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Intermediate trading course
- Risk and Money Management
- Exchange Rates Determinants
- Price Patterns
- Technical Indicators
- Elliot Wave and Fibonnacci
Intermediate Trading Course »
RISK AND MONEY MANAGEMENTRisk Management
Many currency traders find it hard to follow simple risk management rules. Many times, they may turn winning positions into losing ones. They will be surprised to find solid trading strategies result in losses instead of profits. Regardless of how knowledgeable and intelligent a trader may be about the markets, their own psychology and emotions may cause them to lose money. Risk management can make the difference between a trader's survival and sudden death with Forex trading. A person can have the best trading system in the world and still fail without proper risk management.
Risk management is a combination of multiple ideas to control a trader's trading risk. It can be the limit of one's trade lot size, hedging, trading only during certain hours or days, or the knowledge of when to take losses. Risk management is one of the key concepts to survival as a forex trader. It is an easy concept to grasp for traders, but more difficult to actually practice. Brokers in the industry like to talk about the benefits of using leverage in order to keep the focus off of the drawbacks. This causes traders to come to the trading platform with the mindset that they should be taking large risk and aiming for the big bucks. Risk management is all about keeping one's risk under control.
The more controlled a trader's risk is, the more flexible he/she can be. Forex trading is about opportunities; therefore traders need to be able to act when those opportunities arise. By limiting ones risk, risk management insures that trader will be able to continue to trade when things do not go as planned. Using proper risk management can be the difference between becoming a forex professional and being a quick blip on the chart.Money Management
Money management is a strategic technique employed in forex that controls how much traders risk in trading. One of the best money management methods used widely by professional forex traders is to always risk a fixed percentage of equity per position. Using this method, a trader gradually increases the size of trades while winning and decreases the size when losing. The increasing of size of bets during a winning streak allows a geometric growth of the trader's account. Similarly, decreasing size of bets during a loading streak minimizes the damages to the trader's equity.Risk Reward Ratio
Trading on the forex market can be a very profitable business. Armed with this fact some traders are determined to make huge sums of money in as little time as possible by risking too much.
Risk is a part of trading. Every trade carries a certain level of risk. Every trader must know the amount of risk that is being assumed on each trade. Knowing the amount of risk on each trade is one way to limit it and to protect one's trading account. The best way to know one's risk is to determine the risk-reward ratio. It is one of the most effective risk management tools used in trading.
The risk-reward ratio is a parameter that helps a trader to determine the level of risk in a trade. It shows how much a trader is risking versus the potential reward or profit on a trade. While this may seem simplistic, many traders neglect taking this step and often find that their losses are very large. The risk-reward ratio is an important risk management and trading tool. As a trader, one should calculate a risk-reward ratio for every trade that he/she made. In more simple words, a trader should have an idea of how much they are willing to lose if the trade goes against them. Moreover, one should also know how much he/she expects to make in a trade. A general rule of thumb that a trader should apply is that one's risk-reward ratio should not be less than 1:2. With a solid risk-reward ratio, one can eliminate a trade that is not worth the risk by not entering it.Making an Exit
Money management is one of the most important and least understood aspects of trading. Many traders, for instance, enter a trade without any kind of exit strategy and are therefore more likely to take premature profits or, worse, run losses. Traders need to understand what exits are available to them and know how to create an exit strategy that will help minimize losses and lock in profits.
There are obviously only two ways one can get out of a trade: by taking a loss or by making a gain. When talking about exit strategies, we use the terms take-profit and stop-loss orders to refer to the kind of exit being made. Sometimes traders abbreviate these terms as "T/P" and "S/L".Stop Loss (S/L)
This trading order tells one's broker to close a position once pricing reaches a certain level, which can be either increasing or decreasing. Correct use of stop loss orders prevents "margin disasters" and can be part of a strategy that accepts losses as long as the net winnings are greater.Take Profit (T/P)
This trading order tells currency traders when to close out their current position to achieve a profit based on the exact rate or number of pips from the current price point. Currency traders who use a take profit order are able to secure profits to limit losses if the direction of the market shifts.
