Forex Education -


How to enhance your trading experience using price bands

How to use price bands - This article was submitted by ICM.com.A moving average usually helps us detect the trend of the price of certain financial assets. However, prices usually fluctuate around the moving average. Whether you prefer breakout trading or sideways trading, price bands will support you in your journey. We will cover three technical analysis indicators that are used to quantify how much prices fluctuate near a certain moving average. Bollinger Bands, Keltner Channel, and Envelopes are among the most used trading tools. The upper and lower bands for the mentioned three indicators could be used as support and resistance. A trader could adjust the inputs of these indicators in order to suit his trading style. If the trader is trading the reversion to the mean, he will be using larger inputs. He will initiate sell positions near the upper band and buy positions near the lower band, as he believes that near these bands, the prices are extended. On the contrary, if a trader is looking for breakouts, he will be using smaller inputs to jump into trades at the earlier stages of an upcoming trend. Bollinger Bands The popular Bollinger band indicator was developed by John. A. Bollinger. It consists of a simple moving average and two standard deviations; one above and one below the moving average. The moving average is named as the middle band, the standard deviation above is called the upper band, and the standard deviation below is called the lower band. He used the standard deviation as it will give him a signal about the current market volatility. When the volatility is low, the bands get closer to the moving average which will give a signal to the trader that the market could be preparing for a move. On the other hand, when the bands are extremely far away from the moving average, it is a hint that the current market move is coming to an end. The below chart is the daily USDCAD chart with the regular inputs of the Bollinger band indicator (Moving average 20, Standard Deviation 2). The above chart sums up the benefits of the Bollinger band indicator. We can see that when the bands were getting closer to the moving average, we were preparing for a breakout (1), and when the bands were extremely far from the moving average, it gave the trader a signal that the current move is about to end (2). Moreover, the circles prove that the upper and lower bands are used as dynamic support and resistance. Even when the market was trending up, the pair was finding resistance near the upper band and was dropping back towards the moving average which acted as a support. Some breakout traders are now using a new version of the Bollinger band indicator, which only plots the minimum value of the standard deviation that is opposite to the current price direction. The above chart shows the same phase of the USDCAD pair, but with the new version of Bollinger bands that only draws the minimum deviation of the band opposite the price. In a trending market, the break of the upper band is usually considered as the break of resistance and the break of the lower band is usually considered as the break of support. Keltner Channel Keltner Channel is another technical analysis indicator that is used to detect the range where the price fluctuates from the moving average. It consists of a moving average and upper and lower bands. The bands are formed by calculating the Average True Range of the same period of the moving average and adding above and below the moving average. Simply, if the 20-day simple moving average of the USDCAD pair is at 1.3288, the Average True Range of the last 20 days is 0.0081, and the multiplier is set at 1, then the upper band will be at 1.3369, and the lower band will be at 1.3207. If we are looking to trade reversals from overextended price moves, we should raise the multiplier to possibly detect the extremes and jump into trades. The above chart shows the USDCAD daily chart, with Keltner Channel using a 20-day simple moving average and multiplier 1 ATR. Such inputs could help a trader to enter breakout trades, but he should be using a proper stop loss and strict risk management.  The above chart shows the USDCAD daily chart, with Keltner Channel using 20-day simple moving average and multiplier 3 ATR. Such input supported the trader in noticing overextended moves. It gives fewer signals but reduces the chances of defects.  Moving Average Envelopes A moving average envelope is a technical indicator that uses a moving average with an upper and lower band. The upper band is formed by adding a specified percentage above the moving average, and the lower band is formed by adding the same specified percentage below the moving average. Simply, if the 20-day simple moving average of the USDCAD is at 1.3288, we add (1.3288*1%) above the moving average to obtain the upper band and we deduct (1.3288*1%) from the moving average to obtain the lower band. The interpretation is similar to the one of the Keltner Channel, if a trader is seeking breakout trades, he will use a smaller percentage, and if he is searching for the extremes, he should be using a larger percentage.  The above chart shows the USDCAD daily chart, with a simple moving average envelope using 20 as period and 0.5% as a percentage. Such inputs will create numerous trade opportunities which will increase the chances of jumping into losing trades. The above chart is the USDCAD daily chart, with the moving average envelope using 20 as period and 2% as a percentage. The trader will be able to find price extremes and trade back to the mean. Finally, all the above-mentioned indicators are used for the same purposes. They can help us to detect when the market is less volatile and preparing for a breakout, and when the market is overextended. A trader must choose the input that suits his trading style. If he is aiming to find the overbought and oversold zone and trade the price back to the mean then he should be using higher standard deviation, ATR multiplier, or percentage. If a trader wants to scalp or even join an upcoming trend, he should use smaller inputs for the bands. However, a more sensitive indicator would create many trading signals but with smaller chances of success. Make sure you set the proper inputs that suit your trading style and always apply an appropriate strategy with strict risk management to accomplish better trading performance.

