move, up or down, prices often "retrace" most or all of the original move. As prices retrace, support and resistance levels often occur at or near the Fibonacci Retracement levels. For currencies, that means retracements usually happen at 23.6%, 38.2%, 50% or 61.8% of the previous move. 

Forex Quotes

Reading a foreign exchange quote is simple if you remember two things:

      1. The first currency listed is the base currency
      2. The value of the base currency is always 1.

As the centerpiece of the forex market, the US dollar is usually considered the base currency for quotes. When the base currency is USD, think of the quote as telling you what a US dollar is worth in that other currency.

When USD is the base currency and the quote goes up, that means USD has strengthened in value and the other currency has weakened. Rising quotes mean a US dollar can now buy more of the other currency than before.

Majors not based on the US dollar

The three exceptions to this rule are the British pound (GBP), the Australian dollar (AUD) and the Euro (EUR). For these pairs, where USD is not the base currency, a rising quote means the US dollar is weakening and buys less of the other currency than before.

In other words, if a currency quote goes higher, the base currency is getting stronger. A lower quote means the base currency is weakening.

Cross currencies

Currency pairs that don't involve USD at all are called cross currencies, but the premise is the same.

Bids and asks

Just like other markets, forex quotes consist of two sides, the bid and the ask:

The BID is the price at which you can SELL base currency.
The ASK is the price at which you can BUY base currency.

What's a pip?

Forex prices are often so liquid, they're quoted in tiny increments called pips, or "percentage in point". A pip refers to the fourth decimal point out, or 1/100th of 1%.

For Japanese yen, pips refer to the second decimal point. This is the only exception among the major currencies.

How to Calculate your Profits and Loss in Forex ?

How to Calculate your Profits and Loss in Forex ?

It is important to learn in Forex How to Calculate your Profits and Loss in Forex 

So, we decided to share with this helpful lesson about it

To illustrate an FX trade, consider the following two examples.

Let's say that the current bid/ask for EUR/USD is 1.4616/19, meaning you can buy 1 euro for 1.4619 or sell 1 euro for 1.4616.

Suppose you decide that the Euro is undervalued against the US dollar. To execute this strategy, you would buy Euros (simultaneously selling dollars), and then wait for the exchange rate to rise.

So you make the trade: to buy 100,000 Euros you pay 146,190 dollars (100,000 x 1.4619). Remember, at 2% margin (50:1 leverage), your initial margin deposit would be approximately $2,923 for this trade.

As you expected, Euro strengthens to 1.4623/26. Now, to realize your profits, you sell 100,000 Euros at the current rate of 1.4623, and receive $146,230

You bought 100k Euros at 1.4619, paying $146,190. Then you sold 100k Euros at 1.4623, receiving $146,230. That's a difference of 4 pips, or in dollar terms ($146,190 - 146,230 = $40).

Total profit = US $40.

Now in the example, let's say that we once again buy EUR/USD when trading at 1.4616/19. You buy 100,000 Euros you pay 146,190 dollars (100,000 x 1.4619).

However, Euro weakens to 1.4611/14. Now, to minimize your loses to sell 100,000 Euros at 1.4611 and receive $146,110.

You bought 100k Euros at 1.4619, paying $146,190. You sold 100k Euros at 1.4611, receiving $146,110. That's a difference of 8 pips, or in dollar terms ($146,190 - $146,110 = $80)

Total loss = US $80.

The diffrences bwtween Bounce and Break in Forex

Bounce and Break in Forex are the most important terms in Forex world.

Many people do not know Bounce or Break

If you have been reading the Lessons from the Pros for any time now, or if you have graduated from an Online Trading Academy course, you know that to execute trades, we rely on supply and demand levels. The biggest question that most traders face when determining whether to enter a trade is whether the price will bounce or break a level. Fortunately, there are certain clues that may help you determine whether or not to take action and the direction of that action.

First of all, let me state that I am a proponent of trading bounces of supply and demand rather than chasing breakouts. If you read most trading books, they are filled with examples of breakout trades. However, how many people do you know that have become rich from trading after reading a book? The truth is that many if not most breakout trades tend to fail. I'm sure you will now flood me with email examples of breakout trades that netted great gains in the markets. But for every successful breakout, I can find at least six failures.

We want to trade with the highest probability and should stick to those trades that tend to work out more often. Besides, most breakouts turn into bounce trades to shake out weak investors who don't know how to set stops properly. Patience allows us to enter with a more favorable price.

So, what are the clues to look for to determine a bounce or break of supply or demand levels?

1. Look to the candles. If you are seeing small candles, this indicates lack of momentum, and when this occurs near these levels, it is hard for price to break through. Large candles could mean momentum to carry through a level. However, there are exceptions.
2. Topping tails on candles indicate selling pressure. Seeing this on candles near supply makes for reversals much of the time. Bottom tails near demand also indicate this as well.
3. Volume is a major indicator. To break out to new levels, you would expect to see increasing volume to carry you through. Be careful, a spike in volume could be capitulation and a reversal sign.
4. The markets and sectors confirming. The markets and sectors have a large influence on the direction of individual stocks. Watch them for leadership or confirmation.