Lectures on Technical Analysis

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Introduction

There are three important points to achieve success in asset management. The first is "to establish your investment style."

It is built up by every investor on each person's own experience. It there are 100 investors, then there are 100 their own styles. In fact, investors, who have their own investment styles, are able to “survive” in markets a long time.

One reason for it is that they have intellectual and internal support when they fall into a difficult market situation. It make a large difference for making judgement in such a situation.

The second is "risk management". They think through every scenarios, in which how they should act and deal with possible events.

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The third is "mental". Whoever changes one's mind and take an makeshift decision on every spot of event, is not a real investor. He have to have firm will to find a considered solution.

There are various technical analysis means to use, but usually we use somehow 30 of them. Of course you do not have to use all of them, but as a skilled Forex trader, you'd better to master both analysis means, that allow you to interpret future market movement.

Here we shall describe, how to use these technical analysis means in practice, paying no attention to difficult mathematical theory.

by Femi Olubosi (Chief Analyst)

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Moving Average

Perhaps, as Forex traders, you have ever heard “moving average”, the most simple tool for technical analysis for Forex traders. From this simple analytic tool of “moving average”, various another more difficult and complex methods of technical analysis occurred.

So this time we shall study “moving average”. First, please look at the figure below. What investors think of, when the currency price is on the red circle? 

If the current price is the point “A”, many investors would think that “risen enough and it's time to correct the course”, so it's a human nature to take confirm his/her profit as soon as possible and fear to loose his/her profit. If the current price is the point “B”, the opposite situation.

However, in these points there were rising and falling movement and as a result they might miss chances for trading. Therefore, it is important to read trends in order to miss our opportunity for taking profit. The advantage to catch trends is that you can continue in cool blood holding your position regardless of temporary rising or falling movement on the market, if a trend points out upward or downward one.

A way to catch the trade, which traders uses for many years, is “moving average”. The simplest moving average is calculated by the average For example, if you want to know 5-day moving average, you have to calculate all 5-day close price and and divide the sum by 5. But on the trade terminal “NetTradeX” you do not have to calculate it, so the programme automatically does it for you.

There are various figures are used to calculate. 5,6,10,13,20,26,75 and so on. However, on the Internet we usually see the moving average of 5, 10, 20 and so on days.

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According to the characteristics of moving average, of course, a short-term moving average is moving closer to current price than long-term   moving average. Long-term moving average line should run slower and coming up with the current quotation.

Now, we see, how to use the moving average to define buy and sell signals. It is called “Golden Cross” buy and “Dead Cross” sell. 

Golden Cross (buy) is when a short-term moving average passes through a long-term moving average line “from the bottom upwards”, that may mean that "basic trend is changed to upward trend" and you will set "buy" position.

In contrast to it, Dead Cross (sell) is when a short-term passes through a long-term moving average from top downwards, that shows the "underlying trend is changed to downward trend".

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On the trend shows that there are large, it is effective when it is visible.

Of course, not all current movement is fit to these rules. In other words, Golden Cross to "sell signal", Dead Cross to "buy signal". One of the reasons, why it occurs, is the period of a using moving average. Every currency pair has its own characteristics, so you have to find proper moving averages.

In IFC Markets Trade Terminal NetTradeX you can easily set any period of moving average and change parameters of it.

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Fibonacci Retracement

One of the famous indicators named Fibonacci Retracement is based on the theory of the most talented Italian mathematician of the Middle Age.

He is called Leonardo of Pisa, known as Leonard Pisano, Leonardo Bonacci, Leonardo Fibonacci or simply Fibonacci. Fibonacci is posthumously given nickname of Leonardo and means a son of Bonacci (filius Bonacci) .

Fibonacci was born in Pisa, Italy. His father Guglielmo had a nickname Bonaccio meant “good natured” or “simple”. He was a trader and travelled around the Mediterranean area. Fibonacci grew up in Bugia, Algeria, where he learnt about the Hindu-Arabic numeral system. He continued his study further in Egypt, Syria and Greek under leading Arab mathematicians of his time. Leonardo became an amicable guest of the Emperor Frederick II, who enjoyed mathematics and science.

Fibonacci ratio known as Golden ratio is used in Financial markets as a financial indicator. This ratio, which is developed in arts and architecture and considered as the most beautiful ratio, might govern currency movement in the markets. The up and downward movement of currency rate as another nature appearances and as one of appearances in this world obeys golden ratio.

Let see technical analysis with Fibonacci Retracement.

Another analysis in the same chart

by Bello Agbambu (Chart Analyst)

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The basic oscillator - Momentum

I would like to introduce the first oscillator called "Momentum". I'm sure that skillful traders often hear the name of this oscillator.

As technical indicators the momentum measures the rise / down “momentum” in price.

Because of simpleness of this oscillator, it has some weak points, but remains one of more useful ones or was developed to another indicators. 

Momentum = now's quotation – standard price (X period)

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The most common use of this oscillator is that to buy over the 100 points on and to sell underthe line. It is more important is to compare the change in price movement and momentum.

For example, the momentum, which is now over the 100 points, goes further upward, the upward price momentum is growing more and more. On the contrary, the momentum, which is now under 100 points, falls down further under the now's point, the downward momentum is increased.

While the quotation is rising, but the momentum flatten its rise, it means weaking upward/downward trend.

In other words, the momentum and quotation show different, uncorresponding movements, the currency course may be sooner or later changed.

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MACD stands for Moving Average Convergence / Divergence, created by Gerald Appel in the 1960s. It is read as "Mac D (dee)" as usual but has no realtion to a hamburger shop somewhere.

It shows the difference between a fast and slow exponential moving average (EMA) of closing prices.

I perfer MACD, so the technical analysis gives  relatively accurate information of the trade signals, as long as I use.

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<method of MACD>

when you consider the price of tomorrow, which data is helpful, yesterday's data or data of 10 days before? Or in more extreme case yesterday's 1 dollar rising or those of 1 year before?

Of course, yesterday's rising of 1 dollar helps us to consider today's currency movement more than that of 1 year before.
 
MACD includes in its moving average this idea. And the name of MACD represents the characteristics of an abbreviation in English, i.e.  “Moving Average Convergence / Divergence Trading Method”. On the base of moving average MACD adds another mathematic   means to its arsenal.

Well, in MACD Exponentially Weighted Moving Average (as known as EMA) is employed. It applies weighting factors which decrease exponentially. The weighting for each older data point decreases exponentially, giving much more importance to recent observations while still not discarding older observations entirely. The graph at right shows an example of the weight decrease.

It is a little complex, but don't worry. On the trade terminal NetTradeX you do not have to calculate MACD, but it is automatically completed by your trade terminal. So we shall pay attention, how to trade, using this technical analysis.

<Trading point>

Traide chance according to MACD is shown by golde cross and/or dead cross of MACD and its signal. In other words, MACD moves more quickly than the signal, so “buy signal” appears when MACD go through the signal from the bottom to the top, and to the contrary "sell signal” is observed when MACD moves from the top through the signal to the bottom.

Another way is a zero-based view. If MACD and the signal are over the zero line, the currency course may have a upward trend. If they are below the zero line, the course can be on the downward trend. 

These two views help traders to set buy/sell positions adequately with a market trend.

by Femi Olubosi (Chief Analyst)

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[jossytech]

A signal or Analysis
 

Elaborate more pls

[forexlogo]

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Though there are more to it...

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[masterT]

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[muwas2010]

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