Industrial Production
The histogram simply plots the difference between the fast and slow moving average. If you look at our original chart, you can see that, as the two moving averages separate, the histogram gets bigger.
This is called divergence because the faster moving average is "diverging" or moving away from the slower moving average.
As the moving averages get closer to each other, the histogram gets smaller. This is called convergence because the faster moving average is "converging" or getting closer to the slower moving average.
And that, my friend, is how you get the name, Moving Average Convergence Divergence! Whew, we need to crack our knuckles after that one!
Ok, so now you know what MACD does. Now we'll show you what MACD can do for YOU.
How to Trade Using MACD
Because there are two moving averages with different "speeds", the faster one will obviously be quicker to react to price movement than the slower one.
When a new trend occurs, the fast line will react first and eventually cross the slower line. When this "crossover" occurs, and the fast line starts to "diverge" or move away from the slower line, it often indicates that a new trend has formed.
From the chart above, you can see that the fast line crossed under the slow line and correctly identified a new downtrend. Notice that when the lines crossed, the histogram temporarily disappears.
This is because the difference between the lines at the time of the cross is 0. As the downtrend begins and the fast line diverges away from the slow line, the histogram gets bigger, which is good indication of a strong trend.
Let's take a look at an example.
In EUR/USD's 1-hour chart above, the fast line crossed above the slow line while the histogram disappeared. This suggested that the brief downtrend would eventually reverse.
From then, EUR/USD began shooting up as it started a new uptrend. Imagine if you went long after the crossover, you would've gained almost 200 pips!
There is one drawback to MACD. Naturally, moving averages tend to lag behind price. After all, it's just an average of historical prices.
Since the MACD represents moving averages of other moving averages and is smoothed out by another moving average, you can imagine that there is quite a bit of lag. However, MACD is still one of the most favored tools by many traders.
Fundamental Analysis
Economic indicators
GDP (Gross Domestic Product) – measures summary value of goods and services generated in a relevant country. All economic activity is taken into consideration while calculating the index, regardless of nationality of the owner of any given production factor. The level of GDP can be calculated in actual prices, asserting actual market production value, as well as in static prices, allowing estimation of the dynamics in the economic growth rate.
Financial markets analyze carefully changes in GDP published each quarter. Higher then expected economic growth rate can contribute to strengthening the local currency on the international market.
CPI (Consumer Price Index) – reflects the price of consumer goods adjusted by seasonal factor. Investors tend to avoid currencies with increasing inflation. The rise of the CPI index leads to an increase in interest rates, that results in a lowering of bond prices, nominated in a given currency. Panic amongst foreign investors selling the bonds with the perspective of an interest rate rise may result in increased supply and weakening of the currency.
PPI (Production Price Index) – the dynamics of changes in the prices of goods offered by farmers and manufacturers. Financial markets follow changes in final goods prices, published monthly. As a result of seasonal food prices and high instability of energy prices the PPI index may be subjected to frequent revisions. Large increase in PPI together with high inflation expectations can negatively affect market sentiment towards the currency.
Industrial Production – specifies momentum of aggregated growth of the physical level of economic production. High dynamics of the indicator signifies the good condition of an economy and can positively influence the sentiment towards the local currency. Low dynamics of industrial production reflects an unhealthy condition in the local economy.
Trade balance – compares the value of exported and imported goods and services. The difference between the value of export and import for the given country represents the trade balance. Its positive value - advantage of export over import illustrates the status of economic capacity of a country. High competitiveness of economy can interest investors in local currency.
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Trade balance
The histogram simply plots the difference between the fast and slow moving average. If you look at our original chart, you can see that, as the two moving averages separate, the histogram gets bigger.
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This is called divergence because the faster moving average is "diverging" or moving away from the slower moving average.
As the moving averages get closer to each other, the histogram gets smaller. This is called convergence because the faster moving average is "converging" or getting closer to the slower moving average.
And that, my friend, is how you get the name, Moving Average Convergence Divergence! Whew, we need to crack our knuckles after that one!
Ok, so now you know what MACD does. Now we'll show you what MACD can do for YOU.
How to Trade Using MACD
Because there are two moving averages with different "speeds", the faster one will obviously be quicker to react to price movement than the slower one.
When a new trend occurs, the fast line will react first and eventually cross the slower line. When this "crossover" occurs, and the fast line starts to "diverge" or move away from the slower line, it often indicates that a new trend has formed.
From the chart above, you can see that the fast line crossed under the slow line and correctly identified a new downtrend. Notice that when the lines crossed, the histogram temporarily disappears.
This is because the difference between the lines at the time of the cross is 0. As the downtrend begins and the fast line diverges away from the slow line, the histogram gets bigger, which is good indication of a strong trend.