Useful tips to identify support and resistance levels

A couple of pointers on the basics of technical analysis Trading requires a wide range of skills, which sometimes can range from simple techniques to complex patterns. Being able to identify both support and resistance prices trends more towards the former, though this is no less important for any respective trading strategy. At first glance, even novice traders can locate specific levels at which prices inflect. Rather, support and resistance levels form as orders cluster in places where many traders expect the price to stop. In this way, it becomes useful to pinpoint in advance these specific points in order to optimize any trading strategy. Learn more about how to optimally utilize support and resistance levels Ultimately, there are multiple approaches to identifying important market levels. These techniques involve swing highs and lows, psychological levels, trendlines, moving averages, pivot points, and Fibonacci, among others. Swing highs and lows A swing is a distinct movement of the price chart. Highs and lows of such moves are the natural reference points for traders. Take note of swing highs and lows in the visible area of the chart. It is important to not to forget to check higher timeframes for levels that are not normally in your field of vision but that can still create obstacles near the current price. The more times a level stopped the price and made it reverse, the stronger it is. Making use of psychological levels Next up is psychological levels, which are points that are considered to be psychologically important when its price quote ends with 0. The more zeros a level has, the more important it is. If you ask for someone's opinion about the future price of EUR/USD, no one will say something like 1.1932 but they can mention 1.2000 or 1.1500. Harnessing trendlines Diagonal lines are also important just as numbers are with several zeroes attached to them. It is important to note that you need at least 2 points (2 highs or 2 lows) to draw a trendline. There should be about 20-30 candlesticks between these points so that the trend had a 45-degree angle. The more times the price touches the trendline, the stronger this trendline becomes. Moving averages Although moving averages lag behind the price in a sense that they are slow to reflect the most recent changes of the market, they act as good support/resistance levels. One way to utilize moving averages is to rely on 200-, 100- and 50-period lines for this purpose. These MAs are especially strong hurdles for the price on the weekly and daily charts because many "big bank" analysts use them. Exploring pivot points Pivot points represents an instance when math comes to trading. Pivot points are calculated on the basis of previous highs, lows, and closing prices. There are many custom indicators that will draw these levels for you. One way is to look at Pivot Points Multi-timeframe indicator for MetaTrader. It shows a central pivot level, 3 support levels and 3 resistance levels for each timeframe. The indicator will let you see daily levels applied to any other timeframe you use. A good starting point is to analyze weekly levels of this indicator. They are redrawn after the end of every week and provide a very good idea of what the scope of the pair's movement will be like during the coming days. Fibonacci Fibonacci constitutes one of the core trading strategies that exists for users. In order to use this instrument correctly it is important to spread the line from the left to the right of any chart and take into account the candlesticks' shadows in the figure. In the example above, key levels of the Fibonacci retracements are 38.2%, 50%, and 61.8%. A correction is expected to end at one of these levels so that the overall trend could resume. - This article was submitted by LegacyFX. ForexLive

