The trend is your best friend in any financial trading market, as they say, and using a technical analysis chart for trend based trading is a simple method that at the same time can be very successful. Many traders over complicate the markets, especially at the beginning of their trading career. In fact simple systems can be the most effective.
Most traders use candlestick charts for this purpose, because they are so clear. Bar charts can also be used if preferred. Line charts would not be used.
The first thing to consider is whether the market is rising or falling. This should be visible at a glance, especially if we check several time periods. Use an indicator like Bollinger Bands to make sure that a rising market is not overbought, or a falling market oversold. Once we have this information, which should just take a few seconds to verify, we can begin to draw trend lines on our technical analysis chart. Here's how.
First, draw a straight line through the highest highs and another through the lowest lows.
1. Bullish market
If the two lines are approximately parallel and heading upward, there is an upward trend. The two trend lines can be used as support and resistance lines, which means that we assume the price will remain within the area between the two lines while the trend continues.
So if the price hits the lower line, you could buy on the assumption that it would soon rise again. First of course you would check against another indicator such as the Bollinger Bands and perhaps check in another time period to make sure that there are no signs that the trend is ending.
Some forex traders would also open a trade to sell the currency pair when the price hits the upper line, on the assumption that a retracement is due. This bucks the trend so requires extra care, but can be a profitable strategy.
2. Bearish market
If the two lines are approximately parallel and heading downward, then you have the opposite situation. The trend is downward. Again the lines act as support and resistance lines. This time you would be acting in line with the trend by selling when the price hits the upper line. Buying when it hits the lower line would be bucking the trend in the hope of a retracement.
3. Stable market
If the two lines on the technical analysis chart are approximately parallel and horizontal, the market is relatively stable and there is no trend. You could still trade on the basis of the support and resistance lines but most traders using trend-based systems would wait for a new trend to form.
4. Converging prices
If the two lines are not parallel but drawing closer together so that they would meet at an imaginary point in the future, sooner or later the price will break out and head in one direction or the other. Either wait for the breakout or place conditional orders so that if the price breaks above the limit of the upper line you would buy, and if it breaks below the lower line you would sell.
5. Diverging prices
If the two lines are not parallel but moving farther apart, this indicates that prices are becoming increasingly volatile. Most traders would stay out of this market.
Of course, financial trading is always risky and there are no guarantees. Always test systems thoroughly using the technical analysis chart in a demo account before risking any real money.
Showing posts with label currency trading chart. Show all posts
Showing posts with label currency trading chart. Show all posts
Thursday, March 4, 2010
Tuesday, February 2, 2010
MACD Chart: What is it?
The MACD chart is normally shown below the candlestick chart and provides useful forex trading indicators. MACD stands for Moving Average Convergence-Divergence. As the name suggests, it shows the convergence (coming together) or divergence (moving apart) of two exponential moving averages, one of which is fast and the other slow.
The indicator was invented by a New York stock analyst named Gerald Appel in the 1970s. Designed for the stock market, it nevertheless can be applied very well in other markets including forex.
On the MACD chart you will see two lines. One tracks the average of the difference between the two moving averages mentioned. Example settings for those might be 12 and 26 period moving averages. The other line on the chart is an exponential moving average of the MACD line itself, with a typical setting of 9. This is used as a signal line.
There are two simple ways to use the MACD. The first is to open a trade on the crossover of the two lines. If the faster line (the signal line) crosses the other from above, that can be treated as a signal to buy. If it crosses from below, that can be a signal to sell.
This can form the basis of a simple forex trading system which can be refined by checking the MACD in a second time frame. For example in day trading, look for the crossover on an hourly or 30 minute chart before moving in to the shorter time frame to make the trade. Then watch the higher time frame again for a signal that the trend is ending.
It is always best to consult the higher time frame first when trading on the basis of this indicator. This helps to prevent problems caused by trading against a longer term trend.
MACD can also be used to indicate overbought and oversold markets. When both lines are significantly above zero, the market can be said to be overbought. When they both fall significantly below zero, it is oversold.
The chart also includes a histogram giving a visual indication of convergence or divergence between the two lines. If the histogram is growing smaller, the lines are coming together. This can indicate that a crossover is approaching. The histogram is at zero when crossover occurs.
MACD is a lagging indicator and is prone to whipsaws when the market changes. Traders can be badly caught out. This is particularly true in the stock market where traders are relying less on the MACD these days. However, the MACD chart is still a useful provider of trading signals in many other markets, including forex.
The indicator was invented by a New York stock analyst named Gerald Appel in the 1970s. Designed for the stock market, it nevertheless can be applied very well in other markets including forex.
On the MACD chart you will see two lines. One tracks the average of the difference between the two moving averages mentioned. Example settings for those might be 12 and 26 period moving averages. The other line on the chart is an exponential moving average of the MACD line itself, with a typical setting of 9. This is used as a signal line.
There are two simple ways to use the MACD. The first is to open a trade on the crossover of the two lines. If the faster line (the signal line) crosses the other from above, that can be treated as a signal to buy. If it crosses from below, that can be a signal to sell.
