Saturday, December 25, 2010
Tuesday, September 28, 2010
Forex Charts and diagrams
Forex charts are based on market action involving price. Charts are major
tools in Forex trading. There are many kinds of charts, each of which helps to
visually analyze market conditions, assess and create forecasts, and identify
behavior patterns.
Most charts present the behavior of currency exchange rates over time. Rates
(prices) are measured on the vertical axis and time is shown of the horizontal
axis.
Charts are used by both technical and fundamental analysts. The technical
analyst analyzes the “micro” movements, trying to match the actual
occurrence with known patterns. The fundamental analyst tries to find
correlation between the trend seen on the chart and “macro” events
occurring parallel to that (political and others).
What is an appropriate time scale to use on a chart?
It depends on the trader’s strategy. The short-range investor would probably
select a day chart (units of hours, minutes), where the medium and long-
range investor would use the weekly or monthly charts. High resolution charts
(e.g. – minutes and seconds) may show “noise”, meaning that with fine details
in view, it is sometimes harder to see the overall trend.
The major types of charts:
• Line chart The simplest form, based upon the closing rates (in each time unit), forming a
homogeneous line. (Such chart, on the 5-minutes scale, will show a line connecting all
the actual rates every 5 minutes).
This chart does not show what happened during the time unit selected
by the viewer, only closing rates for such time intervals. The line chart
is a simple tool for setting support and resistance levels.
Point and figure charts - charts based on price without time. Unlike
most other investment charts, point and figure charts do not present a
linear representation of time. Instead, they show trends in price.
Increases are represented by a rising stack of Xs, and decreases are
represented by a declining stack of Os. This type of chart is used to
filter out non-significant price movements, and enables the trader to
easily determine critical support and resistance levels. Traders will
place orders when the price moves beyond identified support /
resistance levels.
Bar chart This chart shows three rates for each time unit selected: the high, the low, the closing
(HLC). There are also bar charts including four rates (OHLC, which includes the
Opening rate for the time interval). This chart provides clearly visible information
about trading prices range during the time period (per unit) selected.
Candlestick chart
This kind of chart is based on an ancient Japanese method. The chart
represents prices at their opening, high, low and closing rates, in a
form of candles, for each time unit selected.
The empty (transparent) candles show increase, while the dark (full)
ones show decrease.
The length of the body shows the range between opening and closing,
while the whole candle (including top and bottom wicks) show the
whole range of trading prices for the selected time unit.
Pattern recognition in Candlestick charts
Pattern recognition is a field within the area of “machine learning”.
Alternatively, it can be defined as “the act of taking in raw data and taking an
action based on the category of the data”. As such, it is a collection of
methods for “supervised learning”.
A complete pattern recognition system consists of a sensor that gathers the
observations to be classified or described; a feature extraction mechanism
that computes numeric or symbolic information from the observations; and a
classification or description scheme that does the actual job of classifying or
describing observations, relying on the extracted features.
In general, the market uses the following patterns in candlestick charts:
• Bullish patterns: hammer, inverted hammer, engulfing, harami, harami
cross, doji star, piercing line, morning star, morning doji star.
• Bearish patterns: shooting star , hanging man, engulfing, harami,
harami cross, doji star, dark cloud cover, evening star, evening doji
star.
tools in Forex trading. There are many kinds of charts, each of which helps to
visually analyze market conditions, assess and create forecasts, and identify
behavior patterns.
Most charts present the behavior of currency exchange rates over time. Rates
(prices) are measured on the vertical axis and time is shown of the horizontal
axis.
Charts are used by both technical and fundamental analysts. The technical
analyst analyzes the “micro” movements, trying to match the actual
occurrence with known patterns. The fundamental analyst tries to find
correlation between the trend seen on the chart and “macro” events
occurring parallel to that (political and others).
What is an appropriate time scale to use on a chart?
It depends on the trader’s strategy. The short-range investor would probably
select a day chart (units of hours, minutes), where the medium and long-
range investor would use the weekly or monthly charts. High resolution charts
(e.g. – minutes and seconds) may show “noise”, meaning that with fine details
in view, it is sometimes harder to see the overall trend.