Making the best use out of moving averages

A look at one of the most used tools in a trader's trading arsenal A moving average is a simple tool that traders use for different purposes. The main advantage is that it makes trading smoother and if used correctly, can lead to favorable trading results. A simple moving average is calculated by adding the price of a currency pair (Open/High/Low/Close) for a set period "X" and then dividing the sum by this number "X". For example, to identify a 5-day moving average you would add up the closing prices of the last 5 days and then divide the result by 5. There are several types of moving averages, but traders mostly use the Simple and Exponential Moving Average. The difference between these two types of moving averages is that the Simple Moving Average will give equal weight for all the periods while the Exponential Moving Average will give more weight to the most recent periods. Some traders may believe that the difference does not affect the outcome. The Simple Moving Average is smoother and will respond more slowly to the latest price action, which is good in the case of a false breakout as this prevents traders from jumping into a losing trade. On the contrary, the Exponential Moving Average responds faster to the latest price action and allows the trader to join a new trend faster but remains subjected to fake outs (when a trader believes a price action will take place but it never get fulfilled). Now, after explaining the differences between the two most used moving averages, we should understand how we can benefit from these moving averages. Traders can use moving averages to detect the trend of a certain financial product. We plot one moving average on the chart with a specific period and trade the crosses between the price and the moving average. In other words, if the price moves above the moving average, we can enter a long (buy) position, and if the price moves below the moving average, we can enter a short (sell) position. Traders can add two moving averages: one with a short period (fast), one with a long period (slow). The moving average that has the shorter period will substitute the price which means when the fast moving average crosses above the slow moving average, the trader can initiate a long (buy) position, and if the fast moving average crosses below the slow moving average, the trader can initiate a short (sell) position. Another strategy that can be applied using moving averages can be plotting a fast moving average for execution when crossing above or below the price along with a slow moving average to confirm direction or bias. Moving averages are also used as dynamic support and resistance levels. They are called dynamic because they change along with the recent price action. This means that traders expect a falling price to bounce when touching a moving average. Therefore, the moving average will act as support (heavy buying overcomes selling power) and vice versa. A rising price is expected to falter when touching a moving average. Therefore, the moving average will serve as a resistance (heavy selling overcomes buying power). Many traders ask about the best moving average periods which could provide the best trading outcome. There are no perfect periods. Usually, traders use the 50-100-200 periods. Traders should always set the periods based on their trading strategies and style. For example, a trader uses 5 and 21 periods on the daily charts as he believes that if the price action of the last 5 days differed from the price action of the last 21 days than the market is going to change the direction. Always use periods that match your trading style and strategy. - This article was submitted by ICM.com ForexLive  

Morgan Stanley does not like the USD. What about the technicals?

Some overhead resistance to get through. Adam posted Morgan Stanley's view that the dollar would head lower.  They cite some plausible reasons for their assessment, but as most people realize, what we think most times does not play out the way we think.   That is especially true when we face things like China/US, Brexit, US/Europe, central banks, Pres. Trump, geopolitics, etc.  There are a lot of things that go into the formula.   As a result, I like to also look at the price action and tools applied to that price action for clues that the story is playing out and the "market" (who move the price), is on board.    For example, "If the dollar is going down, is there overhead resistance that might stall the rise?"  If that ceiling stalls the rise, the price can go down.  Another question might be "Is there a lower support level that if broken, would shift the bias more to the downside?"   To go lower, the buyers need to change their mindset from buying to selling. Breaking key technical levels, does that.  Looking at the daily chart above of the DXY (the weighted dollar index), shows that the index is approaching a resistance area at the 97.873 area.   The 61.8% retracement of the move down from the 2017 swing high comes in at that level.The swing high from June 2017 stalled at that levelA topside trend line (see red numbered circles) come in near that level tooThere is overhead resistance from multiple tools that could attract technical sellers.  When multiple tools converge at an area, that are becomes a barometer for bulls and bear.   Trade above it is bullish.  Stay below and sellers are trying to take back control against the key resistance area. It may not lead to a big move lower, but it IS a start.   Right now, we are near a key level for the bulls and the bears. That is off the daily chart.  Drilling down to the hourly chart below, the high price today moved higher to test the swing high from November 12th.  The high price today reached 97.71. The high from November 12th came in at 97.693.  Below the highs, there were some other swing highs from November 28th and December 11th. Those highs come in at 97.538. The price moved above those more recent swing highs today, but we are currently just below those levels. Sellers are taking more control.  So to answer the question,  "Is there overhead resistance that might stall the rise?"   The answer is YES on both the daily and the hourly charts.  That is clear.  If the price can stay below the 97.87 area that would keep the sellers in play for a reversal of the DXY (the USD). The 2nd question is  "Is there a lower support level that if broken, would shift the bias more to the downside?"  Looking at the hourly chart first, the pair has been confined in an up and down trading range. More recently in December, the 96.379 was a double bottom (lows from Dec 4 and Dec 10).  The highs at 97.69 and then 97.54 (see red and green numbered circles) are the higher extremes.    In between those levels are the 100 and 200 hour MAs.  The price lows on Tuesday and Wednesday and Thursday this week found buyers near those MA line (the price dipped below but not my much). The 100 hour MA is now at 97.139. The 200 hour MA is at 96.998. Both are moving higher.  If the price goes and stays below those MA, the bias would shift more to the downside.   Below that the 96.379 double bottom would be targeted.  Again, get below and stay below is more bearish.  On the daily chart, the 50% midpoint of the range since the high in January 2017 comes in at 96.036. The 100 day MA is at 95.842. Moving below those levels would tip the bias for the dollar even more toward the bearish side. Remember, after a rally, the sellers need to wrestle control away from the buyers. They need to change the mindset from buy the dips to sell the rallies.  Getting below targets on the downside, helps to do that.  So, downside targets - that if broken  - would increase the bearishness of the USD include: 97.139 - rising 100 hour MA96.998 - rising 200 hour MA96.038 - 50% of the range since 201795.842 - 100 day MA SUMMARY. It is one thing to say you think this will happen because of this that or the other, but "the market" needs to agree and the crystal ball also needs to be right for it to play out like you (or Morgan Stanley) believes. As a result, it is also important to plan out the road map for that idea. The price action and technical tools, help to give you the feedback you need to bring home the profits and complete the story. ForexLive