Let's take a look at an example.
In EUR/USD's 1-hour chart above, the fast line crossed above the slow line while the histogram disappeared. This suggested that the brief downtrend would eventually reverse.
From then, EUR/USD began shooting up as it started a new uptrend. Imagine if you went long after the crossover, you would've gained almost 200 pips!
There is one drawback to MACD. Naturally, moving averages tend to lag behind price. After all, it's just an average of historical prices.
Since the MACD represents moving averages of other moving averages and is smoothed out by another moving average, you can imagine that there is quite a bit of lag. However, MACD is still one of the most favored tools by many traders.
Fundamental Analysis
Economic indicators
GDP (Gross Domestic Product) – measures summary value of goods and services generated in a relevant country. All economic activity is taken into consideration while calculating the index, regardless of nationality of the owner of any given production factor. The level of GDP can be calculated in actual prices, asserting actual market production value, as well as in static prices, allowing estimation of the dynamics in the economic growth rate.
Financial markets analyze carefully changes in GDP published each quarter. Higher then expected economic growth rate can contribute to strengthening the local currency on the international market.
CPI (Consumer Price Index) – reflects the price of consumer goods adjusted by seasonal factor. Investors tend to avoid currencies with increasing inflation. The rise of the CPI index leads to an increase in interest rates, that results in a lowering of bond prices, nominated in a given currency. Panic amongst foreign investors selling the bonds with the perspective of an interest rate rise may result in increased supply and weakening of the currency.
PPI (Production Price Index) – the dynamics of changes in the prices of goods offered by farmers and manufacturers. Financial markets follow changes in final goods prices, published monthly. As a result of seasonal food prices and high instability of energy prices the PPI index may be subjected to frequent revisions. Large increase in PPI together with high inflation expectations can negatively affect market sentiment towards the currency.
Industrial Production – specifies momentum of aggregated growth of the physical level of economic production. High dynamics of the indicator signifies the good condition of an economy and can positively influence the sentiment towards the local currency. Low dynamics of industrial production reflects an unhealthy condition in the local economy.
Trade balance – compares the value of exported and imported goods and services. The difference between the value of export and import for the given country represents the trade balance. Its positive value - advantage of export over import illustrates the status of economic capacity of a country. High competitiveness of economy can interest investors in local currency.
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Double Bottom
Double Bottom
This price pattern is also known as formation "W" due to its shape. It is made up of two bottoms where the second bottom should not be lower than the first one. A perfect "W" is where both bottoms are exactly on the same level, but like in the previous patter, it is not always easy to find a perfect "W". Most often this pattern is formed, where the second bottom is higher than the first, though the difference between the two bottoms should not exceed 10% counting from the resistance break (green horizontal line in example below).
Example:
In this pattern the market forms one bottom and later forms a corrective movement, after which another bottom is formed. On the maximum of the top formed (correction), we should draw a horizontal line which will be called the resistance break. If the market breaks the resistance break then we could open a long position. In this price pattern we can obviously also expect how far the market will increase. This distance is counted as follows:
X (distance) = Bottom 1 – Resistance Break
More Examples:
An interesting fact in double tops and bottoms is that when making a prognosis to where the market may move to, we automatically find a significant level of resistance or support for the next few weeks and sometimes even months. So keep in mind that the eventual range of both formations could be relevant information for making decisions in the future.
Conclusion:
Double tops and bottoms are not only easy to find, but they are also very effective. Many investors stray away from them stating that they are just too simple to make money on. That is only half true. They are simple but as mentioned before, they are also very effective if managed well. Managing your transactions is very important, sometimes even more important then the position you choose to take. More about capital management will still be mentioned in further materials where we will once more come back to double bottoms and tops and explain how to open a position well and not worry what the market does.
Moving Average Convergence Divergence (MACD)
MACD is an acronym for Moving Average Convergence Divergence. This tool is used to identify moving averages that are indicating a new trend, whether it's bullish or bearish. After all, our top priority in trading is being able to find a trend, because that is where the most money is made.
With an MACD chart, you will usually see three numbers that are used for its settings.
• The first is the number of periods that is used to calculate the faster moving average.
• The second is the number of periods that is used in the slower moving average.
• And the third is the number of bars that is used to calculate the moving average of the difference between the faster and slower moving averages.
For example, if you were to see "12, 26, 9" as the MACD parameters (which is usually the default setting for most charting packages), this is how you would interpret it:
• The 12 represents the previous 12 bars of the faster moving average.
• The 26 represents the previous 26 bars of the slower moving average.