EXCHANGE RATES DETERMINANTSInflation
Inflation is a rise in the general level of prices of goods and services in an economy over a period of time. A chief measure of price inflation is the inflation rate, which is the annualized percentage change in a general price index, normally called as the Consumer Price Index, over time.
Not many are aware but the interplay between inflation and currency exchange rates is not straightforward. For example, in the long run, high inflation would mean a weaker currency because a high inflation would decrease the purchasing capacity of money. However, in the short run, higher inflation could be either positive or negative for the currency depending on whether the market believes that the central bank will address the higher inflation through interest rate policy or whether the inflationary pressures are temporary and doesn't necessarily require a policy adjustment. When a central bank interferes with high inflation, their automatic response is to increase the interest rates to discourage lending and spending. This action will boost the value of the currency as the amount of money in circulation is low. Inversely, when inflation rate is down, the central bank will cut down interest rates to encourage economic activities, increasing the money in circulation thus, depreciating the value of the currency.Interest Rates
Interest rate is a fee that is charged or paid for the use of money. An interest rate is often expressed as an annual percentage of the principal. It is calculated by dividing the amount of interest by the amount of principal. Basically, interest rates have a direct impact on the value of a nation's currency. When a country offers high interest rates, this often attracts the buying of that country's currency thus strengthening its value against other currency counterpart. On the other hand, country's who offer low interest rates will weaken the demand of its currency thus declining its value.Balance of Payment
A Balance of Payments (BOP) sheet is an accounting record of all monetary transactions between a country and the rest of the world. These transactions include payments for the country's exports and imports of goods, services, and financial capital, as well as financial transfers. The BOP summarizes international transactions for a specific period, usually a year, and is prepared in a single currency, typically the domestic currency for the country concerned. Sources of funds for a nation, such as exports or the receipts of loans and investments, are recorded as positive or surplus items. Uses of funds for imports or to invest in foreign countries are recorded as a negative or deficit item. The balance of payments for any country is divided into two broad categories: the Current Account and Capital Account.Current Account
A current account is the sum of the balance of trade (exports minus imports of goods and services), net factor income (such as interest and dividends) and net transfer payments (such as foreign aid). The current account balance is one of two major measures of the nature of a country's foreign trade (the other being the net capital outflow). A current account surplus increases a country's net foreign assets by the corresponding amount, and a current account deficit does the opposite. Both government and private payments are included in the calculation. It is called the current account because goods and services are generally consumed in the current period.
Knowing the components of a current account, how does this affect the value of the currency? Simple, when the current account is in a deficit, the value of the currency depreciates, but when the current account is in a surplus, the value of the currency appreciates. The reason for this is that when a country experiences a deficit, it is spending more on foreign trade than it is earning, and that it is borrowing capital from foreign sources to make up the deficit. In layman's term, it is a situation where in the country's total import of goods, services and transfers is greater than the country's total export of goods, services and transfers. This condition makes a country a net debtor to the rest of the world. Since the country requires more foreign currency than it receives through sales of exports, and it supplies more of its own currency than foreigners demand for its products. The excess demand for foreign currency lowers the country's currency. This is just a simple matter of demand and supply. Given that the country demands less domestic currency, the value of the local currency will depreciate. On the other hand, when a country experiences a surplus, this means that payments received by the country for selling domestic exports are greater than the payments made by the country for purchasing imports. In other words, imports by the domestic economy are less than exports. If this is the case, the demand for the domestic currency increases, thereby the value of the local currency depreciates.Capital Account
Meanwhile, the current account reflects a nation's net income (the capital account reflects net change in national ownership of assets). If the change in foreign ownership of domestic assets is greater than the change in the domestic ownership of foreign assets, then the currency value will appreciate. On the other if the change in foreign ownership of domestic assets is lesser than the change in the domestic ownership of foreign assets, depreciation is likely to happen.Balance of Trade
The Balance of Trade is the difference between the monetary value of exports and imports of output in an economy over a certain period. It is the relationship between a nation's imports and exports. A favorable balance of trade is known as a trade surplus and consists of exporting more than what is imported; an unfavorable balance of trade is known as a trade deficit or, informally, a trade gap. The balance of trade is sometimes divided into a goods and a services balance.