FX Trading Education: GBPUSD trend stays alive for the day. Here's why...

Corrections are modest is the clue. The GBPUSD has trended lower today after the pair peaked against it's 200 hour MA a 1.27586.  Since then the price has moved to the downside.   The move has moved 255 pips from the high to the low. The corrections have been modest.  That is what a trend move does.  It moves: FastDirectional with limited corrections, and Tend to go farther than traders expectYou can see that and measure an intraday trend move by looking at the 5-minute chart. Below is that 5-minute chart for the GBPUSD today.  At the top of the chart, the pair was moving sideways, but when the price stalled at the 200 hour MA, it was the start of the first leg down (see red circle 1).  That leg moved down to a new low of the day (from the 1st hourly bar), but stalled.   The correction off that low  corrected up to the 38.2% of that leg down (just above it). That is a modest correction and implies that sellers are in control.   The price of the 1st leg higher then moved below the lows with momentum.  Sellers were pushing and the buyers were scrambling. The next leg down (red circle 2) saw a bigger move lower.  Like the 1st leg, the pair bottomed and started a correction.  If you put a fibonacci of the trend leg lower, you can measure the "will of the buyers".   If the buyers can't get above the 38.2-50% retracement area (I call it the correction zone), are they taking control?  No!  The seller remain in control.  Seller can lean against the yellow area. If the price goes above, the waters for the trend are muddy. Stay below, however, and the seller remain in control.  Start of trend leg 3 down. The third leg lower was a quicker and steeper trend move lower. The longs and dip buyers are really felling the pain. The price nearly runs to 1.2500, stalling just above that level at 1.2505 where another correction is started. The third correction has the same targets.  The fibonacci of the leg lower has the 1.2560-78 as the "correction zone". Stall in that area and the trend is alive. Move above, and the trend waters are muddy. Putting it another way, the buyers and sellers are more balanced. In this case, the correction moved right up to the 50% retracement and stalled again. Are the buyers taking control?  Not really.  They did put up a bigger battle vs. the sellers but are they winning?  No.   What next? Well, the sellers are still in control and the trend is still in play.  What would muddy the water is a move above the 50%. It might not end the downside momentum forever, but it does muddy the water. The sellers feel some of the pressure of a bigger correction.    Until then however, the trend potential continues.     The sellers remain in control.    Trends are: FastDirectional with limited corrections, andTend to go farther than you expectIf you can recognize a potential trend move early by noting the price action, measuring the corrections, seeing that trend legs stay below the "correction zones", you have a chance to ride that trend by understanding who really is in charge, and who is feeling the pain. The run in the GBPUSD today clearly shows sellers in charge and hurting any buyers in the process.  Until the waters get muddy, assume the pummeling has the potential to continue.   ForexLive

EURUSD choppy but higher. If the dollar is going lower, what do the charts have to tell us?

