Tag: Indicators

Categories
Forex Indicators

The Application of the Moving Average on Indicators

Traders worldwide have shown interest in the Moving Average Convergence/Divergence indicator that we all know as MACD. Praised as a two-line indicator that has generated quite a few pips to many content creators, MACD can certainly point us toward the direction of discovering other amazing tools that we can incorporate into our trading systems. Since […]

Traders worldwide have shown interest in the Moving Average Convergence/Divergence indicator that we all know as MACD. Praised as a two-line indicator that has generated quite a few pips to many content creators, MACD can certainly point us toward the direction of discovering other amazing tools that we can incorporate into our trading systems. Since […]

Traders worldwide have shown interest in the Moving Average Convergence/Divergence indicator that we all know as MACD. Praised as a two-line indicator that has generated quite a few pips to many content creators, MACD can certainly point us toward the direction of discovering other amazing tools that we can incorporate into our trading systems. Since traders are constantly in search of the best components to help build their own algorithms, they inevitably come across a number of low-performing indicators from which their trades can hardly benefit. As a result, these traders immediately cast off the tools that they believe cannot make it to their favorites’ list, which may not be the approach that you will always want to take. Today, we are going to see how adding a moving average on various MT4 indicators can not only improve a tool’s performance but also prove to be the right move towards lucrative trades. 

Many beginners fail to acknowledge the importance of adjusting settings and learning about the ways to make some changes to the existing indicators in order to gain more profit. While MACD indicators’ fame grew due to the diversity of its functions, few actually know how using the moving average on other indicators can truly generate new and unexpected possibilities in many cases. If you are keen on growing a unique system and testing different options, then the use of moving averages can really become one of your favored solutions down the line. By adding a moving average on some of the less efficient indicators, you can have an entirely different experience with tools that you once defined as utterly futile for trading. Naturally, in some cases this approach will not seem to be applicable or useful; however, by incorporating moving averages in your system, you are introducing an additional layer of protection, as all traders look forward to finding indicators to prevent them from making bad decisions while trading in the forex market.

Today’s selection of indicators is meant to serve as a lesson on how you can improve some of the tools which overall do not provide desired results, rather than tell you which tools you should use in your everyday trading. You can later go back to the indicators you saved on a flash after you had stopped using them, as we will show you how some of the indicators that are already built on MT4 miraculously change after the moving average has been added. You can also open the MT4 while you are reading this article and make the same adjustments as we do while you are reading. Be prepared to take notes on some specific settings as well as remember a few key pieces of advice you should follow when you are attempting to carry out this process yourself. 

Accumulation

Accumulation is one of the indicators that are generally considered as bad in the forex trading community, especially due to the fact that traders cannot make any adjustments that could improve its performance. As you can see from the first image below, Accumulation is essentially a one-line indicator, which barely appears to be able to give any relevant information. However, once we apply the moving average, although you cannot expect drastic changes, the overall performance of this tool immediately improves.

In order to make the most of this, you will need to follow a few rules. Firstly, you should not alter the moving average of oscillators, yet expand the Trend tab in your Navigator window inside Indicators. Once you find the moving average there, you will need to drag it down to the indicator window you wish to apply it on. Then, a new window will pop out where you will be able to make further adjustments. What we did is we left the period where it was (10) and changed the settings from Close to First Indicator’s Data. If you, however, decide to apply the changes at Close, you will not see the line in the same place as in the right picture above, it will simply be applied to the price chart. Therefore, the two essential steps to take are to drag the moving average down and apply it to First Indicator’s Data.

The results these steps can deliver are much better than what you can hope to achieve without. The moving average is mostly going to tell you where the trend is, and after we applied this to Accumulation, we discovered five to six entry signals just by glancing over the chart. A better indicator would naturally offer more quality entry signals and, consequently, serve you better. However, the idea behind this is to change a one-line indicator to a two-line-cross one, which is believed to be one of the best confirmation indicators you can use. Even though these changes prevented you from quite a few problematic points, Accumulation is still not recommended to be used for everyday trading purposes. Some professional traders even claim to have tested this tool and every possible variation only to discover that it is not a viable, long-term option for them.

i-BandsPrice

Similar to the Accumulation indicator, i-BandsPrice is also a single line that does not perform very well in general. You can change this tool into a zero-cross indicator by following the steps we previously described. Although it does not truly get to zero, you can still see some benefits from these changes. What you should first do is alter the period and see the results this solution provides. Naturally, you will not go after every opportunity in the chart because you will want to avoid reversal trading. Nonetheless, what you do gain from making these adjustments, in this case, is the ability to discover when you can enter a trade. As with any other zero-cross indicator, i-BandsPrice can now also tell you to start trading when the indicator crosses over the zero line towards the negative or the positive.

Rate of Change (ROC)

In order to see more benefits from using the Rate of Change indicator, we first moved the period to 70. Then we added the zero line because it will tell us to go long if the line crosses the zero upward and vice versa. However, to make the most of it, you will need to add the moving average and look for the places when the lines are already both below zero: when the indicator crosses down again, you will have the opportunity to enter a continuation trade, which some experts see as their most lucrative trades. As ROC is one of the lower options on the performance spectrum, you will not be able to get many good trades despite the changes. Nevertheless, you can alter the period, moving it from 8 to 10 as we did, and see how it begins to resemble the MACD indicator is thought to successfully provide the greatest number of signals to enter continuation trades. Therefore, if you happen to come across a zero-line-cross indicator that seems to have a lot of potential, you can actually grant yourself more lucrative opportunities just by adding the moving average.

Average Directional Movement Index (ADX)

ADX can serve as an example of how you can apply the moving average to a volume indicator. Whenever the line goes above, trend traders receive the signal that they have enough volume to enter the trade. Likewise, whenever the line plunges, it is a signal to stay out of the market. In the example below, we kept the period of 14 and added another line (like we did before) at level 25. ADX has proved to be performing better once the changes have been applied, although it has also proved to give a lot of false signals as well. Another reason why professional traders typically dislike this tool is that it often lags. However, despite the opportunity to test how this tool performs after adding the moving average, we still have some other better options we can use to trade in this market. 

Once you remove the additional line and add the moving average, you will naturally not bring about some unforeseen, alchemical-like change, but you will be able to improve almost any volume or volatility indicator. Drag the moving average down as you did before and change the option from Close to First Indicator’s Data (we kept the period at 10), and you will see how fruitful the results your volume/volatility indicator gives are. If you kept the line we had before, you would have potentially taken a great number of losses because ADX would need too much time to go below. This way, however, you are improving the overall condition because the moving average always adjusts to the volume indicator. Therefore, you could get a signal to take a break at some point in the chart and another one to resume after a while, which is by far better than what the original, unchanged version of this indicator can provide.

As a forex trader, you will naturally be experiencing passing moments of consolidation and stagnation after trading for a period of time. You will then want your indicator to let you know when and how to avoid these troublesome points in the chart. Since the moving average can limit the negative effect a poorly performing tool can have on your trade and expand its functions in terms of quality, you can immediately start testing the indicators you discovered before but for which you could not find the right use. Now the indicators which could not help you seem to have a newfound potential to help you trade more successfully. What is more, the moving average can be applied in such a vast number of cases that it immediately increases the opportunity to win. You only need to take time to test and find a way to use a specific indicator after the changes have been made. Some indicators can only be improved to a certain degree with the MA, yet some others can truly illustrate a distinct difference in your trading.

Many traders are having a hard time finding the right exit indicator, for example. However, an exit indicator that a professional trader would find to be really good is typically a two-line-cross indicator. Luckily, with the help of the moving average, any one-line oscillator can become a two-line-cross indicator and, therefore, also an exit indicator that you can discover to be a really good solution for you. Improvement sometimes implies tweaking the settings, whereas it may also entail adding the moving average so as to give the tools that have not worked well in the past the chance to make a positive difference. The moving average can be applied to almost anything, as we said before, so it does bring a new sense of hope to traders who have had difficulty finding the right elements to complete their technical toolbox. This knowledge simply opens up a number of tremendous possibilities, as a single oscillator changed to a two-line-cross indicator is the proof that tools that were not very useful can be adjusted so that traders can actually make use of them. Whatsmore, indicators with two lines have first and second indicator data. In this case, you can apply MAs to both and have a kind of momentum gauge in an already established trend, for example, on line cross.

Go to your list of indicators that you considered as poor samples and start testing this solution to find out just how much the moving average can improve your trading. At least then you will know that you can write off a tool for good without having to go through periods of hesitation or doubt. Luckily, sometimes the improvement comes just after adding this second line, so you will never again need to question a decision you made with regard to indicators. According to professional traders, some of their most lucrative deals stemmed from continuation trades which these changes made possible. Hence, just by making these adjustments, you can turn a below-average indicator is a tool that is similar to MACD and experience numerous benefits long term. There are many variations and improved versions of MACD, RSI, and others, with a different type of calculations. Playing with MAs on these tools is a definitive winning combo. All you have to do is try it out.

Categories
Forex Fundamental Analysis

US 10-Year TIPS Auction – Everything About This Macro Economic Indicator

Introduction

For any long-term investment, taking the future rate of inflation into account is paramount. The reason for this is because inflation eats into the expected returns. Thus, if you could find a way to insulate your investments from this, you most definitely will. The goal of any inflation-protected investment is to ensure that you are cushioned from the reduction in the purchasing power.

Understanding the US 10-Year TIPS Auction

TIPS refers to Treasury Inflation-Protected Securities. As the name suggests, these are US government-issued securities meant to provide investors with protection against the effects of inflation.

US 10-Year TIPS are Inflation-Protected treasury bonds issued by the US Department of the Treasury. The principal on these bonds is meant to finance spending activities by the US government and is redeemable after ten years.

TIPS auction refers to the sale of the inflation-protected treasury bonds by the US Department of Treasury. Originally, the 10-Year US TIPS are auctioned twice a year – in January and July. The reopening auctions are done in March, May, September, and November. Thus, these auctions are scheduled every two months.

Discount rate: The percentage difference between the price at which the TIPS is bought at auction and the one at which it can be redeemed.

Maturity: For the US Treasury Inflation-Protected Securities, the maturity period refers to the maximum time an investor can hold the bonds before redemption. These bonds are usually issued with a maturity period of 5, 10, and 30 years from the auction date. Usually, the minimum duration of ownership is 45 days. Therefore, one can choose to sell their TIPS before maturity or hold them until maturity.

How to Buy TIPS

TIPS can only be bought in electronic form. The minimum amount of TIPS one can purchase is $100 and increments of $100 after that. The maximum amount that a bidder can purchase in a single auction is $5 million. During the auction, the interest rate on the TIPS is determined by the competitive buyers.

The competitive bidders usually specify the yield that they are willing to accept. The competitive bidders for TIPS are large buyers such as brokerage firms, investment firms, and banks. The competitive bidders set the yield for the TIPS, which requires one to have an in-depth knowledge of the money markets. Competitive bidders are required to submit the number of TIPS they intend to buy and the return on investment they seek. This return is the discount rate.

Not all competitive bids are accepted at the auction. When the competitive bid is equal to the high yield, less than the full amount wanted by an investor might be accepted. The bid might be entirely rejected if it is higher than the yield accepted during the auction. The non-competitive bidders are regarded as “takers” of the yield set by the winning competitive bidders.

Once the bidding process is over, the treasury distributes the issuance. Let’s say, for example, that in an auction, the US Department of Treasury is auctioning $20 billion worth of TIPS. If the non-competitive bids are worth $5 billion, they are all accepted. The remaining $15 billion is then distributed among the competitive bidders. The lower competitive bids are filled first until the $15 billion is exhausted.