The balance of trade forms part of the current account, which include other transactions such as income from the international investment position as well as international aid. If the current account is in surplus, the country's net international asset position increases correspondingly. Equally, a deficit decreases the net international asset position. The same logic for Balance of Payments applies for this indicator, as a trade deficit will depreciate the currency whereas, a trade surplus will appreciate the currency.Stocks
Stocks are microeconomic securities, rising and falling in response to individual corporate results and prospects, while currencies are essentially macroeconomic securities, fluctuating in response to wider-ranging economic and political developments. As such, there is little intuitive reason that stock markets should be related to currencies.
The two markets occasionally intersect, though this is usually only at the extremes and for very short periods. For example, when equity market volatility reaches extraordinary levels, the USD may experience more pressure that it otherwise would- but there's no guarantee of that. The US stock market may have dropped on an unexpected hike in US interest rates, while the USD may rally on the surprise move. In another example, the Japanese stock market is more likely to be influenced by the value of the JPY, due to the importance of the export sector in the Japanese economy. A rapid rise in the value of the JPY, which would make Japanese exports more expensive and lower the value of foreign sales, may translate to a negative stock-market reaction on the expectation of lower corporate sales and profitability.Bond
A bond is a type of investment that is very similar to an IOU. It is a loan in the form of a security with two basic components, the face value (principle), and the coupons (interest rate). The bond is a contract between the issuer and the bondholder to pay certain amounts of money in the future. The issuer of the bond promises to pay the bondholder principal and interest according to the terms and conditions listing in the bond.
Bond yields enter the picture, as the rate of return on the bond that takes into account the sum of the interest payment, the redemption value at the bond's maturity, and the initial purchase price of the bond. Basically, yield on the bond relates to the return on the capital a person invests in the bond. Since Bond yields are strongly dependent on inflation, and inflation is closely related to growth, the term-yield structure of the government bond market provides a very powerful early warning system for predicting periods of boom and bust. Bond yields, like any other economic indicators, are indirectly related to the value of a nation's currency.
On the surface, a bond seems to be an easy-to-understand security. It pays interest for a specified number of years at a specified interest rate and then redeems for a specified price. As with any marketable security, however, numerous external factors can affect the price of a bond, and changes in bond prices result in changes in bond yields. All bonds are subject to inflation risk, which is also known as purchasing power risk. In periods of inflation, money in the future is not worth as much as money currently held. For example, if the inflation rate is 10 percent, goods will cost 10 percent more in one year. As a bond is a promise to return money to you in the future, the money you invest now will not purchase as much in the future when you receive it. Thus, periods of high inflation can greatly move the price of your bond and, consequently, its yield. Now that we are aware of the relationship between Bond yields and Inflation, the logic now revolves around the connection of inflation towards the currency value, which was explained earlier.Gold
Gold is commonly viewed as a hedge against inflation, an alternative to the US dollar, and a store of value in times of economic or political uncertainty. Over the long term, the relationship is mostly inversed, with a weaker USD generally accompanying a higher gold price, and a stronger USD coming with a lower gold price. However, in the short run, each market has its own dynamics and liquidity, which makes short-term trading relationships generally tenuous.