If the dollar has peaked, what do traders want to see? Adam asks a key question at the end of his recent post.  "How much will the dollar fall if the Fed hits the pause button on rate hikes?" For me the price action and technicals help tell the story. Today the price action shows a rebound from yesterday's sell off, but the price action on the hourly chart shows choppy up and down trading.   What I see technically though is that the fall yesterday took the price below the 100 hour MA (blue line - bearish) and marginally below the 38.2% of the move up from the November 12 low. That level comes in at 1.13736.   What did NOT happen yesterday or today is a move below the 200 hour MA (green line) or 50% retracement.  That makes the move low more of a modest correction.   The rebound off that modest correction has taken the price back above the 100 hour MA currently at 1.1390. Watch that level for bullish/bearish clues intraday. Stay above and the dollar selling (higher EURUSD) can be expected.  Move below and the choppy run higher tilts more to the bearish side once again (with a move below the 1.13736 level more bearish).   So stay above the 100 hour MA allows the dollar to sell off more - technically. Taking a broader look at the daily chart below, what does it say about bullish/bearish and where can a more bearish dollar target? Well, the month's low fell below a floor at 1.1398-12 area (see green circles). That level can be tested before moving higher, and still lead to a more bearish dollar picture. Hence the importance of what the hourly chart says (il.e watch the 100 and 200 hour MAs there).   On the topside, if the EURUSD does continue its move higher (lower USD) by staying above the 100 and 200 hour MAs, the 1.1506-296 area (see red circles) has been a swing area and would be the next key upside target area. Move above that area will then target the 100 day MA at 1.1553 (blue line in the chart below - it is moving lower), followed by a downward sloping trend line at 1.1600 currently.  Above 1.1600 and the dollar has more room to roam back higher.  Of course the story line can change in an instant. If Brexit slows EU growth, if slowing US slows global/EU growth more. If Trump continues to go on a tariff rampage (trade deficits are not getting that much better afterall). If the Fed continues to tighten.  All those can keep the dollar bullish.  However, the price action will tell the story. So listen to the story by watching the price.   ForexLive

Forex trading education: Is the trend continuing or ending? What clues can you look for...