The major types of charts:
• Line chart The simplest form, based upon the closing rates (in each time unit), forming a
homogeneous line. (Such chart, on the 5-minutes scale, will show a line connecting all
the actual rates every 5 minutes).
This chart does not show what happened during the time unit selected
by the viewer, only closing rates for such time intervals. The line chart
is a simple tool for setting support and resistance levels.
Point and figure charts - charts based on price without time. Unlike
most other investment charts, point and figure charts do not present a
linear representation of time. Instead, they show trends in price.
Increases are represented by a rising stack of Xs, and decreases are
represented by a declining stack of Os. This type of chart is used to
filter out non-significant price movements, and enables the trader to
easily determine critical support and resistance levels. Traders will
place orders when the price moves beyond identified support /
resistance levels.
Bar chart This chart shows three rates for each time unit selected: the high, the low, the closing
(HLC). There are also bar charts including four rates (OHLC, which includes the
Opening rate for the time interval). This chart provides clearly visible information
about trading prices range during the time period (per unit) selected.
Candlestick chart
This kind of chart is based on an ancient Japanese method. The chart
represents prices at their opening, high, low and closing rates, in a
form of candles, for each time unit selected.
The empty (transparent) candles show increase, while the dark (full)
ones show decrease.
The length of the body shows the range between opening and closing,
while the whole candle (including top and bottom wicks) show the
whole range of trading prices for the selected time unit.
Pattern recognition in Candlestick charts
Pattern recognition is a field within the area of “machine learning”.
Alternatively, it can be defined as “the act of taking in raw data and taking an
action based on the category of the data”. As such, it is a collection of
methods for “supervised learning”.
A complete pattern recognition system consists of a sensor that gathers the
observations to be classified or described; a feature extraction mechanism
that computes numeric or symbolic information from the observations; and a
classification or description scheme that does the actual job of classifying or
describing observations, relying on the extracted features.
In general, the market uses the following patterns in candlestick charts:
• Bullish patterns: hammer, inverted hammer, engulfing, harami, harami
cross, doji star, piercing line, morning star, morning doji star.
• Bearish patterns: shooting star , hanging man, engulfing, harami,
harami cross, doji star, dark cloud cover, evening star, evening doji
star.
Forex techniques and terms
Bollinger Bands - a range of price volatility named after John Bollinger,
who invented them in the 1980s. They evolved from the concept of
trading bands, and can be used to measure the relative height or depth
of price. A band is plotted two standard deviations away from a simple
moving average. As standard deviation is a measure of volatility,
Bollinger Bands adjust themselves to market conditions. When the
markets become more volatile, the bands widen (move further away
from the average), and during less volatile periods, the bands contract
(move closer to the average). Bollinger Bands are one of the most popular technical analysis
techniques. The closer prices move to the upper band, the more
overbought is the market, and the closer prices move to the lower
band, the more oversold is the market.
Support / Resistance – The Support level is the lowest price an
instrument trades at over a period of time. The longer the price stays
at a particular level, the stronger the support at that level. On the
chart this is price level under the market where buying interest is
sufficiently strong to overcome selling pressure. Some traders believe
that the stronger the support at a given level, the less likely it will
break below that level in the future. The Resistance level is a price at
which an instrument or market can trade, but which it cannot exceed,
for a certain period of time. On the chart this is a price level over the
market where selling pressure overcomes buying pressure, and a price
advance is turned back.
Support / Resistance Breakout - when a price passes through and stays
beyond an area of support or resistance.CCI - Commodity Channel Index - an oscillator used to help determine
when an investment instrument has been overbought and oversold. The
Commodity Channel Index, first developed by Donald Lambert,
quantifies the relationship between the asset's price, a moving average
(MA) of the asset's price, and normal deviations (D) from that average.
The CCI has seen substantial growth in popularity amongst technical
investors; today's traders often use the indicator to determine cyclical
trends in equities and currencies as well as commodities.