Overall, the gold market is significantly smaller than the Forex Market, so if we were gold traders, we'd sooner keep an eye on what's happening to the dollar, rather than the other way around. With that noted extreme movements in gold prices tend to attract currency traders' attention and usually influence the dollar in a mostly inverse fashion.Oil
A lot of misinformation exists on the internet about the supposed relationship between oil and the USD or other currencies, such as the CAD or JPY. The idea is that, because some countries are oil producers, their currencies are positively (or negatively) affected by increases (or decreases) in the price of oil. If the country is an importer of oil, the theory goes; its currency will be hurt (or helped) by higher (or lower) oil prices.
Correlation studies show no appreciable relationships to that effect, especially in the short run, which is where most currency trading is focused. When there is a long-term relationship, it's as evident against the USD as much as, or more than, any individual currency, whether an importer or exporter of black gold.
The best way to look at oil is as an inflation input and as a limiting factor on overall economic growth. The higher inflation is likely to be and the slower an economy is likely to grow. The lower the price of oil, the lower inflationary pressures are likely to be. Because US is a heavily energy-dependent economy and also intensely consumer-driven, the US typically stands to lose the most from higher oil prices and to gain the most from lower oil prices. We like to factor changes in the price of oil into our inflation and growth expectations, and then draw conclusions about the course of the USD from them.
Like all markets, the currency market is affected by what is going on in the world. Key political events around the world can have a big impact on a country's economy and on the value of its respective currency. Geo-Political events can have a notable effect on the FX market. Events of a political nature, such as wars, local conflicts, elections or terrorist activity, along with weather-related disasters such as hurricanes, tsunamis, etc can impact how currency pairs trade quite dramatically. Foreign investors inevitably seek out stable countries with strong economic performance in which to invest their capital. A country with such positive attributes will draw investment funds away from other countries perceived to have more political and economic risk. Political turmoil, for example, can cause a loss of confidence in a currency and a movement of capital to the currencies of more stable countries. Therefore, when geopolitical events start to plague a country, depreciation will most likely manifest and vice versa.Geo-political Events
Geopolitics is the art and practice of analyzing, forecasting and using political power over a given territory. This term has applied primarily to the impact of geography on politics, but its usage has evolved over the past century to encompass wider connotations. It also indicates the links and causal relationships between political power and geographic space; in concrete terms it is often seen as a body of thought assaying specific strategic prescriptions based on the relative importance of land power and sea power in world history. This geopolitical tradition sometimes refers to the study of political relations between three types of power (states, intra-states – eg separatist movements, and trans-states – terrorist networks and multinational companies) in relation to geographical factors (physical geography, identity geography and the geography of resources). The study of geopolitics involves the analysis of geography, history and social science with reference to spatial politics and patterns at various scales (ranging from the level of the state to international). It is multidisciplinary in its scope, and includes all aspects of the social sciences with particular emphasis on political geography, international relations, the territorial aspects of political science and international law.
PRICE PATTERNSTechnical Analysis: Reversal Patterns
Head and Shoulder, and Inverted Head and Shoulder
- Head and Shoulder - The Head and Shoulder is the pattern that resembles two peaks (called the shoulders) with a higher peak in between the two shoulders (called the head). The bottom boundary that both shoulders reach is identified as a key point traders that can be use to enter or exit positions.
- Inverted Head and Shoulder - The Inverted Head and Shoulders is a mirror image of a normal Head and Shoulders but is inverted. This pattern occurs when a downtrend loses its force and gets ready to reverse.
Symmetrical Triangle is formed by a consolidation during an uptrend or a downtrend. It has a line of support that slopes upwards and a line of resistance that slopes downward.
Ascending Triangle is formed by a consolidation during an uptrend. It is formed when price action moves between a line of resistance that is somewhat flat and a line of support that is sloping upwards.
Descending Triangle is formed by a consolidation during a downtrend. It is formed when price action moves between a line of resistance that is sloping downwards, and a line of support that is somewhat flat.
Flags and Pennants
Flags and pennants usually form after a large trend, up or down as a sign that the price is consolidating before continuing in the initial direction of the trend. Usually the consolidation period or the flag or pennant, is slanted in a direction opposite of the initial trend. This exhibits the market's hesitation to continue upwards or downwards, but eventually it is nothing more than a hesitation and is an indication that the initial trend is continuing.