Using the US 10-Year TIPS Auction for Analysis

Since the TIPS’s primary goal is to safeguard against the effects of inflation, the interest rate paid on them can be used as an indicator of possible inflation rates in the future.

Before we explain how the US 10-year TIPS auctions can be used for analysis, here are two things you need to keep in mind.

  • TIPS’s interest rate is paid semi-annually at a fixed rate, which is usually based on the adjusted principal.
  • Whenever inflation rises, the interest rate rises, and when there is deflation, the interest rate drops.

Once TIPS have been auctioned and traded in the secondary market, when inflation in the economy rises, the principal on TIPS increases as well. Thus, the interest rate payable on these TIPS increases as well. During the TIPS’ subsequent issues, the interest rate payable will reflect the prevailing rate of inflation. Furthermore, the discount rate set at the auctions can be used to gauge the level of confidence that investors have in the US economy. The lower discount rate shows that the current investment atmosphere in the economy is risky; hence, investors are willing to take lower returns than risk losing their principal in other markets.

On the other hand, when investors can get better returns in other markets within the economy, they would demand a higher discount rate. Furthermore, when there is deflation in the economy, the principal on the TIPS falls along with the interest rates payable.

Impact on Currency

Theoretically, the auction of the US 10-year TIPS can impact the currency in two ways. By showing the confidence level in the economy and by showing the prevailing rates of inflation.

When the interest rate payable on the TIPS increases, it shows that the levels are increasing. This increase shows that the economy is growing, which is good for the currency. Furthermore, the higher discount rate at auctions implies that investors can get better rates elsewhere in the economy.

Conversely, the currency will depreciate relative to others when TIPS’s interest rate decreases, which implies that there is deflation in the economy. This instance can also play out if discount rates at the auction are at historical lows. It shows that the economy is performing poorly and that investors may not get better returns elsewhere.

Sources of Data

US Department of Treasury is responsible for the auction of the US 10-year TIPS. The data of the latest TIPS auction can be accessed from Treasury Direct. Treasury Direct also publishes data on the upcoming TIPS auction, which can be accessed here.

St. Louis FRED publishes an in-depth series of the US 10-year TIPS.

Source: St. Louis FRED

How US 10-Year TIPS Auction Affects the Forex Price Charts

The most recent auction of the US 10-year TIPS was on September 17, 2020, at 1.00 PM EST. The data on the auction can be accessed at Investing.com. The US 10-Year TIPS auction is expected to have a low impact on the USD, as shown by the screengrab below.

During the recent auction, the rate for the 10-year TIPS was -0.996% compared to -0.930% on the July auction.

Let’s see what impact this release had on the USD.

EUR/USD: Before US 10-Year TIPS Auction on September 17, 2020, 
Just Before 1.00 PM EST  

Before the auction, the EUR/USD pair went from trading in a steady uptrend to a subdued uptrend. The 20-period MA can be seen going from a steep rise to almost flattening as the candles formed just above it.

EUR/USD: After US 10-Year TIPS Auction on September 17, 2020, at 1.00 PM EST

Immediately after the release of the auction data, the pair formed a 5-minute “Doji” candle. Subsequently, the EUR/USD pair continued to trade in the subdued uptrend with candles forming just above an almost flattened 20-period MA.

Bottom Line

From these analyses, we can establish that the US 10-year tips auction has no significant impact on the forex price charts. The reason for this could be because most forex traders do not keep an eye on bond auctions but instead focus on more mainstream indicators like the CPI and GDP.

Categories
Forex Course

168. Learning To Trade Multiple Timeframes In The Forex Market

Introduction 

Introduction 

Introduction 

In our previous lesson, we discussed multiple timeframe analysis in forex means. Now, let’s find out what forex trading with multiple timeframes means. In case you are wondering, trading multiple timeframes in forex does not mean that a trader is opening several positions using different timeframes. We are not saying you can’t do this, you if you have the money; but that is not what trading with multiple timeframes in forex means.

Trading multiple timeframes in Forex means using different timeframes to establish the trend and support and resistance levels of a currency pair to determine the best point of entry and exit of a trade. Let’s use a few examples to show how trading with multiple timeframes in forex occurs.

As we had mentioned in our previous lesson, the timeframes you use for your analysis depends on which type of forex trader you are. The best way of trading multiple timeframes in the forex market is by using the top-down technique. With this approach, you first observe the longer timeframes for the general market trend, then use the smaller timeframes to establish more current trends.

Let’s take the example of a forex day trader. You will start by using the 1-hour timeframe to establish the primary market trend. Say, a day trader wants to open a position on September 9, 2020, at 11.00 AM GMT, using the 4-hour timeframe, the market shows an uptrend.

4-hour timeframe for EUR/USD

1-hour timeframe for EUR/USD

The 1-hour timeframe confirms that the pair’s intermediate trend is consistent with the uptrend observed in the 4-hour timeframe.

15-minute timeframe for EUR/USD

The 15-minute timeframe can then be used to select the best entry point.

Determining the market limits: the longer timeframes will enable you to determine the support and resistance levels of a currency pair. The resistance levels help you set your exit points while the support levels will help you timing your market entry.

Establish the trend momentum: While the larger timeframe gives you the overall market trend, the smaller timeframes will help you establish the spikes in the price of the currency pair. These spikes will help you to establish the short-term strength of the trend compared to the longer-term trend.

Helps avoid the lagging effect of some technical forex indicators: Most technical Forex indicators are lagging, meaning trend changes signaled by the indicators lags the real change in the price of the currency pair. Therefore, price-action can be said to be leading the technical indicators in the forex market.

We will cover these three reasons in detail in our subsequent lessons.

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Categories
Forex Indicators

Indicator Testing Pitfall – Repainters

30Test, test and test – the three most important things about choosing a new indicator. But can testing lead you down the wrong path? Before you even think about introducing a new indicator to your forex trading system, you’re going to want to test it to death to make sure it works how you need […]

30Test, test and test – the three most important things about choosing a new indicator. But can testing lead you down the wrong path? Before you even think about introducing a new indicator to your forex trading system, you’re going to want to test it to death to make sure it works how you need […]

30Test, test and test – the three most important things about choosing a new indicator. But can testing lead you down the wrong path?

Before you even think about introducing a new indicator to your forex trading system, you’re going to want to test it to death to make sure it works how you need it to work. Typically, that will mean backtesting it over a certain timeframe – up to and even over a year back in time if you’re trading on the daily chart – as well as forward testing it through a demo account. Now, for several reasons backtesting is your first go-to method of figuring out whether an indicator performs as advertised and as you need it to.

The main reason why backtesting is important and why you want to run that first is that it is so much quicker than forward testing – which you, of course, should also do. When backtesting you don’t need to wait for time to unfold at its natural rate – you can make things a great deal quicker.

Testing Trap

One potential pitfall or trap that an indicator testing process can lure you into – and that can be potentially dangerous if your testing regimen is not sufficiently robust – is the repainting indicator. What is a repainting indicator and why is it dangerous? Well, the short answer is that a repainting indicator is an indicator that moves the goalposts after the fact. It keeps changing its past values based on new candles and therefore makes it seem like it was more successful historically than it really was. This will, however, clearly be much easier through the use of a concrete example.

Backtesting an Indicator

So, let’s say you’re taking apart a combination indicator (like, for example, the Traders Dynamic Index) in order to have a better look at its constituent elements. Combination indicators, like the TDI, are made up of a number of separate indicators that work in concert together to provide what is hopefully a more accurate picture. You can, of course, test combination indicators as though they are one unit simply by treating them as a whole made up of constituent parts. But with combination indicators, there is also another possible approach and that is to examine each of the elements that make them up as a separate indicator. In fact, this is a very important way to test combination indicators – because if someone has gone to all the trouble to wrap up what amounts to a whole trading system into one downloadable tool, you’re going to want to know that all the parts of that tool work, right? Whenever you encounter a combination indicator, make sure you take it apart and test all of its components separately, as you would any other indicator. You can, afterward, always go back and test the whole combination as one tool.

The way to isolate those elements you want to test is to turn off or blank out those parts that you’re not looking at. Sticking with the example of the TDI, you might want to focus on one of the moving averages and temporarily (for the purposes of the test) turn off the other moving average, the Bollinger Bands, and the RSI. If you do this with the TDI, for example, you might notice as other traders have too that there’s something kind of special about the yellow line indicator. It seems that every time the line changes direction it is indicating a price trend. Indeed, it seems to be predicting price trends with an astounding level of accuracy that goes far beyond anything most indicators are able to achieve. Sure, you can’t use that as a trade entry signal but boy is it useful to have an indicator able to predict trends with a level of accuracy that exceeds 80 or even 90 percent. That’s astounding!

Too Good to be True?

How often is it that you find an indicator that you can add to your system that can achieve such levels of accuracy? Just imagine how many bad trades that will cut down on and how many winners it could help you to find. Well, if an indicator does come around and it looks like that, that’s your first red flag. Consider it a shot across your bows that sets alarm bells ringing.

If you’re being thorough and backtesting across multiple currency pairs and over a significant time period and you still come across something that is this accurate, that’s your first warning sign that you could be dealing with a repainting indicator.

As we said before, a repainter is an indicator that will draw you into thinking you’ve found the holy grail of indicators but could be truly dangerous if you start using it without taking the proper precautions. For a start, if you don’t put it through a comprehensive forward test and just rely on your results from backtesting, you could end up losing serious money.

Recognition and Identification

So, how do you know if what you’re dealing with is a repainter? Well, the first part of the problem is to recognise that you have a problem. The first clue should be, as above, that it performs so well in backtesting that you begin to suspect it isn’t quite what it seems. That’s step one. The second step is to identify it as a repainter.

What a repainter will do is basically change shape once a few candles have passed to show an outcome that better reflects what happened with price movements. In other words, the indicator will go back in time and repaint itself to show signals where there were no signals. That is a huge problem you’re your backtesting process and will mess with your results. An indicator that doesn’t repaint will stay the same as the chart moves on and will faithfully record what it showed you as the candles close but a repainter won’t.

The way to see that is to run the indicator through a fast timeframe and essentially catch it in the act. Go to a fast chart, like the five-minute chart or the one-minute chart, and run it through to see if it changes the data. Here you might want to even grab screenshots along the way because those changes might be quite subtle as time rolls forward and you may not want to wait long enough for it to give off false signals. If not, then those false signals will be a sure-fire sign that something is off. A false signal, in this case, is where the indicator initially does not show up a signal but as the candles move on it repaints itself in hindsight and shows up a signal. 

Another quick way of testing if an indicator is a repainter is using the MT4 Strategy tester module. Just set to work on a fast timeframe and look at how it behaves on the closed candles. Just bear in mind about the scale for that indicator. Sometimes when the value of the indicator pushes the window limits, or better to say higher or lower values which are not on the scale, the scale itself resizes to fit the representation. This can lead you into thinking the lines or historic values of the indicator repaints, but it is just because extreme values resize the scale and it may seem as indicator lines are reshaping. 

Catching a repainter in the act is the best and surest way to know that this is an indicator to steer clear of. The reason to use a fast chart in order to do this is because things will happen quickly enough for you to catch it and also because you don’t want to waste your own time waiting for a slower chart to unfold. Part of the purpose of backtesting is to eliminate indicators that would otherwise be a waste of your time to forward test through your demo account so making the process unnecessarily long would kind of defeat its purpose.