The CCI, when used in conjunction with other oscillators, can be a
valuable tool to identify potential peaks and valleys in the asset's price,
and thus provide investors with reasonable evidence to estimate
changes in the direction of price movement of the asset.
Hikkake Pattern – a method of identifying reversals and continuation
patterns, this was discovered and introduced to the market through a
series of published articles written by technical analyst Daniel L.
Chesler, CMT. Used for determining market turning-points and
continuations (also known as trending behavior). It is a simple pattern
that can be viewed in market price data, using traditional bar charts,
or Japanese candlestick charts.
Moving averages - are used to emphasize the direction of a trend and to
smooth out price and volume fluctuations, or “noise”, that can confuse
interpretation. There are seven different types of moving averages:
• simple (arithmetic)
• exponential
• time series
• weighed
• triangular
• variable
• volume adjusted
The only significant difference between the various types of moving
averages is the weight assigned to the most recent data. For example,
a simple (arithmetic) moving average is calculated by adding the
closing price of the instrument for a number of time periods, then
dividing this total by the number of time periods.
The most popular method of interpreting a moving average is to
compare the relationship between a moving average of the
instrument’s closing price, and the instrument’s closing price itself.
• Sell signal: when the instrument’s price falls below its moving
average
• Buy signal: when the instrument’s price rises above its moving
average
The other technique is called the double crossover, which uses short-
term and long-term averages. Typically, upward momentum is
confirmed when a short-term average (e.g., 15-day) crosses above a
longer-term average (e.g., 50-day). Downward momentum is confirmed
when a short-term average crosses below a long-term average.
MACD - Moving Average Convergence/Divergence - a technical
indicator, developed by Gerald Appel, used to detect swings in the
price of financial instruments. The MACD is computed using two
exponentially smoothed moving averages (see further down) of the
security's historical price, and is usually shown over a period of time on
a chart. By then comparing the MACD to its own moving average
(usually called the "signal line"), traders believe they can detect when
the security is likely to rise or fall. MACD is frequently used in
conjunction with other technical indicators such as the RSI (Relative
Strength Index, see further down) and the stochastic oscillator (see
further down).
Momentum – is an oscillator designed to measure the rate of price
change, not the actual price level. This oscillator consists of the net
difference between the current closing price and the oldest closing
price from a predetermined period.
The formula for calculating the momentum (M) is:
M = CCP – OCP
Where: CCP – current closing price
OCP – old closing price
Momentum and rate of change (ROC) are simple indicators showing
the difference between today's closing price and the close N days ago.
"Momentum" is simply the difference, and the ROC is a ratio expressed
in percentage. They refer in general to prices continuing to trend. The
momentum and ROC indicators show that by remaining positive, while
an uptrend is sustained, or negative, while a downtrend is sustained.
A crossing up through zero may be used as a signal to buy, or a crossing
down through zero as a signal to sell. How high (or how low, when
negative) the indicators get shows how strong the trend is.
RSI - Relative Strength Index - a technical momentum indicator,
devised by Welles Wilder, measures the relative changes between the
higher and lower closing prices. RSI compares the magnitude of recent
gains to recent losses in an attempt to determine overbought and
oversold conditions of an asset.
The formula for calculating RSI is:
RSI = 100 – [100 / (1 + RS)]
Where: RS - average of N days up closes, divided by
average of N days down closes
N - predetermined number of days
The RSI ranges from 0 to 100. An asset is deemed to be overbought
once the RSI approaches the 70 level, meaning that it may be getting
overvalued and is a good candidate for a pullback. Likewise, if the RSI
approaches 30, it is an indication that the asset may be getting
oversold and therefore likely to become undervalued. A trader using
RSI should be aware that large surges and drops in the price of an asset
will affect the RSI by creating false buy or sell signals. The RSI is best
used as a valuable complement to other stock-picking tools.
Stochastic oscillator - A technical momentum indicator that compares
an instrument's closing price to its price range over a given time period.