Although both flags and pennants indicate a continuation of the current trend, there is a visual difference between the two. The flag is usually represented by a more rectangular consolidation period, by which both support and resistance levels are about an equal distance from one another. A pennant on the other hand, is represented by support and resistance levels that are moving towards one another in the shape of an irregular triangle.
The rising wedge pattern in general, identifies a bearish pattern in the market. It is usually formed when the market is making higher highs, and even higher lows with a decreasing price movement range. Furthermore, the rising wedge pattern is considered a bullish pattern when it develops in a downtrend, and is considered a reversal pattern when it develops in an uptrend.
The falling wedge pattern in general, identifies a bullish pattern in the market. It is usually formed when the market is making lower lows, and even lower highs with a decreasing price movement range. In addition, the falling wedge pattern is considered a reversal pattern when it develops in a downtrend, and is considered a bullish pattern when it develops in an uptrend.
Descending Triangle is formed by a consolidation during a downtrend. It is formed when price action moves between a line of resistance that is sloping downwards, and a line of support that is somewhat flat.
TECHNICAL INDICATORSTrend Follower Moving Average
Moving average sums up the short term price and calculate the averaged value among multiple periods to illustrate the long term trend for predictions. The method is often the first approach for traders while predicting prices and it is an effective way to exclude the shocks and errors that do not lie within the trend.Bollinger Bands
The purpose of Bollinger Bands is to provide an estimation of upper and lower bands of prices based on the choice of standard deviations and periods of price data. The Bollinger Bands usually provide three bands that are called the upper band, lower band and middle band. The middle band is usually the simple moving average and the volatility of prices set the interval between high band and low band.Average Directional Moving Index (ADX)
Average Directional Moving Index or ADX, measures the strength of the current price trend and whether or not there is a direction in the currency market.
The ADX relates to the set of oscillators, which change positions in a range from 0 up to 100. Though the indicator's fluctuations are in a range from 0 and up to 100, it rarely goes over a point of 60. On the other hand, a figure that is lower than 20, indicates a weak trend, while a figure over 40 indicates a strong trend. Meanwhile, a position above 40 indicates both strong descending, and a strong ascending trend.Commodity Channel Index (CCI)
Commodity Channel Index or CCI is used to determine reversal points in the market. It measures the speed of price fluctuations based on the supposition that all actives move under the influence of definite cycles.
High value indicates that prices are unusually high compared to average prices, while low value indicates that prices are unusually low.Parabolic SAR
The Parabolic SAR is a time/price trend following system, used to set trailing price stops and also provides excellent exit points. The aim of the Parabolic SAR system is to make reverse orientation of trading positions when the current trend turns.
Traders using this technical indicator are advised to close long positions when the price falls below the SAR, and close short positions when the price rises above the SAR. If the trade is long (the price is above the SAR), the SAR will move up every day, regardless of the direction the price is moving. The amount the SAR moves up depends on the amount that price rates move.Standard Deviation
Standard Deviation is a numerical term that shows the volatility of the price in the market. It measures how widely values or closing prices are dispersed from the average.
Dispersion is defined as the difference between the actual value of the closing price, and the average value or mean of the closing price. The larger the difference between the closing price and the average price, the higher the standard deviation and volatility of the currency measured will be, and vice-versa.Oscillator Relative Strength Index (RSI)
The RSI is a lagging price-following oscillator that ranges between 0 and 100. It measures overbought (an indicator value of 70 or more) or oversold (an indicator value of 30 or less) conditions.