If you’re running an indicator through this repainter test on a fast chart and you see any kind of movement at all a few candles back, in the region where the data is supposed to be fixed, that is already too much movement. This is why it is a good idea to shoot off a few screenshots as you’re doing this because even the tiniest amount of alteration of data that is supposed to be fixed because it’s in the past is too much.

In addition to screenshots, another thing that will help you to identify a repainter is larger price movements. If you’re running an indicator through a one-minute chart but the price is not moving much, you will have a hard time catching any unwanted changes to the indicator’s history but if the price is moving up and down more drastically, those changes are likely to be more visible. Also, make use of the drawing tools in your platform to mark signals the indicator gives off as you go along. If you look back and signals you marked turn into non-signals or if new signals appear where you didn’t mark them, then you’re dealing with a repainting indicator.

Repainter Alert

So what can you do if you run a repainter check and the indicator you had such high hopes for because it looked so good in backtesting turns out to be repainting? The short answer is there is nothing you can do. Just steer clear of it like it’s the plague. Bin it and never think another thing about it.

The long answer is also there is nothing you can do. To change the indicator you would have to break into the code and start messing around in there to reprogram it. Now, some of you may feel that this is something you’d be good at and that’s fine as far as it goes. Just be aware that the reprogrammed indicator is going to essentially be a whole brand new indicator that you have to run through the full gamut of testing from scratch. None of the backtesting you’ve done on it so far will apply. However, even if you reprogram an indicator so that it no longer repaints, you now have to start wondering what else might be wrong with it.

Therefore, the best option remains scrapping it and continuing your search for indicators elsewhere.

Protecting Yourself

So, what can you do about repainters if you can’t fix them? Well, you can identify them and avoid them. Expand your testing regime to include a repainter check as described above – especially for indicators that seem to be too good to be true. Although you should really do this with every indicator before you introduce it into your system.

The second thing to do is to make sure you run proper forward testing and cross-reference this with results you expected to get on the back of backtesting you did. These will never precisely match up, of course, but there is a chance that this will help you catch out a repainter.

The last thing you want to do is introduce a repainting indicator into your system and use it to trade in the real world. It will throw your results off and it will require time and effort to identify the problem – hopefully before you lose too much money.

Finally, never get so hopeful or sentimental about any aspect of your trading system – whether it’s an indicator, a process or an approach – that you can’t ditch it the moment you discover it isn’t working for you.

Categories
Forex Basic Strategies

Generating Profitable Forex Signals Using The ‘Indicator-Price Action’ Combo Strategy

Introduction

Introduction

Introduction

Few strategies discussed previously focussed on chart patterns and indicators. Now let us a strategy that is based on two of the most powerful indicators in technical analysis. We already know how to trade using these indicators separately. But using any technical indicator in isolation will not generate a great amount of profit.

Therefore, it becomes necessary to combine at least two indicators and use them in conjunction to produce signals. In today’s article, we not only combine two indicators but also provide a price action edge to it that will make this one of the best strategies of all time. This particular strategy gives traders an insight into both volatility and momentum in the forex market.

The two indicators we will using are Bollinger Band (BB) and MACD. Using the two indicators together can assist traders in taking high probability trades as they gauge the direction and strength of the existing trend, along with volatility. Let us find out the specifications of the strategy and how we imbibe concepts of price action here.

Time Frame

The strategy is designed for trading on longer-term price charts such as the 4 hours and ‘Daily.’ This means the strategy is suitable for the swing to long-term traders.

Indicators

As mentioned earlier, we use Bollinger Band and MACD indicators in the strategy with their default settings.

Currency Pairs

We can apply this strategy to both major and minor currency pairs. However, pairs that are not volatile should be avoided.

Strategy Concept

In this strategy, we first identify the trend of the market and see if the price is moving in a channel or not. When looking for a ‘long’ setup, the price must move in a channel below the median line of the Bollinger band. The lesser time price spends above the median line of the Bollinger band better for the strategy.

The reason behind why we chose to have the price below the Bollinger band is to verify that the price is moving into an ‘oversold’ zone. When price moves into the zone of ‘overbought’ or ‘oversold,’ it means a reversal is nearing in the market. Similarly, in a ‘short’ setup, the price should initially move in an upward channel above the median line of the Bollinger band. This indicates that the price is approaching an ‘overbought’ area.

The MACD indicator shows when a true reversal is taking place in the market. The histogram tells about the momentum and strength of the reversal. Depending on the level of the bars, we ascertain the strength of the reversal. Not only is the strength of the reversal important, but also the ’highs’ and ‘lows’ it makes. Once price crosses previous highs and lows, we enter the market at an appropriate ‘test.’ Let us understand in detail about the execution of the strategy.

Trade Setup

In order to execute the strategy, we have considered the 4-hour chart of the GBP/JPY pair, where we will be illustrating a ‘long’ trade. Here are steps to execute the strategy.

Step 1: Firstly, we have to identify the trend of the market. In a ‘long’ trade setup, we need to look for series of ‘lower lows’ and ‘lower highs’ below the median line of the Bollinger band, and in a ‘short’ trade setup, we need to look for series of ‘higher highs’ and ‘higher lows’ above the median line of Bollinger band. When this is confined in the channel, the trend becomes very clear, and reversal can easily be identified.

Step 2: We say that an upward reversal has taken place when we notice a bullish crossover in MACD along with a positive histogram. While in an uptrend, we say that a reversal has occurred when we notice a bearish crossover in MACD along with a negative histogram. Once reversal becomes eminent in the market, it is necessary to confirm that the reversal is ‘true,’ and thus, we could take a trade in the direction of the reversal.

The below image shows a downtrend reversal, as indicated by MACD.

Step 3: In this step, we should make sure that the price makes a ‘high’ that is above the previous ‘lower high,’ in an upward reversal. While in a downward reversal (reversal of an uptrend), the price should make a ‘low’ that is lower than the previous ‘higher low.’ When all these conditions are fulfilled, we can say that the reversal is real, and now we will look to trade the reversal.

We enter the market for a ‘buy’ or ‘sell’ when price ‘tests’ the median line of the Bollinger band after the reversal and stays above (‘buy’) or below (‘sell’).

Step 4: Finally, after entering the trade, we need to define appropriate levels of stop-loss and ‘take-profit’ for the trade. The rules of stop-loss are pretty simple, where it will be placed below the lowest point of the downtrend in a ‘long’ position and above the highest point of the uptrend in a ‘short’ position. ‘Take-profit’ will be set such that the risk-to-reward (RR) of the trade is at least 1:1.5. Once the price starts moving in our favor, we will put our stop-loss to break-even and extend our take-profit level.

Strategy Roundup

The combination of the Bollinger band and MACD is not suitable for novice traders. Since it involves complex rules and indicators, we need prior experience of using the indicators and charts before we can apply the strategy successfully. Traders should pay attention to every rule of the strategy to gain the maximum out of it. As there many rules and conditions, there is a tendency among traders to skip some rules, but it is not advisable.

Categories
Forex Basic Strategies

Learning To Trade The Forex Market Using ‘2-Period RSI’ Trading Strategy

Introduction When we look for a trade setup, most of the times we do not have an idea of the strategy, we will be using for taking a particular trade. From there, we start to pick random indicators and start trading using those indicators without a proper strategy associated with that indicator. With our 2-Period […]

Introduction When we look for a trade setup, most of the times we do not have an idea of the strategy, we will be using for taking a particular trade. From there, we start to pick random indicators and start trading using those indicators without a proper strategy associated with that indicator. With our 2-Period […]

Introduction

When we look for a trade setup, most of the times we do not have an idea of the strategy, we will be using for taking a particular trade. From there, we start to pick random indicators and start trading using those indicators without a proper strategy associated with that indicator. With our 2-Period RSI strategy, we will solve this confusion by looking at the market with a systematic approach that involves using the RSI indicator. In addition to the RSI indicator, we will also use a 20-period EMA. Most importantly, we will look to take trades in the direction of the main trend.

Now that we know what our goals are, we will look into the various parameters of the strategy and understand how to apply the same.

Time Frame

This strategy works well on the 5-minutes and 15-minutes time frame. This is a perfect intraday trading strategy.

Indicators

The strategy uses RSI as its major indicator. We also use the EMA for identification of the trend. Both the indicators are applied with their default settings.

Currency Pairs

This strategy is applicable to most of the currency pairs listed on the broker’s platform. However, illiquid pair should be completely avoided.

Strategy Concept 

The concept of the strategy is very simple if we have a clear understanding of the previously discussed strategy. The basic idea of here is to trade the retracement of an established trend. Therefore, the strategy can only be used when the market is trending. Once the trend has been identified, we wait for a ‘pullback’ in the price and then take an ‘entry’ in the direction of the market after a suitable confirmation. The Relative Strength Index (RSI) is an important indicator in this strategy which helps us in measuring the over-extended phase of the retracement.

A reading above 70 indicates an over-extended ‘up’ move while a reading below 30 indicates an over-extended ‘down’ move. In an uptrend, we will look for a retracement that is overextended, implying that the RSI should be below 30. While in a downtrend, we will look for a retracement that is overextended, implying that the RSI should be above 70. The crucial part of the strategy is that we don’t enter for a ‘buy’ or ‘sell’ soon after the RSI gives an indication, but instead wait for a sign of reversal that confirms the continuation of the trend.

Trade Setup

In order to explain the strategy, we will be taking a ‘long’ trade in the GBP/USD currency pair on the 5-minutes chart using the 2-period RSI strategy.

Step 1

The first step is to identify the major direction of the market. Many technical indicators help in identification of the trend, but the one that is suitable for this strategy is the EMA. We will identify the trend of the market using the 20-period EMA, which is best suited as per the conditions of the strategy.

In our example, we have identified an uptrend whose retracement shall be evaluated.

Step 2

Next, we need to wait for the market to turn from its highest or lowest point, depending on the trend, and then check if that is a retracement or a reversal. After the price starts to pull back, we wait until the RSI shows a reading below 30, in an uptrend and above 70, in a downtrend. Once that happens, we become alert and watch the price cautiously.

Step 3

Now we wait for the price to reverse and close above the 20-period EMA, in an uptrend and close below the EMA, in a downtrend. Ensuring this step is critical as it confirms the continuation of the trend. We enter the market with an appropriate position at the close of the candle. There are two ways of entering the market. One, wait for the candle to close and then enter. Second, enter at the crossing of the price above or below the EMA. The second approach is an aggressive form of ‘entry’ and is not recommended for everyone. There is also a conservative form of entry, that is entering at the re-test of the EMA.

In the below image, we can see that we are entering at the close of the bullish candle above the EMA. But since the candle is long and has a large body, the ‘entry’ price is much higher than what we were looking for.

Step 4

Finally, we determine the stop-loss and take-profit for the strategy. The stop-loss is placed below the ‘low’ from where the market reverses and starts moving higher in case of a ‘long’ trade. In a ‘short’ trade, it will be placed above the ‘high’ from where the market reverses and starts moving lower. Since we are trading with the trend, the ‘take-profit’ can be set at the new ’high’ or ‘low’ that will result in a higher risk-to-reward ratio.

In our case, the risk-to-reward ratio of the trade is just 1:1 since we took a late ‘entry.’