You have to drill into your charts to see a clearer picture of the clues for the trend A common wonder in trading is when does a trend move end?    The answer is we really don't know.  However, we can speculate by looking for clues from the price action and technical tools that might give us an idea, that the momentum is fading. That in turn might lead to a correction, which may lead to the end of the trend.    In this post, I will take a look at the trend move higher in the USDJPY seen after the break of a key ceiling yesterday, and what I am looking for from the price action and technical tools.  ---------------------------------------------------------------------------------------  The USDJPY made a trend run higher yesterday with a break of a ceiling area at 111.39-477.   Looking at the daily chart, that area corresponded with swing highs from January at 111.477. That was a corrective high just prior to a continuation of the fall that took the price to the March low at 105.623.  In May, the swing high stalled just ahead of that level at 111.39 and the price backed off from that peak.  On Tuesday, the price moved up toward that area, but backed off.  Yesterday, however, saw the price crack higher and trend higher. Today that run has extended.  up to a high price of 112.62.  You can see the trend higher better from shorter time frame charts. Looking at the hourly chart below, the yellow area is that ceiling area at the 111.39-477.  When the hourly bar broke above, the price stayed above.  That is bullish.  Another indication of a trend is that the corrections on the rise have been modest. It has been more or less, a straight shot higher.  So when might the trend stall?  When, if long should you take profit?One place, might be at a key target level. If I took a step to a longer term weekly chart, the 113.19-29 area is a key target above that I would expect some profit taking.  Why? The 200 week MA (green line on the chart below) and the 61.8% of the move down from the end of 2016 high to the 2018 low comes in at that 10 pip area. That combination should attract sellers on a test.  The high price today has reached 112.62 so far.  There is room to roam before we get there but it should be in traders minds for taking profit. What happens if it does not get there?  Is there other clues that you can use to take profit from the trend?Drilling all the way to the 5 minute chart could provide a clue.Looking at the chart below, the yellow area is the swing area from the daily chart at 111.39-477.  You can see the break, the test and the run higher from yesterday.Today, the slope of the move higher is flatter. It is still higher but at a slower pace.Technically, however, the price has tested the 100 bar MA on three occasions and bounced.  More recently, the price has started to dip below that MA line.  IN addition, the highs have been lower.  Is that indicative of a slowing of the trend?Yes.Is it more bearish?Yes.Is it the end of the trend?It could be. It certainly has traders more on the defensive for a swing/more corrective move.Could/should traders take profit/some profit?I would be interested in taking some profit technically. We are at a point where there is a slowing of the trend. There  are lower highs. The price is dipping below the 100 bar MA.  All are already indicative of some profit taking.  Not so alarming, is that the price remains above the 38.2-50% of the move up today (at 112.26-345) and the price is still above the 200 bar MA. As a result, there is more of a battle phase going on right now.  The price can go either way.  A move back above the 100 bar MA and the topside trend line could ignite the next run to the key levels from the weekly chart above 113.19-29 area.  On the downside, a move below the 200 bar MA at 112.301 would be indicative of more corrective action to come, and getting below the 50% midpoint at 112.26 would muddy the trend water even more.  How far could a correction lower go?I don't know but traders will be more focused on the "trading" the pair vs. 'trending" the pair (i.e., be more flexible with buys and sells).  The same MAs would still be in play for bias shifts (i.e, a move above would be more bullish again).My hunch is that the upside continues, it might just be a little less choppy, until that key weekly area at 113.19-29 is approached. Then, traders who are running the price higher, should become a little more cautious and that might shift the bias more to the downside.  But the price action and trading tools will ultimately help tell the real technical story.  For more education posts, check out my recent videos:"What does England soccer, NBA basketball and Forex trading have in common?""Forex Trading Education Video: Look for the easy shot in your trading"Also, you might want to read this post too on algo vs retail traders.Forex Education: Algos vs. the lowly retail trader. Can you compete in an algo world?ForexLive

In volatile markets, you have to pick your spots (and hope a little)....

"Trade the wide", and rely on your technical tools. When the markets are volatile and influenced by lots of forces, you really don't know what is around the next corner.   So you have choices, exit and wait for the market to calm down, or be really patient, pick your spots and hope the "market" agrees when "the spot" is reached. Take the EURJPY.  The hourly chart below shows lots of volatility. Lots of ups and downs and the over the last few days as the stocks have gotten crazy, this pair can whip around.   However, if you apply technical tools that you trust and most importantly, the "market" tends to follow, you can define some levels "on the wide" that might give you a low risk trading opportunity.   I like the fibonacci retracements, and in particular the 50% midpoint, as a proxy for bulls and bears.   I also like the 100 and 200 bar MAs.  That is no secret for those who follow me on Forexlive (or who read my book).  If you put a Fibonacci retracement of the move down from the Friday high to the low today, the 50% comes in at 135.732.   The 200 hour MA at the time of the move higher  (green line) comes in at 135.73 too.   With those two levels at the same level, it become the "hope level" for those looking to trade as the price moved higher earlier today.  That is a wide level to eye and patiently wait for.   If the price stalls, you have the chance for a rotation lower and because of the volatility, the reward can easily be a multiple of the risk.  If there is momentum on the break above, get out.  You have to give a little space in a volatile market but you don't need to risk a lot of pips. Remember you are "hoping" that "the market" sees what you see and jumps in with you.   SUMMARY:  The lesson in volatile markets, is to be patient. Pick your spots to trade "on the wide".  Don't force things.  When the price is right, go in the water and hope.  Hope that the "market" sees what you see.   If you use tools that "the market" tends to use like the 50% retracement and the 200 hour MA, you might just get lucky, your hope turns to reality and you have a nice winner, on a very difficult trading day.  


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