One method of analyzing the RSI is to look for a divergence in which the currency price is making a new high, while the RSI is failing to surpass its previous high. This divergence is an indication of a coming reversal. Meanwhile, when the RSI then turns down and falls below its most recent trough, it is said to have completed a failure swing that is considered a confirmation of the coming reversal in the price of the currency.Stochastic Oscillator
The Stochastic Oscillator is a momentum indicator that shows the location of the current close relative to the high/low range over a set number of periods. Closing levels that are consistently near the top of the range indicates accumulation or buying pressure and those near the bottom of the range indicates distribution or selling pressure.
The Stochastic Oscillator is based on the principle that as prices rise, closing prices tend to be near the high value. Conversely, as prices fall, closing prices are near the low for the period. This oscillator is made up of two lines, %D and %K, which moves between a scale of 0 and 100. The %D line is the moving average over a specified period of time of the %K line. The %K line meanwhile, measures where the closing price of a currency is compared to the price range for a given number of periods.Price Envelope
The Price Envelope is an indicator that determines the lower and the upper margins of the price range. It is an indicator which consists of two outer bands that are moving averages - one is located at the top of the price action (upper band), while the other one is located at the bottom (lower band). Purchase signal happens if the price action reaches the lower margin, while the selling signal happens if the price action reaches the upper margin of the band.Average True Range
The Average True Range is an indicator that measures volatility and market noise. It notifies the trader about the tendency of the market to change direction.
The average true range, specifically, is the moving average of the true range for a given period. The true range is at the utmost in the following:
- The difference between the current high and the current low.
- The difference between the current high and the previous close.
- The difference between the current low and the previous close.
Elder-Ray is an indicator that uses exponential moving average indicator, or EMA, with the preferable period of 13 as a tracing indicator. This oscillator is composed of two indicators, namely, the Bull Power and Bear Power.
The Bull Power is the distance between the top bar and a current exponential moving average. It represents the ability of a bull/bullish to push prices above the consensus average. There is an increasing bullish pressure from an increasingly high price.Demarker
Demarker is an indicator used in comparing the most recent price action to the previous period's price in an attempt to measure the demand of the underlying asset. This indicator is commonly used to identify price exhaustion, and can also be used to identify market tops and bottoms. This oscillator is bounded between -100 and +100. A value above 60 is a sign of lower volatility and risk, while a value below 40 is a sign that risk is increasing.Ichimoku Kinko Hyo
Ichimoku Kinko Hyo is a technical indicator used to measure the market's momentum along with future areas of support and resistance. The Ichimoku indicator is comprised of five lines called the tenkan-sen, kijun-sen, senkou span A, senkou span B and chickou span. This indicator was developed so that a trader can measure an asset's trend, momentum, and support and resistance points without the need of any other technical indicator.
- The Tenkan-sen is used as an indicator of a market trend. If this line increases or decreases, the trend exists. When it goes horizontally, the forex market has come into the channel.
- The Kijun-sen is used as an indicator of movement in the market. If the price is higher than the Kijun-sen, the price will most likely rise. When the price action intersects this line, changes in the trend are likely to occur.
- A buy signal is generated when the Tenkan-sen intersects the Kijun-sen from below (Strong if above Kumo, normal if within Kumo, weak if below Kumo).
- A sell signal is generated when the Tenkan-sen intersects the Kijun-sen from above (Strong if below Kumo, normal if within Kumo, weak if above Kumo).
- The Chikou span can be used to determine the strength of a buy or sell signal. Strength is shown to be with the sellers if the Chikou Span is below the current price. Strength is shown to be with the buyers when the opposite is true.
- Support and resistance levels are represented by the Kumo cloud. If the price is entering the Kumo from below, then the price is at a resistance level. If the price is falling into the Kumo, then there is a support level.
- Trends are determined by looking at where the current price is in relation to the Kumo. If the price is above the Kumo, the trend is said to be up. Meanwhile, if the price is below the Kumo, the prevailing trend is said to be down.
- Volatility is determined by looking at the thickness of the Kumo Cloud. A thin Kumo implies the current volatility is low, while a thick Kumo implies strong support or resistance and increased volatility.