Strategy Roundup

We are making use of the RSI indicator in a most constructive way which helps us in identifying when the market is overbought or oversold. Using the concept of trends, we are applying the strategy to reduce risk and maximise gains. The rule for entering the market in this strategy is what stands out. We are entering only after getting clear signs of confirmation from the market. We can also trail our stop-loss and exit when we get signs of another reversal. This is an aggressive way of taking profit and is mostly done to increase the gains.

Categories
Forex Basic Strategies

Exploring The Forex Market Opportunities With The Help of ‘Volume’

Introduction

Introduction

Introduction

In the Forex market, we don’t really have a centralised exchange as we’re trading over the counter. This is the reason why it is so difficult to determine exact trading volumes in Forex. Even though there is no centralised exchange to provide us with the volume data, many forex broker’s and trading platforms keep track of the average volumes in a pair. Each retail broker will have their own aggregate trading volume. Platforms like TradingView also have a volume attached to their chart. We all have realised over time that volume in the forex market is an important indicator, which is the reason why we need the best volume indicator.

The volume indicator used to read the volume in the forex market is the Chaikin Money Flow indicator (CMF.) The CMF was developed by Marc Chaikin, who is a trader himself, and was coached by the most successful institutional investors around the world. The reason Chaikin Money Flow (CMF) the best volume indicator is that is measures institutional accumulation and distribution.

Normally, on a rally, the Chaikin volume indicator should be below zero. Conversely, on sell-offs, the indicator should be below the ‘zero’ line.

Time Frame

The strategy works well on the 1-hour and 4-hour time frame only. Therefore, we can say that it is a swing trading strategy and is not suitable for trading intraday.

Indicators

We will be using just one indicator in this strategy, and that is the Chaikin Money Flow indicator (CMF.) The rest all is based on price action.

Currency Pairs

The strategy is suitable for trading in almost all currency pairs that are listed on the broker’s platform. But we need to make sure that the forex pair has enough trading volume.

Strategy Concept

Volume trading requires us to pay careful attention to the forces of demand and supply. Volume traders look for instances of increased buying or selling orders. They also pay attention to the current price movement and trend of the market. Generally, increased trading volume leans towards heavy buy orders. These positive volume trends will prompt us to open new positions on the ‘long’ side of the market, depending on the price action.

On the other hand, if trading volumes and cash flow decrease—it indicates a “bearish divergence. This may be appropriate to sell. We will pay attention to the relative volume—regardless of the number of transactions occurring in a trading period. By learning how to use the Chaikin money flow and other relevant indicators, we will be able to identify whether to ‘buy’ or ‘sell.’

With practice, the volume trading strategy can yield a win rate of 75%!

Trade Setup

In order to explain the strategy, we have considered the chart of EUR/USD, where we will be illustrating a ‘long’ trade using the rules of the strategy.

Step 1

Firstly, look for a price reversal in the market or a price action that reverses an established downtrend or uptrend. This is an easy and simple step that requires us to have a basic understanding of price reversal. This reversal should be accompanied by the rising Chaikin volume indicator that shoots up in a straight line from below zero to above the ‘zero’ line, during the reversal of a downtrend. In an uptrend, the slope should be downwards, i.e., from positive to negative.

When the volume indicator goes negative to positive in a strong fashion, it shows an accumulation of smart money.

Step 2

Wait for the price to pullback near the previous lower low after an upward reversal. Likewise, wait for the price to pullback near the previous higher high. The Volume Indicator should also pullback in a similar manner. If the pullback is coming in slowly, the trade has a higher probability of performing. If the pullback is strong, we will exercise some caution.

When the volume indicator is decreasing and drops below zero, we have to make sure that the price remains above the swing low. If the market is satisfying all the conditions of the strategy until now, we can move on to the next step.

Step 3

Wait for the Chaikin volume indicator to break back above the zero lines. We enter for a ‘buy’ once a ‘higher low’ is confirmed, and the price starts moving in the direction of the reversal. In a reversal of an uptrend, the Chaikin indicator should break below the ‘zero’ line. We enter for a ‘sell’ once a ‘lower high’ is confirmed, and the price starts moving lower. Once the institutional money comes back in the market, we wait for them to step back and drive the market.

The below image shows a ‘higher low’ being formed along with the volume breakout.

Step 4

This brings us to the next important step, where we establish protective stop-loss and take-profit for the strategy. We place stop-loss below the ‘higher low’ that confirmed the reversal when ‘long’ in the pair and above the ‘lower high ‘when ‘short’ in the currency pair. This strategy indicates a strong reversal in the market that will change the trend of the market. This is why we set our ‘take-profit’ at the origin of the previous trend.

In our example, the risk-to-reward of the trade was over 1:2, which is great.

Strategy Roundup

The volume trading strategy will continue to work in the future; it is based on the activities of the smart money. Even though they hide all their operations, their footprints are still visible. We can read those marks by using proper tools. The Chaikin indicator will add value to our trading because it gives a window into the volume activity the same way we traded the stocks. Make sure to follow this step-by-step guide to trade properly using volume.

Categories
Forex Indicators

Backtesting Indicators of a Swing Trading System Guide

Most traders already know that designing an algorithm to trade in the forex market is an essential step. We also know that any such algorithm is generally based on several indicators, with ATR, the confirmation indicator, and the exit indicator altogether partly making the algorithm’s skeleton we will disclose fully as we progress. What some […]

Most traders already know that designing an algorithm to trade in the forex market is an essential step. We also know that any such algorithm is generally based on several indicators, with ATR, the confirmation indicator, and the exit indicator altogether partly making the algorithm’s skeleton we will disclose fully as we progress. What some […]

Most traders already know that designing an algorithm to trade in the forex market is an essential step. We also know that any such algorithm is generally based on several indicators, with ATR, the confirmation indicator, and the exit indicator altogether partly making the algorithm’s skeleton we will disclose fully as we progress. What some traders are curious about, however, is the way to backtest these indicators in order for them to assess their performance. If you come across an interesting indicator that you want to give a chance and see whether it works, it is only natural that you would want to apply it in your charts and see if it rendered any success in the past. If you have already had the opportunity to do some research on the indicators that forex traders use, you probably know which ones are the most popular. However, do not give in to the popularity of some outdated tools, such as Stochastics, Japanese Candlesticks, or RSI, because you may certainly have more luck with some of the more modern indicators designed specifically to trade in the forex market.

While some sources insist that there is no such thing as a bad indicator, you may need to ask yourself what your ultimate goal is because one indicator cannot possibly serve all trading needs. On top of that, the market of trading currencies, which have no intrinsic value themselves, cannot possibly be the same as the trading stocks, commodities, or other equities that, unlike fiat currencies, actually have real values. Therefore, even the way we perceive trading can affect our choice of indicators. Nonetheless, even if you are certain that an indicator would perform well, there is no one single reason why you should not test it and compare it, if possible, to some other tools you have used for the same purpose.

What is more, as it turns out, you may find out that some indicators, such as Heiken Ashi, are generally used for entering trades, while some professional traders warn people about its shortcomings and suggest that they use it as an exit indicator and as a tool to test other exit indicators instead. Furthermore, the previously mentioned indicator is a perfect example of tools that do not let traders adjust any settings, which may be a much-needed option for many trades. Another almost equally important topic besides indicators is planning due to the fact that the right strategy and an overall plan on how to enter and exit a trade, including your risk and win limits, will inevitably have an impact on the quality of your trading. In addition, knowing how to scale out is another precondition for trading successfully, which will determine the level of safety and possibly stabilize the situation should your finances ever be at risk because of some unforeseen events.

Professional traders around the globe know that indicators alone cannot be fully functional and bring us all the profit we desire unless we put effort into learning. Therefore, in the process of looking for a good indicator, you must first be aware of the nature of the market you trade, understand its needs, and see what your own needs are. Testing at this point can be not only better because you have a vast array of information at your disposal, but it can also lead to some truly amazing discoveries such as where you can use and how you should never use a specific indicator. Consequently, testing, along with demo trading, should be a precondition to using any tool in real trading, which is why we intend to discuss the tools which can help you backtest and enter any trade with peace of mind. In today’s example, we will go through the steps of how you can backtest a confirmation indicator, which should serve as an overall useful guide and the path to discovering backtesting indicators in general.

How should we then commence this process? Firstly, after finding a confirmation indicator which you are willing to test for yourself, you should choose a specific currency pair for testing the indicator of choice, open your daily chart, and turn this indicator on in the chart. You will be using the default settings at first and, interestingly enough, these default settings often prove to be the best choice after all. By using the default settings, you also give yourself more room to compare later on with some other values after some adjustments. This is the best way to begin this process and what you will also do here is put the ATR indicator in the MT4 platform right below the confirmation indicator in question.

At this point, you will probably need to go at least 6—12 months back in time, although you can always decide to go even further in the past to get even more signals. Some professional traders choose to go back as far as two to three years because a longer time span provides them with a bigger sample size and a clearer idea of how this tool can work out long term. Going too far back, however, is not something experts would recommend just because of the vast number of market changes that have such a profound impact on trading and also because the odds of some market conditions occurring once again are quite low.

Your next question will likely be related to the number of entry signals your confirmation indicator can give you because you really need to find out what a win and what a loss was before. ATR will come in handy here since you will compare it with the number of pips you could have made with your indicator of choice. If the ATR for the USD/JPY currency pair was 80 at the time of entry, you will want to discover if your new indicator made 80 pips before losing 120 pips, because the system we are using sets out first take profit level at 1xATR value (you may want to experiment with different values but this value proves to be the best on the daily time frame according to our tests).

Naturally, if the answer is yes, then it is a winning choice and vice versa. It is of utmost importance to record this information in a clear way so that you can always go back to it and use it for future analyses (e.g. spreadsheet as suggested in the table below). As you will go backward, you will want to document every time you get the same results like these, so for your specific time frame, you can obtain very comprehensive win-loss ratio information, which can help you get a winning percentage on which you can base your decision whether you will use that particular indicator or not. Generally speaking, there are a few other questions you will need to answer before you start: what is the number of currency pairs you will be testing with this indicator, will you be changing the settings, how many times will you tweak the settings, and how far back in time will you be going?

The only rule you should be following is to maintain separate sheets or tabs for different currency pairs. The table below should successfully exemplify how you can keep the necessary data and, to calculate the percentage of wins, you can either divide the wins by the total number of trades yourself or set up a function to do it for you. For example, if the Win % is located in the E column, you may create and duplicate the following equation for all indicators you wish to test: C1/(C1+D1)=E1. The reason why we store this information so meticulously lies in the fact that you will need to go through the same process again for other indicators at least and use the data you collected to rank all of the tested indicators based on how well they did. The two to three indicators with the highest win percentage are actually the ones on which you will be focusing from that point. Although we lack the information regarding what happened with the trade afterward and we do not have any news events involved as well as other relevant data we would otherwise be using in a real-life situation, it will suffice for the time being.

Even though backtesting in this simple manner may seem devoid of some important circumstantial data, it can still help you distinguish between winning indicators and the losing ones as well as pinpoint some vitally important information you will definitely need for your day-to-day trading in this market. Simply put, if you are already witnessing the scenario where any indicator is showing poor performance at this point, imagine how poorly it will perform once you have all facts at your disposal and decide to actually invest real money.

On the other hand, if you come across an indicator which offers a greater number of wins as opposed to losses, you can assume that it may be possible to include this tool in your algorithm in the future. What you will do here is wait on it, but you will also need to and want to know which ones are worthy of hanging on to. Once you have figured this part out, you can freely use it in trading, of course initially in your demo account. Testing out whether an indicator is legitimately good will not require an unreasonable amount of time, especially if you take recording data seriously. In the greatest number of cases, the few winning indicators that you select will outperform the losing wins by far. Now, depending on the type of indicator you are looking for, you may need to consider some other pieces of information.