This can form the basis of a simple forex trading system which can be refined by checking the MACD in a second time frame. For example in day trading, look for the crossover on an hourly or 30 minute chart before moving in to the shorter time frame to make the trade. Then watch the higher time frame again for a signal that the trend is ending.
It is always best to consult the higher time frame first when trading on the basis of this indicator. This helps to prevent problems caused by trading against a longer term trend.
MACD can also be used to indicate overbought and oversold markets. When both lines are significantly above zero, the market can be said to be overbought. When they both fall significantly below zero, it is oversold.
The chart also includes a histogram giving a visual indication of convergence or divergence between the two lines. If the histogram is growing smaller, the lines are coming together. This can indicate that a crossover is approaching. The histogram is at zero when crossover occurs.
MACD is a lagging indicator and is prone to whipsaws when the market changes. Traders can be badly caught out. This is particularly true in the stock market where traders are relying less on the MACD these days. However, the MACD chart is still a useful provider of trading signals in many other markets, including forex.
Thursday, September 24, 2009
Currency Trading Chart: What is it?
The currency trading chart is one of the most important tools for the forex trader. Charts are at the root of forex technical analysis, which forms trading systems based on studying price movements rather than economic forecasts which are the basis of fundamental analysis in forex trading. Most traders these days prefer technical analysis which does not require any special knowledge or training in economics.
Any currency trading chart will show price movements. Usually you can track these over a variable period of time. You can look at the last few minutes, hours, days or longer. Using a chart in conjunction with the mathematical indicators provided by most brokers and charting services, you can identify emerging tendencies and trends that can signal a trading opportunity.
Forex charts come in three formats.
1. The Line Chart
A line chart plots the closing prices at the end of each trading period, which could be anything from one minute to one day, you can set this. These are joined with a line to show the direction of movement. However, a line chart does not tell you anything about what happened at different times during the time period, only the final closing price.
2. The Bar Chart
A bar chart gives you four prices for each period: opening, high, low and closing price. You will see a vertical line for each period. The top of the line marks the high and the bottom is the low. A notch on the left side shows the opening price and a notch on the right shows the close. Usually these are at different levels but they could be the same. Either one of them could be the same as the opening or closing price but more commonly they are somewhere between.
The advantage of the bar chart over the line chart is that it shows you how wide the fluctuations were during the period, giving you an idea of the volatility of the pair at a glance.
3. The Candlestick Chart
This last type of chart gives you all of the same information as the bar chart but in a coloured format which many people find easier to take in.
Again a vertical line marks the high and low prices during a period, but there is also a wider block that runs between the opening and the closing price. This block will be filled with colour, usually red if the price is falling (opening price is the high end of the block, closing price is the low end) and green or blue if it is rising (closing price is the high end of the block, opening price is the low end). If shown in black and white you will see black for a falling price and white for a rising price.
The colours give you an instant view of whether prices rose or fell during the period. This makes candlesticks quicker to read at a glance than a bar chart. You can immediately see a reversal, which will show up as a series of green blocks marking the trend followed by one red marking the reversal, or vice versa. That is why candlesticks are the favorite type of currency trading chart for many traders.
Any currency trading chart will show price movements. Usually you can track these over a variable period of time. You can look at the last few minutes, hours, days or longer. Using a chart in conjunction with the mathematical indicators provided by most brokers and charting services, you can identify emerging tendencies and trends that can signal a trading opportunity.
Forex charts come in three formats.
1. The Line Chart
A line chart plots the closing prices at the end of each trading period, which could be anything from one minute to one day, you can set this. These are joined with a line to show the direction of movement. However, a line chart does not tell you anything about what happened at different times during the time period, only the final closing price.
2. The Bar Chart
A bar chart gives you four prices for each period: opening, high, low and closing price. You will see a vertical line for each period. The top of the line marks the high and the bottom is the low. A notch on the left side shows the opening price and a notch on the right shows the close. Usually these are at different levels but they could be the same. Either one of them could be the same as the opening or closing price but more commonly they are somewhere between.
The advantage of the bar chart over the line chart is that it shows you how wide the fluctuations were during the period, giving you an idea of the volatility of the pair at a glance.
3. The Candlestick Chart
This last type of chart gives you all of the same information as the bar chart but in a coloured format which many people find easier to take in.
Again a vertical line marks the high and low prices during a period, but there is also a wider block that runs between the opening and the closing price. This block will be filled with colour, usually red if the price is falling (opening price is the high end of the block, closing price is the low end) and green or blue if it is rising (closing price is the high end of the block, opening price is the low end). If shown in black and white you will see black for a falling price and white for a rising price.
The colours give you an instant view of whether prices rose or fell during the period. This makes candlesticks quicker to read at a glance than a bar chart. You can immediately see a reversal, which will show up as a series of green blocks marking the trend followed by one red marking the reversal, or vice versa. That is why candlesticks are the favorite type of currency trading chart for many traders.
Subscribe to:
Posts (Atom)