Momentum is a technical indicator designed to measure the rate of price change, and is consisted of the net difference between the current closing price, and the oldest closing price from a pre-determined period. The Momentum indicator can be used as either a trend-following oscillator similar to the MACD, or as a leading indicator.Relative Vigor Index
Relative Vigor Index is a technical indicator that measures the conviction of a recent price action and the possibility that it will continue. It is based on the idea that in a rising market, the closing price is usually higher than the opening price, and on the bearish market the closing is usually below the opening price. Thus, the RVI compares the positioning of a price action's closing price relative to its price range, and by calculating an exponential moving average of the values.William's Percent Range
William's Percent Range is a technical indicator that attempts to measure overbought and oversold conditions in the market. The Williams %R always falls between a value of 100 and 0. A value in the range of 80 to 100 indicates that the security is oversold, while a value in the 0 to 20 range suggests that it is overbought.
The explanation of Williams' %R is very similar to that of the Stochastic Oscillator, except that %R is plotted upside-down and the Stochastic Oscillator has internal smoothing.
In using the William's percent Range, just like with the other overbought and oversold indicators, before trading, it's worth waiting for the price action to change direction. As the price action continues to increase or to decrease, it's quite untypical for overbought or oversold indicators to stay in that condition for a long time. Due to the fact that it can take some time before the price show signs of deterioration, selling on the first indication of an overbought signal may diminish profit.Volume Accumulation/Distribution (A/D)
The Accumulation/Distribution (A/D) is a volume indicator that attempts to measure the cumulative flow of money into and out of a market. Its basic principle has always been that a volume or money flow may be a leading indicator to price action.
The A/D indicator determines rising prices or falling prices, if the volume is increasing or decreasing, respectively. Signals are usually generated using the Accumulation/Distribution indicator when looking for positive and negative divergences between the A/D line and the price. The A/D indicator can also be used as a measure of strength or sustainability behind a price move. In an uptrend, the A/D indicator should also be moving upwards, while in a downtrend the A/D indicator should be moving downwards.Money Flow Index (MFI)
The Money Flow Index (MFI) is an indicator that combines both price and volume analysis. It is designed to measure the efficiency of a price movement. The efficiency is measured by comparing the current bar's MFI value, to the previous bar's MFI value. If the MFI increases, then the market is facilitating trade and is more efficient - an indication that the market is trending. Meanwhile, if the MFI decline, then the market is becoming less efficient, which may indicate a trading range is developing that may be a trend reversal.On Balance Volume (OBV)
On Balance Volume (OBV) is an indicator that measures positive and negative money flow into the market. It has concept of volume precedes price, and therefore an understanding of volume is crucial to understanding the direction of price.
When the price action closes higher than the previous close, all of the day's volume is considered an up-volume, and when the price action closes lower than the previous close, all of the day's volume is considered a down-volume.Volume
Volume is an indicator that measures the worth/value of a market move. If a currency pair has a strong price move, either up or down, the supposed strength of that move depends on the amount of volume for that period. Actions backed by higher volume are more significant. Important moves will usually come on a spike, or a short period of time when there is more volume than normal. This indicator can also help a trader prepare for breakout from a trend. Traders should also be able to identify periods where there are calm ranges and consolidation, as they will have lower volume.
A high volume is a characteristic of market tops when a consensus appears, believing that prices will move higher. High volume is also normal while launching new trends as prices emerge from a trading range. Meanwhile, a low volume often appears during the indecisive period during market bottoms.
ELLIOT WAVE AND FIBONACCIElliot Wave Theory
The Elliot Wave Theory is a method of predicting trends in the market. It applies fractal mathematics to movements in the market to make predictions based on crowd behavior. In theory, the Elliot Wave states that the moves in a series of 5 swings upward and 3 swings back down, repeats continuously. The first 5-wave pattern is called impulse waves and the last 3-wave pattern is called corrective waves.
