Tuesday, July 30, 2013

Trading with Moving Average

A moving average indicator is used to help us forecast future prices. By looking at the slope of the moving average, you can better determine the potential direction of market prices. 

The two major types of moving averages:
  1. Simple
  2. Exponential
Simple moving average (SMA) is the simplest type of moving average. Basically, a simple moving average is calculated by adding up the last "X" period's closing prices and then dividing that number by X. Here is an example of how moving averages smooth out the price action.

Simple Moving Averages

On chart above, we have plotted three different SMAs on the 1-hour chart of USD/CHF. As you can see, the longer the SMA period is, the more it lags behind the price.

Notice how the 62 SMA is farther away from the current price than the 30 and 5 SMAs.
This is because the 62 SMA adds up the closing prices of the last 62 periods and divides it by 62. The longer period you use for the SMA, the slower it is to react to the price movement.

The SMAs in this chart show you the overall sentiment of the market at this point in time. Here, we can see that the pair is trending.
Instead of just looking at the current price of the market, the moving averages give us a broader view, and we can now gauge the general direction of its future price. With the use of SMAs, we can tell whether a pair is trending up, trending down, or just ranging.

Exponential moving averages (EMA) give more weight to the most recent periods. In our example below, the EMA would put more weight on the prices of the most recent days, which would be Days 3, 4, and 5.

Let's say we plot a 5-period SMA on the daily chart of EUR/USD.


The closing prices for the last 5 days are as follows: Day 1: 1.3172
Day 2: 1.3231
Day 3: 1.3164
Day 4: 1.3186
Day 5: 1.3293

The simple moving average would be calculated as follows:
(1.3172 + 1.3231 + 1.3164 + 1.3186 + 1.3293) / 5 = 1.3209

Well what if there was a news report on Day 2 that causes the euro to drop across the board. This causes EUR/USD to plunge and close at 1.3000. Let's see what effect this would have on the 5 period SMA.
Day 1: 1.3172
Day 2: 1.3000
Day 3: 1.3164
Day 4: 1.3186
Day 5: 1.3293

The simple moving average would be calculated as follows:
(1.3172 + 1.3000 + 1.3164 + 1.3186 + 1.3293) / 5 = 1.3163

The result of the simple moving average would be a lot lower and it would give you the notion that the price was actually going down, when in reality, Day 2 was just a one-time event caused by the poor results of an economic report.

This would mean that the spike on Day 2 would be of lesser value and wouldn't have as big an effect on the moving average as it would if we had calculated for a simple moving average.
If you think about it, this makes a lot of sense because what this does is it puts more emphasis on what traders are doing recently.

Let's take a look at the 4-hour chart of USD/JPY to highlight how an SMA and EMA would look side by side on a chart.

Exponential Moving Averages

Notice how the red line (the 30 EMA) seems to be closer price than the blue line (the 30 SMA). This means that it more accurately represents recent price action. You can probably guess why this happens

It is because the EMA places more emphasis on what has been happening lately. When trading, it is far more important to see what traders are doing NOW rather what they were doing last week or last month.

Remember, using moving averages is easy. The hard part is determining which one to use! 

That is why you should try them out and figure out which best fits your style of trading. Maybe you prefer a trend-following system. Or maybe you want use them as dynamic support and resistance.

Whatever you choose to do, make sure you read up and do some testing to see how it fits into your overall trading plan. 

For more details about Forex Trading with ICM Brokers, please click the link: www.ICMBrokers.com and feel free to access our product and services that can help you easily to trade.

Tuesday, July 23, 2013

Trading with Candlesticks

Most of the traders use candlesticks on their charts but do not fully understand the signals given by candlesticks. The learning curve on how to correctly interpret a candlestick pattern obviously begins with studying what the shapes and shadows mean, and then seeing if a trend is indicated.

Long vs Short Candlestick

Long bodies indicate strong buying or selling. The longer the body is, the more intense the buying or selling pressure. Short bodies imply very little buying or selling activity.

The Shadow
If a candlestick has a long lower shadow and short upper shadow, this means there is a buyers rejection.
  1. Sellers force price lower, but for one reason or another, 
  2. Buyers came in and drove prices back up to end the session.
Anatomy of a Japanese candlestick
If a candlestick has a long lower shadow and short upper shadow, this means there is a sellers rejection.
  1. Buyers force price higher, but for one reason or another,
  2. Sellers came in and drove prices back down to end the session.
Long Vs. Short Shadows

The upper and lower shadows on candlesticks can tell a lot about the trading session. Candlesticks with short shadows indicate that most of the trading action was confined near the open and close, while candlesticks with long shadows indicate that the price extended well past the open and close.


Candlesticks with a long upper shadow and short lower shadow show buyers dominated during the session and pushed prices higher, but sellers later forced prices down from their highs before close. On the other hand, candlesticks with long lower shadows and short upper shadows show that sellers dominated during the session and drove prices lower, but buyers later bid prices higher by the end of the session.

spinning topSpinning tops 
Spinning tops are candlesticks with long upper and lower shadows with small bodies. These candle sticks are known for representing indecision. The small body shows little movement from open to close and the shadows indicate that both bulls and bears were active during the session but neither could gain the upper hand. Spinning tops can signal both the top of a run and the bottom of a decline.