For example, if you are looking for a confirmation indicator, you know that it should be able to signal favorable market conditions as well as tell you when the market is not ready for any action. Unfortunately, we could not have the same process for testing exit indicators since we would need to include trailing stops that are used to compare with your exit indicator of choice. Nonetheless, no matter how crude backtesting may seem to be, the data you gather should be relevant enough for you to know what your next step should be. To sum up, you will start from today firstly go back to a specific time in the past until the moment you see your indicator telling you to buy or sell.

Secondly, you will check for the ATR at that exact point in time when you discovered the buy/sell signal. And, thirdly, attempt to discover what happened first – the price hitting the ATR value (take profit) or the value of 1.5xATR in the opposite direction (stop loss level we use in our algorithm example). Keep repeating the same process for every indicator and every setting each time the indicator gives you any signal until the time you decide to stop recording data. If you have found a really good indicator, you can use it until a better tool comes along. Whatever you do, keep searching because this market, as well as the tools used for the purpose of trading currencies, is unbelievably prone to change and you may want to be equipped with the best and most modern tools you can get.

Maintain the level of curiosity which is necessary for this line of business and keep your records neat and tidy because you will inevitably direct your finances according to what you discover while backtesting. Finally, although this backtesting method is imperfect at this moment, its power lies in its ability to tell you which the winning and the losing indicators are, saving your time and quite possibly your finances. Together with your comprehensive knowledge of the different types of indicators, the forex market, and your personal goals, this approach to backtesting will surely lead to success and these are the skills you will always be able to use to your advantage regardless of the outside factors.

Categories
Forex Indicators

Which Indicator is Best for Trade Management and Risk Measurement?

Out of the thousands of indicators out there that technical forex traders add to their charts, there is one that is often overlooked. Sometimes even ignored. Indeed, though it is used relatively frequently, many traders often forget that it is part of their process. Yet, in reality, it is one of the most important indicators […]

Out of the thousands of indicators out there that technical forex traders add to their charts, there is one that is often overlooked. Sometimes even ignored. Indeed, though it is used relatively frequently, many traders often forget that it is part of their process. Yet, in reality, it is one of the most important indicators […]

Out of the thousands of indicators out there that technical forex traders add to their charts, there is one that is often overlooked. Sometimes even ignored. Indeed, though it is used relatively frequently, many traders often forget that it is part of their process. Yet, in reality, it is one of the most important indicators to have in your toolkit.

That indicator? It is, of course, the ATR.

What Is ATR?

Many of you will, of course, already know what ATR is and how it works as well as you know the back of your hand. It never hurts, however, to refresh that knowledge and take another look at it. Put as simply as possible, Average True Range is a measure of volatility. What it does is take a look at the last fourteen candles (it doesn’t have to be fourteen but that’s usually the default setting) and tells you how much movement there has been. This will be expressed in the number of pips the currency combination you have selected has moved, on average, over those last fourteen candles.

It’s a moving indicator so you need to take care when you’re measuring it and whether the most recent candle is throwing off the rating in some way. So, if you’re day trading, for example, it is best to wait to measure the ATR just as the candle you’re currently on is coming to a close. That way your measurement is of fourteen complete candles – which will give you the best reading.

And that’s it. It’s that simple.

But Why Is ATR So Important?

The thing is, ATR is simply not one of those glamorous indicators. Which is probably why it often goes so unnoticed. In fact, many traders don’t even have it up on their chart the whole time. But that doesn’t mean it isn’t a key part of their system. Perhaps even the most crucial one. That isn’t to say that it is the best indicator or some kind of silver bullet. But it needs to be part of your system because it provides you with two key pieces of information.

Firstly, by telling you how much a currency pair is moving over a given period, it can help you to make sense of your other indicators and tell you when to trade – or rather, when not to. For example, say a currency pair has already moved beyond its average range but your strategy is signaling that you should go long. Combining the ATR into your other indicators can help to show you whether what you’re dealing with is a breakout or whether it would be better to go short or simply not trade at all.

But, here’s the key thing. The ATR is not a silver bullet. No indicator on its own is. It must be just one part of your strategy and not the driving force behind it. You shouldn’t use the ATR on its own to decide whether you should pull the trigger on a trade or not. If you think any single indicator can do that, perhaps it’s time to duck out of trading altogether or, at the very least, get back to the classroom.

It is also useful to give yourself a little history lesson and use the ATR to explore how a currency pair has performed in the past under different circumstances. Crosscheck that with any significant news events you know about and it can provide a useful picture of the volatility of a currency combination – ultimately helping you to have a better understanding of what to expect.

Managing Risk

The second useful thing the ATR can give you – and according to some this should actually be its primary function – is that it can help you to manage how much you risk on a given trade. You should not make a single trade without consulting it. So, how does that work? Well, let’s say you’re doing everything right. You’re avoiding being drawn into trading with the herd. You’re ducking and diving and staying clear of the big players are – avoiding those hotspots where everyone else is trading. 0You’re using your system to identify when the optimal moment is to trade – getting all of your indicators to line up to make sure it’s the right moment and whether to go long or short.

Before you pull the trigger, you need to know how much to trade. And that’s where the ATR comes in. You need to factor it into the process you go through – make it part of your checklist – because in that sense it is probably the most useful indicator you have. It allows you to gauge risk in a measurable way so that you can improve how you manage your money and the amount that you invest per trade for any given currency pair. Now, the number one question here is how much money you put on a trade. But it doesn’t make sense to speak in terms of dollar amounts in this example. The ATR can’t tell you to put, say, USD 5,000 on a yen vs. pound trade. Neither does it make sense to talk in terms of lots, because a lot on the pound/dollar pair will be a different amount to a lot on another currency pair. Instead, it’s better to think of how much you are trading per pip.

To do that, compare the ATR for two currency pairs. For the sake of the example, let’s take a commonly traded pair like GBP/USD. Depending on what’s happening in the news cycle but assuming no dramatic news has been happening, this pair is likely to turn out a pretty low ATR. Perhaps something like 14 pips. If we compare that to the ATR of a more volatile pair, for example, GBP/AUD, here we might see an ATR of 115 pips. Some pairs will blow that out of the water and will easily generate ATRs of 200 or 300 pips regularly. And a lot of traders will look at that volatility and will steer clear of trading in those waters.

Sticking with the example of the dollar/pound and pound/Aussie dollar pairs, it doesn’t take a mathematical genius to look at the ATR and see that 115 pips is about eight times as many as 14 pips. That means the pound/Aussie is moving about eight times as fast as the dollar/pound. As we would expect given the respective volatilities of these pairs. So, armed with that knowledge, how do we trade it? It couldn’t be simpler. Let’s say that in this example you’re trading the dollar/pound at 16 dollars per pip. You can trade the pound/Aussie with full confidence, simply by trading it at eight times less. In short, when trading a faster currency pair, use the ATR to modify your per pip trading amounts to correspond to the increased volatility. In so doing, not only are you managing risk but you are also managing your overall approach to trading.

A Whole New World

Many, if not most, traders out there – particularly the less successful ones – start off by trading equal amounts per pip on different currency pairs, without taking into account the different speeds at which they move. This makes no sense. To all intents and purposes, by doing that they are saying that they have equal confidence in their trades across currency combinations of different volatilities. The danger that exposes them to could really take a chunk out of their account very quickly indeed if things go south. Traders who do that are taking on unnecessary risks because they are not mitigating the risk of greater volatility.

The ATR allows you to see that risk and modify your behaviour accordingly. It can be a tool for managing how much you trade per pip on a given pair and, consequently, it allows you to profile your trades for risk. This ability can introduce you to a whole new world of more exotic currency pairs because it enables you to broaden the spectrum of the pairs you trade. Placing the right amount of money per pip on a trade mitigates the risk of volatile pairs and means that you can add new currency combinations to your trading schedule without the fear of being towed under by fast-moving pairs.

In a Nutshell

The most important thing to take away from all of this is that managing risk and managing your money are the most important functions you have when you approach forex trading. If you can get these two right, you can separate yourself from the less successful or outright unsuccessful traders. It is the thing that will ultimately determine whether your forex trading career is going to result in more money in your bank account or less. And the primary tool you have at your disposal for mitigating risk and managing the money you invest in trades is the ATR. Even if you don’t have it on your actual chart – and many traders chose not to – you should still use it for every single trade you make.

Categories
Forex Fundamental Analysis

Imports by Category – Comprehending This Forex Fundamental Driver!

Introduction Understanding the portfolio of an economy’s exports and imports can help us track down the fundamental moves in currencies. Tracking imports and exports can help speculators ride the fundamental wave of currency value change in their favor. Imports and Exports are critical components of a nation’s trade balance. The deeper our understanding of these […]

Introduction Understanding the portfolio of an economy’s exports and imports can help us track down the fundamental moves in currencies. Tracking imports and exports can help speculators ride the fundamental wave of currency value change in their favor. Imports and Exports are critical components of a nation’s trade balance. The deeper our understanding of these […]

Introduction

Understanding the portfolio of an economy’s exports and imports can help us track down the fundamental moves in currencies. Tracking imports and exports can help speculators ride the fundamental wave of currency value change in their favor. Imports and Exports are critical components of a nation’s trade balance. The deeper our understanding of these dynamics, the better will be our understanding of macroeconomic trends.

What are Imports by Category?

Imports: They are the goods or services purchased that were produced outside the domestic country. Imports are purchased goods or services from foreign markets. Imports are required for many reasons and inherently constitute a nation’s trade balance. In importing, foreign goods or services come into the country while domestic currency goes out into the international market. A country in general imports when it is more efficiently produced or is cheaper in other countries. It may also import when the nation is unable to produce or meet the required demand.

A country will have numerous corporations that would have requirements for foreign goods or services, and hence the country’s valuation of imports would be in millions and billions. Hence, while importing millions and billions of domestic currency goes into foreign markets where currencies are exchanged for various reasons. Suppose a country wants to import goods or services from another country. It generally pays it in the exporting country’s currency. Hence, during export, currency comes into the country, and products go out, and during imports, the currency goes out, and products come in.

How can the Imports by Category numbers be used for analysis?

When a country’s imports exceed its exports, it is said to have a negative trade balance or trade deficit. Based on the geographical location, technological and business setups, different nations will have a competitive edge in different sectors. For instance, countries like Venezuela, Canada, or Middle Eastern countries are naturally sitting on abundant oil reserves. Hence, it will export oil to countries that do not have such reserves.

Companies may often require raw materials that are more cheaply available from other countries. For instance, companies in the United States might import electronic goods from China, which is cheaper. Hence, such companies may put up bulk order imports and trade takes place. Hence, what a country needs it may import and what it produces it can export.

The international market is decentralized and operates through free-market forces that keep economies in natural equilibrium. Currency exchanges can take place for genuine business transactions or speculative purposes also. When exchanges occur for purely business reasons, we call them fundamental moves in the currency pairs. These fundamental moves give currency their volatility along with speculation from investors.

Understanding a country’s Imports by the Category of products can help us track the fundamental moves. When significant transactions related to import or export takes place, it induces volatility into the currencies. During a considerable import, the international market is flooded with importing the country’s currency, and due to supply exceeding demand, the currency value falls.