The Impulse wave formation has five distinct price movements, three in the direction of the trend and two corrections against the trend. The three waves in the direction of the trend are impulses and therefore these waves are also composed of five smaller waves when viewed at a smaller scale. This feature illustrates the fractal nature of the waves.
The waves against the trend are corrections and are composed of three waves. The corrective wave formation normally has three (but in some cases five or more distinct price movements), two in the direction of the main correction and one against it. The waves of the shorter term trend are impulsive and composed of five waves, when viewed at a smaller scale, again illustrating the fractal nature of the waves.
An impulse wave formation followed by a corrective wave, form an Elliott wave degree consisting of trend and counter trend. Impulse waves trend up in a bull market, but they trend down in a bear market, indicating the major trend in both cases.Five Waves
- Wave 1 Wave one is seldom obvious at its beginning. When the first wave of a new bull market begins, the fundamental news is almost frequently negative.
Wave two corrects wave one, but can never extend beyond the starting point of wave one. Normally, the news is still bad in a bull trend. As prices retest the previous low, bearish sentiment quickly builds, and "the crowd" proudly reminds all that the bear market is still deeply ensconced.
Wave three is usually the largest and most powerful wave in a trend. The news is now positive and fundamental analysts start to raise earnings estimates. Prices rise quickly, corrections are short-lived and shallow. Anyone looking to "get in on a pullback" will likely miss the boat. As wave three starts, the news is probably still bearish, and most market players remain negative; but by wave three's midpoint, "the crowd" will often join the new bullish trend. Wave three often extends wave one by a ratio of 1.618:1.
Wave four is typically clearly corrective. Prices may wander sideways for an extended period, and wave four typically retraces less than 38.2% of wave three. Volume is well below than that of wave three. This is a good place to buy a pull back if you understand the potential ahead for wave 5.
Wave five is the final leg in the direction of the dominant trend. The news is almost universally positive and everyone is bullish. Unfortunately, this is when many average investors finally buy in, right before the top. Prices may shoot up absurdly during a bullish fifth wave. The knowledgeable trader will sell to reduce exposure at big surges to raise cash to buy in after the correction phase. Volume is lower in wave five than in wave three, and many momentum indicators start to show divergences (prices reach a new high, the indicator does not reach a new peak). At the end of a major bull market, bears may very well be ridiculed.
The Fibonacci retracement analysis is a leading indicator used to determine possible target points to enter and exit the market. This indicator can also be used to determine potential levels of resistance and support. The idea behind this indicator is that whatever currency market you are interested, will, at some point retrace some previous activity. It will also find support and resistance at main levels before regaining its original direction.
The Fibonacci retracement is the potential retracement of a financial asset's original move in price. It is regarded as a solid tool in identifying key support and resistance areas at any time frame.
If prices have fallen from a recent swing high down to a swing low, the expectation is that price should retrace distance, high to low, by a ratio of the Fibonacci sequence (23.6%, 38.2%, 50%, 61.8% and 100%).
- 23.6% -- The shallowest of the retracements. In very strong trending markets price typically quickly bounces in the area of this ratio.
- 38.2% -- This is the first line of defense of the current trend. Breaking this level starts to erode the underlying trend.
- 50% -- The neutral point of any retracement. This is the critical tipping point.
- 61.8% -- retracing to this typically signals a breakdown in the trend.
- 100% -- Matching the move
The larger prices move from swing high to swing low, the more accurate the retracement projections. Identification and selection of the correct swing points are keys to success.
The EUR/USD had risen from 1.3360 to 1.4278. The next day the EURUSD failed to make a new high and the potential swing point was in place. Using swing points, you may place Fibonacci retracement on this chart like this.
The trend was clearly very strong. The first retracement to the 23.6% level was met with an aggressive change in track. As you can observe, there had been a noticeable dip below the 23.6% level and the swift reversal. While there are multiple entry methods, the most conservative would be to wait until the level is penetrated and price establishes itself above that level and enter on the open of the next bar as shown.