• The 9 represents the previous 9 bars of the difference between the two moving averages. This is plotted by vertical lines called a histogram (the green lines in the chart above).
There is a common misconception when it comes to the lines of the MACD. The two lines that are drawn are NOT moving averages of the price. Instead, they are the moving averages of the DIFFERENCE between two moving averages.
In our example above, the faster moving average is the moving average of the difference between the 12 and 26-period moving averages. The slower moving average plots the average of the previous MACD line. Once again, from our example above, this would be a 9-period moving average.
This means that we are taking the average of the last 9 periods of the faster MACD line and plotting it as our slower moving average. This smoothens out the original line even more, which gives us a more accurate line.
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Elliott Wave Theory: Basics
Ralph Nelson Elliott discovered in the 1920’s that stock markets do not behave, as many thought, in chaos but in harmony. Why? It is difficult to state but most probably due to investors emotions and psychological influence. All this points to the fact that due to the eruption of our emotions on markets, the market itself could be interpreted as a living organism with harmonic movements, whether in shape, proportion or even time.
Basically, Elliott stated that market swings whether in an increase trend or decrease trend moved in repetitive movements which he called waves. In his typical wave structure market movement was made up of five waves in the direction of the trend and three waves forming a corrective movement.
There are many rules regarding the structure of the waves and the following are some of the most significant:
1. Wave 2 cannot break the bottom of wave 1 in an increase trend and cannot break the top of wave 1 in a decrease trend.
2. Wave 3 cannot be shortest in term of length and time, in comparison to waves 1 and 3.
3. Wave 4 cannot break the top of wave 1 in an increase trend and cannot break the bottom of wave 1 in a decrease trend.
4. Wave 4 cannot be longer than wave 2.
Example:
1. Rule one is not broken as wave 2 represents 78.6% of wave 1.
2. Rule two is not broken as wave 3 is the longest of all waves in the direction of the decrease trend.
3. Rule three is not broken as the bottom of wave 1 is not broken by the top of wave 4.
4. Rule four is not broken as wave 4 represents 78.6% of wave 2.
As seen on the USACAD market this decrease was followed by corrective movement ABC.
Conclusion:
Many believe that the Elliott Wave Theory can only be used on structures that have already been formed and that it is very unlikely to use this tool in real time investments. I believe that this is not true. Many great traders like Ed Seykota, Bryce Gilmore and Robert Miner make use of this tool with great success. It is not easy to specify where in the five wave structure the current market movement is and this could lead to many losing transactions due to the fact that investors may believe that they are in one specific wave whilst being in another. Personally, I do not seek which wave I am currently encountering but I do analyze markets and trade on the basis of many of Elliott’s rules assigned to specific structures with strong concentration on corrective movements and their possible end. If you are able to recognize when a correction has ended then you may be on the right track to making money. Why? Because after every correction a new top or bottom could follow, enabling investors to assign a minimum reach of market movement. When trading a minimum reach or in other words the investors trade target is very significant because this decreases the effect of destructive emotions such as the fear of loss or the greed to earn more.
Price Patterns
Double Top
This price pattern is also known as formation "M" due to its shape. It is made up of two tops where the second top should not be higher than the first one. A perfect "M" is where both tops are exactly on the same level, but these types of situations cannot be always found. Most often this pattern is formed, where the second top is lower than the first, though the difference between the two tops should not exceed 10% counting from the support break (green horizontal line in example below). Before explaining how you could make money on this pattern, let’s take a look at the shape itself.
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The Trend
The Trend
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In simple words the trend is the direction in which market prices moves in. Prices could move in three directions specifying what type of trend we are encountering:
1. Increase trend: An increase trend is a trend where tops and bottoms are higher and higher.
2. Decrease trend: A decrease trend is where tops and bottoms are lower and lower.
3. Horizontal trend: A horizontal trend is where tops and bottoms are situated horizontally, portraying a calm in the market and a break prior to a new impulse.
Obviously these are not the only rules specifying what type of trend we are in and additional tools will help us as investors specify where we exactly are.
One of the tools that could help us specify where we are and what we can expect from the market is the trend line. Basically the trend line is defined as the line which is formed by connecting two following bottoms in an increase trend and two following tops in a decrease trend.
Example:
How should we interpret this tool?
By connecting points 1 & 2 in this decrease trend we draw a trend line. If this trend line is broken, i.e. if the market breaks through the line in the upward movement, then this could be a signal that this trend could be over and that we could expect the market to increase. The strength of this trend line is portrayed where the market wasn’t able to break the trend line in points 1 & 4.
In the world of investment you will often come around two significant terms: Support& Resistance. For now we will stick to the basics concerned with the terms, but on later materials you will come to see how relevant they really are.