On the other hand, when a country exports a massive volume of goods, the corresponding transaction would withdraw a large sum of that country’s currency out of the international market. When demand exceeds the supply, the currency value appreciates. Scarcity appreciates value and oversupply reduces value. Hence, a country must maintain a “balance” in its trades, i.e., the monetary value of all its imports and exports should ideally cancel off. In reality, it is not so, and this imbalance in different country’s trade balance gives currencies the volatility which traders are always looking to capture.

Understanding the economy’s portfolio of imports can help policymakers also in identifying exceeding dependencies in other countries. Too much reliance on foreign countries for goods or services is not suitable for the economy. The more a country is dependent on other countries, especially for basic needs like energy and food, the less it has control over its economic growth and currency valuation.

Countries that depend on fewer categories of imports and exports have more concentrated risk in terms of currency volatility. Countries like AUD and NZD show more volatility in general than currencies like USD and EUR because of the diverse portfolio of exports and imports of the latter currencies.

Impact on Currency

Imports by Category of goods or services is not an economic indicator, but it is necessary to facilitate an understanding of international trade balance amongst currencies. It directly does not impact any currency volatility but is a requisite to base trade analysis amongst currency pairs. Changes in imports by Category does not frequently change as most trade agreements are made for multiple years on end. Any changes in trade composition in terms of Category will be priced through leading economic indicators and news releases.

Economic Reports

In the United States, the Census Bureau tracks the import and export data categorized by trade partners and products. The lists are ranked based on trade volume, deficits, and surpluses, etc. Monthly and year-to-date data are two types listed for all its trade partners.

Sources of Imports by Category

We can find the Census Bureau data on its Top Trading Partners. We can find the percentage of statistics consolidated for most countries for imports by Category on Trading Economics.

Imports by Category News Release – Effect on the Price Charts

Both Exports and Imports are fundamental indicators that vaguely impact the forex market. The Imports report is calculated by considering the Imports by Category and Imports by Country. Reliable results are obtained when they are combined. Thus, to analyze the impact of Imports by Category, we shall be taking into account the Imports number as well.

Level of Impact

The Imports by Category report released by the Australian Bureau of Statistic has minimum to negligible impact on the value of the Australian dollar.

Imports data – AUD

The Imports report published on July 02, 2020, stood negative 6%, beating the previous number -10%. Even though the numbers are not up to the mark, they have recovered to a great extent from the previous month’s readings.

From the below chart ranging from 2016 to 2020, the Australian Imports hit a new low to -10% for the May report. However, it shot up 4% higher the following month.

Imports – Australia

Below is the Imports by Category for the top five categories in imports. We can see that four out of five categories saw a drop from the previous report.

AUDUSD – Before the Announcement

Focusing on the left side of the chart, we can see that the market is in an uptrend and is currently consolidating.

AUDUSD – After the Announcement

On the day of the report release, the impact in the volatility of the currency was insignificant. However, later through the month, the Australian dollar got stronger and continued its uptrend. This indicates that, despite the disappointing number overall, the AUD saw strength as the number beat the previous month report by a significant margin.

AUDCAD – Before the Announcement

Before the news released, the market was in a range for an entire month.

AUDCAD – After the Announcement

On the day of the announcement, the market tried to inch above the top of the range but failed. However, in the subsequent trading sessions, volatility picked up, and the price made a higher high. Hence, we can, to an extent, conclude that the AUD had a positive impact on the Imports by Category numbers.

AUDJPY – Before the Announcement

In the below chart of AUD/JPY on the 4H time frame, we can see that the market is in a strong uptrend. It made a high to around 77.000. The prices were in a pullback phase, the whole month of June.

AUDJPY – After the Announcement

On the day of the report announcement, the market barely had any impact in terms of volatility. That said, in the following weeks, the price rallied up to the previous high of 77.000, indicating AUD strength.

Therefore, we can conclude that the Australian dollar had a feeble effect during the news release day but did have a positive impact on the report in the subsequent trading sessions. Cheers!

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Forex Basic Strategies Forex Daily Topic

Stop Hunting – The Strategy That Is Used By Most Of The Investment Banks

Introduction

Introduction

Introduction

Currently, there is a strategy that is followed by most investment banks around the world, and that is known as Stop Hunting. It attempts to force some market participants out of their positions by driving an asset’s price to a level where many retail traders set their stop-loss orders. The triggering of many stop losses at once generally leads to high volatility, and this can present opportunities to some smart traders who seek to trade in such an environment.

The fact that the price of a currency pair can experience sharp moves when many stop losses are triggered is exactly why many traders engage in stop hunting. Traders who are aware of this fact and have observed this phenomenon of the market try to make of this opportunity by being patient and conservative. The strategy we will be discussing today takes advantage of this sudden rise in volatility due to what is known as ‘stop-hunting.’

Timeframe

The beauty of this strategy is that it can be employed on all timeframes. However, it is not recommended in extremely small timeframes as there is a lot of noise in those timeframes, which may lead to confusion and misunderstanding. Hence, if one wants to profit greatly from this strategy, he/she should trade in 15 minutes or a higher time frame.

Indicators

We will be using just one technical indicator, and that is ‘Simple Moving Average (SMA)’ with 5 or 10 as it’s period. No other indicators are used in this strategy.

Currency Pairs

The strategy is suitable for trading in all currency pairs, including major, minor, and some exotic pairs. However, illiquid currency pairs should be avoided as the price action patterns are not reliable in these pairs.

Strategy Concept

In this strategy, we will be using the concept of previous highs and lows instead of support and resistance to act as our reference points. This is easy to understand and easier to spot in a chart. We will then anticipate these highs and lows as our support and resistance areas, which could break out of. Lows on a price chart are points where the price found support and started to go up.

In other words, this is a price point where there were ready sellers. When price revisits that area, sell orders get triggered, and the price starts to fall. However, during a breakout scenario, the momentum of the price is so much that it breaks the previous high and continues moving south. The Opposite is true for the breakdown of previous lows.

At times it is seen that even when the previous high or low is broken, the price doesn’t always continue in the direction of the breakout or breakdown. The price immediately retreats and bounces off the high or low. We will call these scenarios as fake-out or ‘stop-loss hunt.’ When price retraces back immediately, there is a high chance that it will continue in the same direction, at least until the latest hurdle. Let us explore the steps of the strategy.

Trade Setup

To explain this strategy, we will consider the EUR/USD currency pair and find a trade that fulfills all the criteria of the strategy. In this example, we will be analyzing the 1-hour time frame chart and look for appropriate price action patterns in the pair.

Step 1

The first step of the strategy is to look for highs and lows from where the market has traveled a fair amount of distance. Spotting for such areas in the direction of the major trend is preferred as the risk is lower in such trade setups. For instance, look for buying opportunities at lows of an uptrend and selling opportunities at the highs of a downtrend. This step is very important from a risk aversion point of view. Thus, one should give a lot of importance to this step of the strategy.

Step 2

The next step is to look for a fake-out price action pattern at the low, marked in the previous step. This is the first confirmation that buyers or sellers have come back into the market, and the banks have cleared out all the strategies that were placed below the low and above the high.

The below image shows how the price goes slightly below the previous low clearing all the stops of retail traders, and the last candle closes with a great amount of bullishness.

Step 3

In this step, we see where we take an entry in the market. We take an entry right after the price starts moving higher or lower and closes above or below the simple moving average (SMA), respectively. Conservative traders can wait for the price to retrace to the SMA and then take an entry while aggressive traders can enter right at the close of the candle.

The arrow mark in the below image shows that the entry is made at the close of the second bullish candle after the fake-out.

Step 4

We have one take-profit and one stop-loss point for this strategy where we take profit at the high or low as we had marked in the first step of the strategy while stop loss is placed below or above the low and high, respectively. If one is trading in the direction of the major trend, he/she can take profits at new highs or lows. However, one needs to be conservative while taking counter-trend trades.

Strategy Roundup

Stop-loss hunts are becoming as common as breakouts. By including this strategy in our trading arsenal, we will have something that we could use when we notice such patterns in the market where other traders are looking for breakouts. In this strategy, we have put a significant amount of stress on price action, which makes this strategy very reliable and consistent. One can use trailing stop-loss to protect their profit even when the target isn’t reached. All the best!

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Forex Course

103. Analyzing The Power Of Oscillators

Introduction

Introduction

Introduction

In the previous lesson, we had an introduction to oscillator indicators and understood how they work. In this lesson, we shall put that into action by analyzing some of the most used oscillators.

Quick Revision

In general, Oscillator is any object that moves back and forth between two points. In simple terms, anything that moves between two points, 1&2, is said to be an oscillator.

The concept remains the same for trading as well. An oscillator is an indicator which moves within two bounds in a range. When trading using oscillators, our eye catches interest when it is around the peaks and troughs. These areas generate buy and sell signals. Precisely, it indicates the end of a trend or the beginning of a new trend.

Trading Oscillators

Stochastic, Relative Strength Index, and Parabolic SAR are the extensively used oscillators by traders.

All these indicators work under the premise that the rate of price change begins to slow; that is, the number of buyers or sellers have reduced at the current trading price. And this change in the momentum indicates a possible trend reversal because the other party is losing its gas. Such indications are given when the oscillators are at the overbought or oversold regions.

Stochastic Indicator

The stochastic indicator is an oscillator whose upper and lower bounds are 80 and 20, respectively. So, if the line moves 80, it enters into the overbought region, and if it drops below 20, it is said to be in the oversold region.

Calculating stochastic variables

There are two line on the stochastic oscillator, namely, %K and %D. Both the values are calculated as follows:

%K = 100 x (Price – L) / (H – L)

%D = (K1 + K2 + K3) / 3

Where, in %K, H and L represent the Low and High for the specified period. And %D represents the average of the most three recent values of the %K.

Note: In the given example, the period is chosen as 14 (last 14 days/candles).

RSI Indicator

The Relative Strength Index (RSI) is a momentum oscillator that measures the rate of change of price and the magnitude of directional price movements. The RSI calculates the momentum as the ratio of higher close values and lower close values for a specified period. As it is an oscillator, it oscillates between the bounds 30 and 70. The interpretation for it is the same as that of other oscillators.

Interpretation Example

To illustrate the use of the oscillators, consider the given chart of USD/CAD on the 1D timeframe. To the price chart, the stochastic and the RSI oscillator has been applied.

At the vertical red lines, it can be seen that the market was overbought according to both the oscillators. This is an indication that the market which was in an uptrend priorly is not losing strength. Hence, in hindsight, the market falls as the oscillators start to make their way back into the range.

Bottom Line

Oscillators are great leading indicators that help in determining oversold and overbought conditions. It also gives traders an indication of the possibility of a market reversal. From the above example, it is seen that these indicators work like a charm. However, one must note that oscillators work in your favor, but not always. Sometimes, one oscillator indicates a buy while the other does not. These are the times when traders must avoid trading such instruments. As shown, oscillators must be used with other oscillators or technical tools to achieve the best out of it.

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Forex Course

101. What Are Oscillators & How To Interpret Them?

Introduction

Introduction

Introduction

Technical Indicators are primarily used to confirm a price movement and the quality of a candlestick pattern, and also to create trading signals with them. Indicators are a great source of strength to confirm an existing analysis. Moreover, some indicators solely help in analyzing the trend, momentum, and volatility of the market.

As discussed previously discussed, there are two types of indicators, leading and lagging. And oscillators fall under the leading indicators. That is, they determine the trend of the market before-hand.