The oscillator's sensitivity to market movements can be reduced by
adjusting the time period, or by taking a moving average of the result.
This indicator is calculated with the following formula:
%K = 100 * [(C – L14) / (H14 – L14)]
C= the most recent closing price;
L14= the low of the 14 previous trading sessions;
H14= the highest price traded during the same 14-day period.
The theory behind this indicator, based on George Lane’s observations,
is that in an upward-trending market, prices tend to close near their
high, and during a downward-trending market, prices tend to close
near their low. Transaction signals occur when the %K crosses through a
three-period moving average called the “%D”.
Trend line - a sloping line of support or resistance.
• Up trend line – straight line drawn upward to the right along
successive reaction lows
• Down trend line – straight line drawn downwards to the right
along successive rally peaks
Two points are needed to draw the trend line, and a third point to
make it valid trend line. Trend lines are used in many ways by traders.
One way is that when price returns to an existing principal trend line’ it
may be an opportunity to open new positions in the direction of the
trend in the belief that the trend line will hold and the trend will
continue further. A second way is that when price action breaks
through the principal trend line of an existing trend, it is evidence that
the trend may be going to fail, and a trader may consider trading in the
opposite direction to the existing trend, or exiting positions in the
direction of the trend.
who invented them in the 1980s. They evolved from the concept of
trading bands, and can be used to measure the relative height or depth
of price. A band is plotted two standard deviations away from a simple
moving average. As standard deviation is a measure of volatility,
Bollinger Bands adjust themselves to market conditions. When the
markets become more volatile, the bands widen (move further away
from the average), and during less volatile periods, the bands contract
(move closer to the average). Bollinger Bands are one of the most popular technical analysis
techniques. The closer prices move to the upper band, the more
overbought is the market, and the closer prices move to the lower
band, the more oversold is the market.
Support / Resistance – The Support level is the lowest price an
instrument trades at over a period of time. The longer the price stays
at a particular level, the stronger the support at that level. On the
chart this is price level under the market where buying interest is
sufficiently strong to overcome selling pressure. Some traders believe
that the stronger the support at a given level, the less likely it will
break below that level in the future. The Resistance level is a price at
which an instrument or market can trade, but which it cannot exceed,
for a certain period of time. On the chart this is a price level over the
market where selling pressure overcomes buying pressure, and a price
advance is turned back.
Support / Resistance Breakout - when a price passes through and stays
beyond an area of support or resistance.CCI - Commodity Channel Index - an oscillator used to help determine
when an investment instrument has been overbought and oversold. The
Commodity Channel Index, first developed by Donald Lambert,
quantifies the relationship between the asset's price, a moving average
(MA) of the asset's price, and normal deviations (D) from that average.
The CCI has seen substantial growth in popularity amongst technical
investors; today's traders often use the indicator to determine cyclical
trends in equities and currencies as well as commodities.
The CCI, when used in conjunction with other oscillators, can be a
valuable tool to identify potential peaks and valleys in the asset's price,
and thus provide investors with reasonable evidence to estimate
changes in the direction of price movement of the asset.
Hikkake Pattern – a method of identifying reversals and continuation
patterns, this was discovered and introduced to the market through a
series of published articles written by technical analyst Daniel L.
Chesler, CMT. Used for determining market turning-points and
continuations (also known as trending behavior). It is a simple pattern
that can be viewed in market price data, using traditional bar charts,
or Japanese candlestick charts.
Moving averages - are used to emphasize the direction of a trend and to
smooth out price and volume fluctuations, or “noise”, that can confuse
interpretation. There are seven different types of moving averages:
• simple (arithmetic)
• exponential
• time series
• weighed
• triangular
• variable
• volume adjusted
The only significant difference between the various types of moving
averages is the weight assigned to the most recent data. For example,
a simple (arithmetic) moving average is calculated by adding the
closing price of the instrument for a number of time periods, then
dividing this total by the number of time periods.
The most popular method of interpreting a moving average is to
compare the relationship between a moving average of the
instrument’s closing price, and the instrument’s closing price itself.