The doji is formed when a stock’s open and close are exactly or almost equal. The length of the upper and lower shadows can be long or short, but the resulting candlestick looks like a cross or plus sign. Although a doji can help signal a reversal much like the spinning top, they should never be used alone. Any bullish or bearish signal using the doji is based on preceding price action and future confirmation.

dragonfly dojiDragon Fly Doji
A dragon fly doji is made when the open, high and close are equal, but the stock’s low creates a long lower shadow, creating a candle that looks like a “T”. A dragon fly doji shows that sellers dominated trading and drove prices lower during the session, but that buyers came back and pushed prices back to the opening level and the session high. A dragon fly doji can be used to signal a potential reversal of a downtrend as well as a potential reversal of an uptrend.

gravestone doji
Gravestone Doji
The gravestone doji is simply an upside down dragon fly doji. The gravestone doji shows that buyers dominated trading and drove prices higher during the session, but that sellers pushed back and drove prices back to the opening level and the session low. As with the dragon fly doji, the gravestone doji only indicates a reversal based on previous price action and future confirmation. Even though the long upper shadow shows a failed rally, the intraday high shows there is buying pressure, so bearish or bullish confirmation is required.

Understanding the psychology behind the candlestick is far more important than the pattern itself because in reality, when you are trading live at the right hand edge of the chart, the patterns are not so easy to see.

For more details about Forex Trading with ICM Brokers, please click the link: www.ICMBrokers.com and feel free to access our product and services that can help you easily to trade.

Wednesday, July 3, 2013

How to Identify Support and Resistance Levels?

Support and Resistance represent key junctures where the forces of supply and demand meet. In the financial markets, prices are driven by excessive supply (down) and demand (up). Supply is synonymous with bearish, bears and selling. Demand is synonymous with bullish, bulls and buying. 

As demand increases, prices advance and as supply increases, prices decline. When supply and demand are equal, prices move sideways as bulls and bears slug it out for control.

Trend Lines
In their most basic form, an uptrend line is drawn along the bottom of easily identifiable support areas (valleys). In a downtrend, the trend line is drawn along the top of easily identifiable resistance areas (peaks).

There are three types of trends:
  1. Uptrend (higher lows)
  2. Downtrend (lower highs)
  3. Sideways trends (ranging)
To create an up (ascending) channel, simply draw a parallel line at the same angle as an uptrend line and then move that line to position where it touches the most recent peak.
To create a down (descending) channel, simple draw a parallel line at the same angle as the downtrend line and then move that line to a position where it touches the most recent valley.
  1. Ascending channel (higher highs and higher lows)
  2. Descending channel (lower highers and lower lows)
  3. Horizontal channel (ranging)
What is Support? 
A price level on a chart where historically the trade has had difficulty falling below. The price level acts as a floor and prevents the price of the trade from falling any further.

A level of Support is always found BELOW prices.

There are two ways the trade will test this level of support:

  1. Either the trade will fall to this level and then "bounce" off of it and begin to rise again or...
  2. The trade will fall to this level, break through it, and continue dropping until it finds another level of support, a resting spot so to speak.
Below is an example of how support works. The trade found support around $40. It bounced around $40 for some time and then when it finally broke the $40 threshold, it continued dropping until it found its next level of support around $29.

The more times a trade falls to the level of support and bounces off it, the more significant (stronger) the price level becomes.

What is Resistance? 
The price level at which selling is thought to be strong enough to prevent the price from rising further.
The logic dictates that as the price advances towards resistance, sellers become more inclined to sell and buyers become less inclined to buy. By the time the price reaches the resistance level, it is believed that supply will overcome demand and prevent the price from rising above resistance.

Resistance does not always hold and a break above resistance signals that the bulls have won out over the bears. A break above resistance shows a new willingness to buy and/or a lack of incentive to sell. 

Resistance breaks and new highs indicate buyers have increased their expectations and are willing to buy at even higher prices. In addition, sellers could not be coerced into selling until prices rose above resistance or above the previous high. Once resistance is broken, another resistance level will have to be established at a higher level.

Two methods in trading support and resistance levels 

The bounce we want to tilt the odds in our favor and find some sort of confirmation that the support or resistance will hold. Instead of simply buying or selling right off the bat, wait for it to bounce first before entering. By doing this, you avoid those moments where price moves so fast that it slices through support and resistance levels like a knife slicing through warm butter.

The break there is the aggressive way and there is the conservative way. In the aggressive way, you simply buy or sell whenever the price passes through a support or resistance zone with ease. In the conservative way, you wait for price to make a "pullback" to the broken support or resistance level and enter after price bounces.

In conclusion, you must study how a trade behaves at key support and resistance levels and take note of market trend. This is a good time to look for or take the opposite side of the primary trend. Remember, climactic volume eats up a large amount of buyers and sellers and tends to produce sharp snap backs in either direction as buyers have put in major support and sellers will have put in major resistance going forward.

For more details about Forex Trading with ICM Brokers, please click the link: www.ICMBrokers.com and feel free to access our product and services that can help you easily to trade.