Indicator construction

There are two ways through which indicators are designed:

  1. Non-bounded
  2. Oscillators

Non-bounded, as the name suggests, they are the indicators that are not bound in a specific range. They usually display the strength and weaknesses, and to an extent, generates buy and sell signals.

Oscillators, on the other hand, are indicators that are bound within a range. For example, 0-100 is the range they oscillate between. However, based on the type of oscillator, the range varies.

Oscillators

Oscillators are technical indicators that are mainly used to determine the oversold and overbought conditions. These non-trending indicators are used when the market is not showing any certain trend in either direction. They are unlike the moving averages (MA), which determine the trend and overall direction of the market.

When security is under an overbought or oversold situation, the oscillators show its real value. It indicates that one of the parties is losing its strength, and the other is slowly starting to gain together.

Interpreting Oscillators

Oscillators are constructed with lower and upper bounds. And these bounds form a range. In the below oscillator, the purple region represents range-bound, where 30 is the lower bound, and 70 is the upper bound. The upper and lower bounds are also referred to as peaks and troughs. Typically, the peaks and troughs in the oscillator correspond to the peaks and troughs in the market as well.

Extreme Regions

The oversold and overbought regions are the extreme regions. That is, when the oscillator line shoots above the upper bound, the market is considered to be overbought. On the contrary, if the oscillator falls beneath the lower bound, the market is said to be overbought.

An overbought market means that the buying volume has diminished over a few trading days. So, there could be a possibility for investors to sell their positions. However, note that this interpretation holds true when the market was in a predominant uptrend and is currently consolidating.

An oversold market indicates that the selling volume, which was high in the past days, has now diminished. This could mean that the sellers are done selling with the security and might begin closing their positions. Hence, indicating a turn-around in the market.

Midpoint Line

A crossover at midpoint region of the range depicts the gain in strength of the buyer or sellers. From the oscillator given, 50 is the midpoint line. So, if the oscillators cross above the 50 mark, it indicates bullishness in the market. And if cuts below 50, it could indicate bearishness in the market.

This concludes the lesson oscillators. In the coming lessons, we shall discuss some strategies using a few oscillators. Stay tuned. Happy trading!

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Forex Course

Introduction To Forex Course 4.0

Hello People,

Hello People,

Hello People,

As you all know, we have completed Course 3.0 successfully. Thanks a lot for the brilliant response and great job on the quizzes you all have taken. We have covered some of the most critical fundamentals pertaining to technical analysis in course 3.0. Please make sure to practice all the concepts we have discussed in a demo account. Without practice, it is impossible to ace the Forex Market using technical analysis. We have also made a quick navigation guide for Course 3.0 so that it’ll be easier for you to get a quick recap whenever required. You can find that guide in the link below.

Quick Navigation Guide – Forex Academy Course 3.0

With all these learnings in mind, we will be moving on to the Forex Academy Course 4.0. We have discussed most of the basics concerning technical trading in the previous course. Hence, we will be exploring some sophisticated strategies and intermediate to advanced concepts of technical analysis in Course 4.0. It is crucial to have acquired the knowledge of whatever we have studied in the previous course to catch up with these complex concepts. So it is highly recommended to finish the previous course before starting off with this one.

Topics that will be covered in Course 4.0

✫ Forex Chart Patterns & Their Importance

✫ Trading The Most Popular Chart Patterns

✫ Oscillators

✫ Momentum Indicators

✫ Pivot Points & their importance

Each of these topics will have about 7 to 10 course articles with corresponding quizzes. The USP of this course are the writers who prepared TOC and the related content. They are professional technical & price action traders who have a combined experience of 20+ years in the Forex market. So make sure to follow all the concepts that are discussed in this course and practice them well to become a successful Technical Trader. Also, try to answer the quiz questions until you get all the questions right. We wish you all the luck. Cheers!

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Forex Course Guides

Forex Course 3.0 – Complete Guide

Hello everyone,

Hello everyone,

Hello everyone,

Firstly, we want to thank you guys for following us throughout the course so well. We feel privileged that we are helping you guys in becoming better traders. Especially in Course 3.0, we have discussed some of the most crucial aspects of technical trading, which are essential for every aspiring technical trader to know. We have seen the quiz results for all the course articles that you guys have taken, and that gave us a gist of how well you’ll be following the topics discussed.

However, for the people who want to revisit a few topics, we would like to make their lives easier. So we are putting up a list of topics that we have discussed in this course. Also, this article will act as a quick revision guide for all the basics involved in Technical Analysis.

In this course, we have started by discussing the concept of Candlesticks and its fundamentals. Then we learned how to trade various candlestick patterns along with their importance. Introduction to Fibonacci trading has been done, and we also have paired the Fib levels with various indicators to generate accurate trading signals. We extended that discussion to Moving Averages and its types. Finally, we have learned the principles of indicator-based trading, where at least 10 of the most popular indicators have been discussed.

Below are the corresponding links for each of the topics that we have discussed in this course.

Candlestick Charts

Concept of Candlesticks – Introduction | Anatomy | Fundamentals

Trading Candlestick Patterns – Single Continuous | Single Reversal | Dual Continuous                                                   Dual Reversal | Triple Continuous | Triple Reversal

Deeper Insight – Candlestick Patterns Cheat Sheet | Candlestick + S&R

Fibonacci Trading

Introduction | Entry Using Fib Levels | Challenges of using Fib levels | Fib + S&R Candlestick Patterns + Fib Levels | Fib + Trendlines | Fib for TP & Fib for SL | Summary

Moving Averages

Introduction | SMA | EMA | SMA vs. EMA | MAs to identify the trend | MA Crossover Strategy | MA + S&R | Summary 

Indicator-Based Trading

Introduction | Pros & Cons | Bollinger Bands | RSI | MACD | Donchain Channel | RVI | TSI | Stochastic | Ichimoku Cloud | Parabolic SAR | ADX | ATR 

With this, we have ended our Course 3.0, and soon we will be starting our Course 4.0, where we will be discussing some of the advanced topics in Technical Trading. So stay tuned and watch this space for more interesting and informative content. Cheers!

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Forex Course

90. The ATR Indicator & Its Corresponding Trading Strategy

Introduction

Introduction

Introduction

ATR (Average True Range) is a popular volatility indicator in the market. It is used to find how much the instrument moves on an average over a given period of time. This indicator is introduced by J. Welles Wilder Jr. in his book, ‘New Concepts in Technical Trading Systems.’ Apart from ATR, this book also includes some of the most famous technical indicators such as RSI, ADX, and Parabolic SAR, etc.

The ATR indicator was originally developed to trade the commodities market, but it has been modified in such a way that it could be widely used for stocks, indices, and the Forex market as well. This indicator is not developed to indicate the price direction. Instead, it is used to measure the volatility of the instrument, which is caused by the gaps, up & down moves. ATR is a boundless indicator, unlike the other indicators we learned till now. Higher the ATR level, higher is the market volatility, and lower the ATR level, lower is the volatility of the underlying asset.

Below is an illustration of how this indicator looks on a price chart.

Trading With The ATR Indicator

The image below represents the ATR indicator on a GBP/AUD Forex chart. The orange box indicates the pullback phase, and at this phase, we can see the ATR indicator keeps going down. This means that there is currently low volatility in this pair. Conversely, the uptrend in the Green box indicates high ATR value. This means the big players are back in the business, and they are accumulating big chunks. As a result, the instrument is quite volatile. Furthermore, the yellow box again shows a decline in volatility.

Traders can use this indicator to get an idea of how far the price of an asset is expected to move on a daily basis. We suggest you use this way of trading only on higher timeframes such as daily, weekly, and monthly. If the last closed candle of a daily chart shows 50 ATR value, it means that the last candle has moved 50 pips, and we can expect the next day price movement to move similarly.

First of all, we must find out the ATR value of the last closing candle on the daily chart. Then we can look for buy/sell opportunities at the opening of a new day’s candle. The profit target should be based on the last day’s ATR value. Some traders also use double the value of the ATR indicator to place their take-profit orders. It all depends on what kind of trade you are. If the ATR value is 50, we can go for 50 pip target (conservative move), or you can even go for the 100 pip target (aggressive move)

We can also use the ATR indicator for placing Stop-loss orders. When the ATR gives us the value of the present day, we can use those values to place the stop-loss orders below or above our entry points. If the market hits the stop-loss, it means that the daily price range is moving in the opposite direction. Hence we must exit our positions as soon as we can. The major benefit of placing the stop-loss orders by using the ATR value is that we can avoid the ‘market noise.’ That is, the unusual up and down moves will not stop us out.

Changing the Settings of this Indicator affects its Sensitivity

The standard setting of this indicator is 14, which means the ATR indicator will measure the market based on the last 14 candles. If we use a setting lower than 14, it makes the indicator more sensitive, and it will show us a choppier ATR line. On the other hand, a setting above 14 makes the indicator less sensitive to the price action and shows smoother reading.

In short, most of the Traders use the ATR indicator to check the market volatility and to place the stop-loss & take-profit orders. The higher value of the indicator implies that we must go for deeper stops, and the low value means we must go for smaller stops.

That’s about the ATR indicator and its use cases. Try using this indicator to check the market volatility and place accurate stop-loss orders. There are traders who use this indicator to enter the market as well, but those are advanced strategies that we will be discussing in the future. Cheers.

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Forex Course

89. Identifying Trading Signals Using The ‘ADX’ Indicator

Introduction

Introduction

Introduction

The ADX indicator is created by a technical analysis legend, ‘J Welles Wilder.’ ADX (Average Directional Index) shows how strong the market is trending in any direction. This indicator doesn’t have a negative value, so it is not like the oscillators that may fluctuate above and below the price action. The indicator gives a reading that ranges between 0 and 50 levels. Higher the reading goes, stronger the trend is, and lower the reading goes, weaker the trend is.

The ADX Indicator Consists of Three Lines.

  1. The ADX Line.
  2. The DI+ Line. (Plus Directional Movement Index)
  3. The DI – Line. (Minus Directional Movement Index)

The chart above is the visualization of the ADX indicator. We can see the green line (DM+), the Red Line (DM-), and the Yellow Line. (ADX)

Trend Direction and Crossovers

Buy Example

To take a buy trade using this indicator, the first requirement is that the ADX line should be above the 20 level. This indicates that the market is in an uptrend. We go long when the DI+ crosses the DI- from above as it indicates a buy signal.

The chart below is the EUR/AUD Forex pair, where we have identified a buy trade using the ADX indicator. As we can see, the market was in an uptrend, and it is confirmed by the ADX line going above the 20 level. At the same time, we can also see the crossover happening between the DI+ and DI- lines of this indicator. This clearly indicates a buying trade in this pair.

The stop-loss placed below the close of the recent candle is good enough, and we must exit our position when the ADX line (yellow line) goes below the 25 level.

Sell Example

The first requirement to take a seeling position using the ADX indicator is that the ADX line must be below the 20 level. This indicates that the market is in a downtrend. We go short when the DI+ line crosses the DI- line from below as it indicates a sell signal.

The below chart of the GBP/USD Forex pair indicates a sell signal. In a downtrend, when the ADX line (yellow line) goes below the 20 level, it confirms the strength of the downtrend. At the same time, when the DI+ crosses the DI-  from below, it shows that the sellers are ready to resume the downtrend.

Breakout Trading Using The ADX Indicator

This strategy is similar to the crossover strategy that is discussed above. However, we are adding the price action breakout part to it. The idea is to go long when the ADX line is above the 20 level and when the DI+ crosses the DI- line from above. Also, the price action must break above the major resistance level to confirm the buying signal.