• Sell signal: when the instrument’s price falls below its moving
average
• Buy signal: when the instrument’s price rises above its moving
average
The other technique is called the double crossover, which uses short-
term and long-term averages. Typically, upward momentum is
confirmed when a short-term average (e.g., 15-day) crosses above a
longer-term average (e.g., 50-day). Downward momentum is confirmed
when a short-term average crosses below a long-term average.
MACD - Moving Average Convergence/Divergence - a technical
indicator, developed by Gerald Appel, used to detect swings in the
price of financial instruments. The MACD is computed using two
exponentially smoothed moving averages (see further down) of the
security's historical price, and is usually shown over a period of time on
a chart. By then comparing the MACD to its own moving average
(usually called the "signal line"), traders believe they can detect when
the security is likely to rise or fall. MACD is frequently used in
conjunction with other technical indicators such as the RSI (Relative
Strength Index, see further down) and the stochastic oscillator (see
further down).
Momentum – is an oscillator designed to measure the rate of price
change, not the actual price level. This oscillator consists of the net
difference between the current closing price and the oldest closing
price from a predetermined period.
The formula for calculating the momentum (M) is:
M = CCP – OCP
Where: CCP – current closing price
OCP – old closing price
Momentum and rate of change (ROC) are simple indicators showing
the difference between today's closing price and the close N days ago.
"Momentum" is simply the difference, and the ROC is a ratio expressed
in percentage. They refer in general to prices continuing to trend. The
momentum and ROC indicators show that by remaining positive, while
an uptrend is sustained, or negative, while a downtrend is sustained.
A crossing up through zero may be used as a signal to buy, or a crossing
down through zero as a signal to sell. How high (or how low, when
negative) the indicators get shows how strong the trend is.
RSI - Relative Strength Index - a technical momentum indicator,
devised by Welles Wilder, measures the relative changes between the
higher and lower closing prices. RSI compares the magnitude of recent
gains to recent losses in an attempt to determine overbought and
oversold conditions of an asset.
The formula for calculating RSI is:
RSI = 100 – [100 / (1 + RS)]
Where: RS - average of N days up closes, divided by
average of N days down closes
N - predetermined number of days
The RSI ranges from 0 to 100. An asset is deemed to be overbought
once the RSI approaches the 70 level, meaning that it may be getting
overvalued and is a good candidate for a pullback. Likewise, if the RSI
approaches 30, it is an indication that the asset may be getting
oversold and therefore likely to become undervalued. A trader using
RSI should be aware that large surges and drops in the price of an asset
will affect the RSI by creating false buy or sell signals. The RSI is best
used as a valuable complement to other stock-picking tools.
Stochastic oscillator - A technical momentum indicator that compares
an instrument's closing price to its price range over a given time period.
The oscillator's sensitivity to market movements can be reduced by
adjusting the time period, or by taking a moving average of the result.
This indicator is calculated with the following formula:
%K = 100 * [(C – L14) / (H14 – L14)]
C= the most recent closing price;
L14= the low of the 14 previous trading sessions;
H14= the highest price traded during the same 14-day period.
The theory behind this indicator, based on George Lane’s observations,
is that in an upward-trending market, prices tend to close near their
high, and during a downward-trending market, prices tend to close
near their low. Transaction signals occur when the %K crosses through a
three-period moving average called the “%D”.
Trend line - a sloping line of support or resistance.
• Up trend line – straight line drawn upward to the right along
successive reaction lows
• Down trend line – straight line drawn downwards to the right
along successive rally peaks
Two points are needed to draw the trend line, and a third point to
make it valid trend line. Trend lines are used in many ways by traders.
One way is that when price returns to an existing principal trend line’ it
may be an opportunity to open new positions in the direction of the
trend in the belief that the trend line will hold and the trend will
continue further. A second way is that when price action breaks
through the principal trend line of an existing trend, it is evidence that
the trend may be going to fail, and a trader may consider trading in the
opposite direction to the existing trend, or exiting positions in the
direction of the trend.
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