Support: Support is the level where the market is likely to bounce back from abottom and not break through. On the other hand if the market breaks through then it will continue its decrease movement seeking a further support level.
Resistance: Resistance is the level where the market is likely to bounce back from atop and not break through. On the other hand if the market breaks through then it will continue its increase movement seeking a further resistance level.
It is not easy to find all relevant support or resistance levels. In later materials you will find out more about how to find significant support and resistance levels and why the ones that you found are more important than others. For now let us accept bottoms as support levels and tops as resistance levels.
Support and resistance levels will not only help us understand how the market can react at different market levels but it will also help us in forming one of the most popular technical analysis tools, i.e. the trend channel.
The trend channel is formed by drawing a trend line and drawing a parallel line to the first line, connecting bottoms in a decrease trend and tops in an increase trend starting from the first bottom or top.
The trend line was formed by connecting points 1 & 3. Later a parallel line was formed and initiated from point 2, which is the first top following bottom 1.
How can this trend channel be interpreted?
In order to draw such a channel we should be in point 3. Later points can be interpreted as follows. The points which bounce back from the support level at the bottom, i.e. points 1,3 & 7 portray the strength of support at this market level, whilst the points which bounce back from the resistance level at the top, i.e. points 2,4 & 6 portray the strength of resistance at this market level. As we can observe points 6 & 8 were placed lower than the former peaks showing that the market is becoming less and less dynamic in the upward movement. This could be the first signal that the trend may want to change its direction. This is confirmed when the trend channel is broken at point 9 and the increase trend turns to a decrease trend.
It may seem like a simple question, but knowing what we know from only this educational material, try to think about which points from 1-9 seem like good points to open a position, taking into account that the trend channel we see started earlier and point 1 is not the beginning of the channel?
Try to obviously answer on your own but I will give you a hint from George Lane: “The trend is your friend”.
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FOREX - introduction
FOREX - introduction
To earn money on FOREX, commodity or the equity market, a trader should either buy an asset and sell it higher o
r sell it and then buy back lower. This however, is not that simple. The key to a successful transaction is to know when the price is relatively low or high, and then - is it going to fall or to rise? In order to achieve that, traders basically use two types of investment analysis:
r sell it and then buy back lower. This however, is not that simple. The key to a successful transaction is to know when the price is relatively low or high, and then - is it going to fall or to rise? In order to achieve that, traders basically use two types of investment analysis: • Fundamental analysis - method of predicting exchange rate movement on the basis of economic and political data and factors, those influence supply and demand of currencies, commodities or equities and other markets.
• Technical analysis - method of predicting exchange rate movement and future market trends on the basis of charts, oscillators and other indicators constructed from historic exchange rates and turnover data.
In practice investors usually apply both investing techniques, combining methods and relying on their own investment experience.
Technical Analysis
General Information and Principles
Before describing how investors use technical analysis in order to predict future price movement, the general definition and prime principles of technical analysis cannot be omitted. Technical analysis is the study of price movement on the basis of charts. It is also the study of repetitive price patterns portraying our psyche. The first notes with regard to the subject date back to XVIII century Japan, where a rice trader described that without price analysis no one could become a successful trader. He didn’t know then, that in the future there would be a possibility to actually earn or lose money by predicting what prices could do in the future.
Technical analysis is based around three prime principles:
1. Market action discounts everything
What this means is that to a technical analyst, everything that happens around us from natural disasters to presidential elections, is portrayed in the price itself. Things happening around us obviously do affect the market price, but this can be anticipated or observed on the charts themselves.
2. Prices move in trends
If you take a look at any chart you could realize that prices move in trends, keeping hold of one long term trend. Obviously even a long term trend could change and does on many occasions but most of the time prices remain in the main trend. Larger trends are divided into smaller ones which are also later divided into even smaller ones…etc. From this principle we could reach a significant conclusion which will also be our most important rule. It comes from George Lanes famous words “The trend is your friend”. More about the trend itself will be discussed in later materials but bare in mind that these words should NEVER be forgotten.
3. History likes to repeat itself
Technical analysis as mentioned before is the analysis of repetitive price patterns. How and why are these patterns repetitive? The answer is quite simple but on the other hand very complicated. It is simple due to the fact that these patterns portray our behavior and our psyche, they portray what we do and how we react to different market events. The complicated part is that these patterns are often very precise what shows, that people behave exactly the same way now as they did in the distant past. It is easy to realize, but nearly impossible to explain. It seems like a “Big Brother” is watching over the market and precisely controlling what occurs. If an investor takes hold of the knowledge necessary to understand the repetitiveness of market patterns, then he is on a good way to earning lots of money.
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