As we can see, in the below USD/CAD Forex chart, when the ADX line goes above the 20 level, it indicates that the uptrend is gaining strength. It also means that we can expect a break above the resistance line soon. When the price action broke above the resistance line, we can see the crossover on the ADX indicator. This clearly indicates a buy trade in this currency pair.

We can exit the trades when the opposite signal is triggered. Most of the time, breakout trades travel quite far. So if your goal is to ride longer moves, exit your position when the momentum of the uptrend starts to die or when the price action approaches the major resistance area.

That’s about the ADX indicator and related trading strategies using this indicator. If you have any questions, please let us know in the comments below. Cheers!

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Forex Course

85. Learning To Trade By Using The ‘True Strength Index’ Indicator

Introduction

Introduction

Introduction

The True Strength Index (TSI) is a technical indicator used to analyze the financial markets. ‘William Blau’ developed the indicator in the mid of 1991. If you are interested to know more about William Blau and the technical tools developed by him, we suggest you read his book – ‘Momentum, Direction, and Divergence.’ The True Strength Index abounds between the +100 and -100 levels, and most of the values fall between +25 and -25.

Typically, the price action moves between these levels, and they are considered as overbought and oversold levels. This indicator also warns the weakening of a trend through the divergence and indicates a potential trend changes via centerline. When the indicator goes above the zero-level, it means the indicator is in positive territory, and the buying market is strong. But if the indicator goes below the zero-level, it means that the indicator is in negative territory, and the selling market is strong.

Below is how the price chart looks when the True Strength Index indicator is plotted on it.

True Strength Index Trading Strategies

Traditional Trading Strategy

Buy Example

We must look for buy trades when the crossover of the TSI lines happen at the oversold levels and hold it until the price action reaches the overbought level. The image below represents a buying entry in the AUD/JPY Forex pair. In an uptrend, when the market gives a decent pullback, the TSI indicator reached the oversold area, which means that the sellers are exhausted now and prepare for the buys. Soon after the exhaustion, the crossover happened on the TSI indicator, indicating a buy trade.

Sell Example

Look out for selling opportunities when the crossover happens at the overbought levels and hold it until the price action reaches the oversold level. The below chart represents the sell trade in the AUD/JPY Forex pair. The TSI indicator reached the overbought level when the price action gave enough pullback; the crossover indicates the failure of buyers to move price action higher, and as a result, reversal happened. We can exit our positions at any of the major support levels, or when the indicator gives an opposite signal.

TSI Breakout Strategy

Buy Example

The strategy is to identify a breakout on the price chart. Once the breakout happens, the TSI indicator must be above the zero-line to take the buy trade. We can see that in the below image when the breakout happened on the EUR/CAD Forex pair. After the breakout, we can see that the TSI indicator was also above the zero line, indicating a buy signal in this pair. We can exit our positions at the higher timeframe’s resistance area or exit when the TSI reaches the overbought area.

Sell Example

In a downtrend, find out a sell-side breakout. After the breakout, if the TSI indicator goes below the zero-line, it indicates a sell trade. As we can see in the image below, when the price action broke the trend line, the TSI indicator also breaks below the zero line, which shows that the sellers are ready to print a brand new lower low in this pair.

That’s about TSI and trading strategies related to this indicator. Make sure to try this indicator and these strategies and let us know hoe did your trades go in the comments below. Cheers.

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Forex Course

83. Learning To Trade The Donchain Channel Indicator

Introduction

Introduction

Introduction

The Donchain channel indicator is one of the quite popular technical indicators in the market. It is developed by Richard Donchian in the mid-twentieth century. This indicator consists of three moving average lines calculated by the highest high and lowest low of the last ‘n’ period. The upper Donchian band marks the highest price of the security over the ‘n’ period of time, whereas the lower band of the indicator marks the lowest price of a security over the “n” period of time. The area between the upper and lower band represents the Donchian channel.

If the price action is stable, the Donchian channel stays in a narrow range, and in volatile market conditions, the Donchian channel indicator will be wider. In this way, the Donchian channel is a wonderful indicator to assess the volatility of the market. The upper Donchian band indicates the extent of bullish energy, highlighting the price action achieved a new high in a particular period. Whereas the centerline of the indicator identifies the mean reversion price for a particular period. The bottom line identifies the extent of bearish energy, highlighting the lowest price achieved by the sellers in a fight with the buyers.

Below is how the price chart looks once the Donchain Channel indicator is plotted on to it.

Trading Strategies Using The Donchain Channel Indicator

Scalping Strategy

This strategy is made for traders who prefer to make quick bucks from the market. By following this strategy, we can get a couple of trades in a single trading session. The idea is to go long when the price action hits the lower band and go short when the price hit the upper band. The preferred time frame will be a 5- or 3-minute chart.

The image above represents a couple of buying and selling trading opportunities. Scalping is the easiest way to make quick bucks from the market. When we take a buy or sell trade, and if the price action goes five pip against your entry, we suggest you close the trade and wait for the price action to give another trading opportunity. Book the profit when price action hits the opposite band of the indicator.

Donchain Channel To Trade The Trending Market

If the market is in an uptrend, it is advisable to go only for the buy trades, and if it is in a downtrend, only go for sell trades. In this way, we can filter out false trading opportunities, and by following the trend, we can easily hold our position for longer targets.

Buy Trade

The below image represents two buying opportunities that we have identified in the EUR/NZD pair. We can see that the trend was up, and if we take any of those small sell trades, we will end up on the losing side. So on a higher timeframe, it is advisable to trade with the trend. We have captured the whole buying movement in this Forex pair. This is the easiest and safest way to trade the market using this indicator

Sell Trade

The below image represents a couple of selling opportunities in the CAD/JPY Forex pair. We can scale our positions when the market gives an opportunity to do so. Or, we can close our positions when the opposite signal is triggered. Always wait for the desired signal with patience to trade the market.

The advantage of trading with the trend is that whenever the market gives us the trading opportunity, we can easily hit the trade without worrying much. Another advantage of trading with the trend is that we can go with a smaller stop-loss as the price action spikes very less in a trending market.

These are only a few applications of the Donchain Channel Indicator. You can follow our strategy section to learn many advanced applications of this indicator. Stay tuned to learn many more technical indicators. Cheers!

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Forex Course

78. Brief Introduction To Technical Indicators & Indicator Trading

Introduction

Introduction

Introduction

In the past two sections of this course, we have discussed two of the most important tools in Technical Analysis – Fibonacci & Moving Averages. These two are discussed in an elaborated way because you might be using them in conjunction with many of the other reliable indicators in the market. They can be used standalone not just to take trades but also for different other purposes. For instance, Moving Averages can be used to identify the direction of the trend. Likewise, Fibonacci Levels can be used to test the reliability of any support and resistance level.

Since we have completed learning these crucial tools, it’s time for us to extend our learning to understand specific technical tools known as indicators and oscillators. There are many indicators and oscillators in the market. Some are reliable, and some are not. So in the next few course lessons, we will be discussing some of the most credible and reliable indicators. In this lesson, let’s first understand what an Indicator basically is and why it is important to use them in technical analysis.

What is an Indicator?

An indicator is a tool that is used by technical traders and investors to understand the price charts and market conditions. The important purpose of any indicator is to interpret the existing data and accurately forecast the market direction. These indicators are built on various mathematical calculations by market experts.

These days, with the advent of technology, hundreds of indicators can easily be accessed. They are available on most of the charting platforms that we currently use, like MT4 & TradingView. Many of the reliable indicators we have today are a result of extensive research and back-testing. Any technical indicator considers a lot of important data like historical price and volume to predict the future price of an asset.

Indicators are an integral part of technical analysis, and the number of traders who just rely on indicators to take trades is pretty high. Typically, most of the indicators overlay on the price charts to predict the market trend. However, there are indicators that position themselves below the price chart to make users understand the overbought and oversold market conditions.

Oscillators are nothing but range-bound indicators. Which means, an oscillator can range from 0 to100 levels (0 being the floor and 100 being the roof). Essentially, if the price of an asset is at 0, it represents oversold conditions. Likewise, if the asset’s price is at 100, it represents overbought conditions.

Two Types of Indicators

Indicators are classified into two different types – Leading Indicators & Lagging Indicators. As the names pretty much suggest, leading indicators are those that predict the future price direction of any given currency pair. Essentially, these indicators precede the price action and predict the price.

Leading Indicator Examples: RSI (Relative Strength Index), Stochastic Indicator, & Williams %R.

Contrarily, lagging indicators act more like a confirmation tool. They follow the price action and help traders to understand the complex price charts better. One of the best use cases of a lagging indicator could be while testing the trend. We can confirm the trend along with its strength using a lagging indicator.

Lagging Indicator Examples: MACD (Moving Average Convergence & Divergence) & Bollinger Bands.

That’s about a brief introduction to Indicators and Indicator trading. In the next lesson, let’s understand the pros and cons involved in Indicator trading. Once that is done, we can start learning some of the most reliable indicators and how to trade the markets using them. Cheers.

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Forex Course

45. Analyzing the Forex Market – Technical Analysis

A way to analyze the markets other than fundamental analysis is technical analysis. In this lesson, we shall exactly understand what technical analysis is, and also the different techniques to analyze the market using technical analysis.

A way to analyze the markets other than fundamental analysis is technical analysis. In this lesson, we shall exactly understand what technical analysis is, and also the different techniques to analyze the market using technical analysis.

A way to analyze the markets other than fundamental analysis is technical analysis. In this lesson, we shall exactly understand what technical analysis is, and also the different techniques to analyze the market using technical analysis.

What Is Technical Analysis?

In simple terms, technical analysis can be defined as the study of price movements.

Unlike fundamental analysis, where people study the factors which affect the supply and demand of the market, technical analysis involves the study of the historical price movements and the present market condition.

Why should Technical Analysis be used?

Let us answer this question by bringing up an analogy.

The first thing one must understand about the market is that the forex market business is no different from a real-life business.

For instance, let’s say there’s a car dealer and they have been selling one particular car for six months by varying the prices every month. And an illustration of the sales report is given below.

Now, from the above table, can you predict what could be priced in the near future? If yes, then you can consider yourself as a technical analyst, as this is what technical analysts do.

Consider the above table. We can see that initially, the car was priced at $20,000, and 9,000 units of the car were sold. Next month, the owner price reduced by $1,000, and the sales increased by 1,000 units. Seeing this demand in the car, the owner increases the price to $25,000. But, this time the sales drop down to 1,000 units. So, the car owner reduces the price back to $19,000. And he observes that the sales increase from 1,000 to 10,000. Later, he again raises the price to $26,000.

Now, by analyzing the past price movements, we can predict with a high probability that the price will reduce yet again, as the previous time the price came to $25,000, the price dropped drastically. Thus, looking at the price of the car in June, we can see that the price did fall to $15,000.

Therefore, the above example, in a nutshell, is referred to as Technical Analysis.

Switching back to the Forex market, the analysis is done similarly. The only difference being the Forex market involves the trading of currency pairs, and the real market consists of the buying and selling of products.

Hence, from this, we can conclude that a market moves as per the historical price movements. The above example is just to give you a gist of how technical analysis work. There are many more complex ways to accurately predict the market using technical analysis. Price Action traders do their technical analysis using different types of charts (like candlesticks, bars, lines, area, etc.), timeframes, and indicators.

Hence, this brings us to the end of this lesson. In the lessons coming forward, we shall be discussing tons of stuff related to technical analysis. So, stay tuned.

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