21. MACD Indicator: Trade it Like a Pro (Part 2)
The second lesson of two on how to trade the moving average convergence divergence (MACD) for day traders and investors using technical analysis in the stock market, futures market, and forex market.
In addition to being able to tell if the stock, futures contract, or currency you are analyzing is trending or not from simply looking at its price action on the chart, you can also use the MACD indicator. Very simply if the MACD line is at or close to the zero line, this indicates that the financial instrument you are analyzing is not exhibiting strong trending characteristics, and thus should not be traded using the MACD. Example of Trending and Non Trending MarketsOnce it is determined that the financial instrument you are analyzing is exhibiting trending characteristics, there are three ways that you can trade the MACD.1. Positive and Negative Divergence2. The MACD/Signal Line Crossover3. The zero line crossoverTrading the MACD Divergence:
Divergence occurs when the direction of the MACD is not moving in the same direction of the financial instrument you are analyzing. This can be seen as an indication that the upward or downward momentum in the market is failing. Traders will thus look to trade the reversal of the trend and consider this signal particularly strong when the market is making a new high or low and the MACD is not.
22. How to Trade the Relative Strength Index (RSI) Like a Pro
A lesson on how to trade the RSI for traders and investors using
technical analysis in the stock market, futures market and forex market.
In our last lesson we looked at 3 different ways that the MACD
indicator can be traded. In today's lesson we are going to look at a
class of indicators which are known as Oscillators with a look at how to
trade one of the more popular Oscillators the Relative Strength Index
An oscillator is a leading technical indicator which
fluctuates above and below a center line and normally has upper and
lower bands which indicate overbought and oversold conditions in the
market (an exception to this would be the MACD which is an Oscillator as
well). One of the most popular Oscillators outside of the MACD which
we have already gone over is the Relative Strength Index (RSI) which is
where we will start our discussion.
The RSI is best described
as an indicator which represents the momentum in a particular financial
instrument as well as when it is reaching extreme levels to the upside
(referred to as overbought) or downside (referred to as oversold) and is
therefore due for a reversal. The indicator accomplishes this through a
formula which compares the size of recent gains for a particular
financial instrument to the size of recent losses, the results of which
are plotted as a line which fluctuates between 0 and 100. Bands are
then placed at 70 which is considered an extreme level to the upside,
and 30 which is considered an extreme level to the downside.
Example of the RSI :
The first and most popular way that
traders use the RSI is to identify and potentially trade overbought and
oversold areas in the market. Because of the way the RSI is constructed
a reading of 100 would indicate zero losses in the dataset that you are
analyzing, and a reading of zero would indicate zero gains, both of
which would be a very rare occurrence. As such James Wilder who
developed the indicator chose the levels of 70 to identify overbought
conditions and 30 to identify oversold conditions. When the RSI line
trades above the 70 line this is seen by traders as a sign the market is
becoming overextended to the upside. Conversely when the market trades
below the 30 line this is seen by traders as a sign that the market is
becoming over extended to the downside. As such traders will look for
opportunities to go long when the RSI is below 30 and opportunities to
go short when it is above 70. As with all indicators however this is
best done when other parts of a trader's analysis line up with the
Example of RSI Showing Overbought and Oversold :
second way that traders look to use the RSI is to look for divergences
between the RSI and the financial instrument that they are analyzing,
particularly when these divergences occur after overbought or oversold
conditions in the market. These divergences can act as a sign that a
move is loosing momentum and often occur before reversals in the market.
As such traders will watch for divergences as a potential opportunity
to trade a reversal in the stock, futures or forex markets or to enter
in the direction of a trend on a pullback.
Example of RSI Divergence :
third way that traders look to use the RSI is to identify bullish and
bearish changes in the market by watching the RSI line for when it
crosses above or below the center line. Although traders will not
normally look to trade the crossover it can be used as confirmation for
trades based on other methods.
The Stochastic Oscillator contains two lines which are plotted below the price chart and are known as the %K and %D lines. Like the RSI, the Stochastic is a banded oscillator so the %K and %D lines fluctuate between zero and 100, and has lines plotted at 20 and 80 which represent the high and low ends of the range.
24. The Difference Between the Fast, Slow and Full Stochastic
Answer to a question on what is the difference between the fast stochastic, slow stochastic and full stochastic
25. How to Trade Bollinger Bands - Stocks, Futures, Forex
A Lesson on Bollinger Bands for active traders and investors using
technical analysis in the forex, futures, and stock markets.
In our last lesson we learned about the Stochastic Oscillator and
how traders use this in their trading. In today's lesson we are going
to learn about an indicator which helps traders gauge the volatility and
how current prices compare to past prices.
Bollinger Bands are comprised of three bands which are referred to as
the upper band, the lower band, and the center band. The middle band is
a simple moving average which is normally set at 20 periods, and the
upper band and lower band represent chart points that are two standard
deviations away from that moving average.
Example of Bollinger Bands:
bands are designed to give traders a feel for what the volatility is in
the market and how high or low prices are relative to the recent past.
The basic premise of Bollinger bands is that price should normally fall
within two standard deviations (represented by the upper and lower
band) of the mean which is the center line moving average. If you are
unfamiliar with what a standard deviation is you can read about it here.
As this is the case trend reversals often occur near the upper and
lower bands. As the center line is a moving average which represents
the trend in the market, it will also frequently act as support or
resistance. The first way that traders use the indicator is to
identify potential overbought and oversold places in the market.
Although some traders will take a close outside the upper or lower bands
as buy and sell signals, John Bollinger who developed the indicator
recommends that this method should only be traded with the confirmation
of other indicators. Outside of the fact that most traders would
recommend confirming signals with more than one method, with Bollinger
bands prices which stay outside or remain close to the upper or lower
band can indicate a strong trend, a situation that you do not want to be
trading reversals in. For this reason selling at the upper band and
buying at the lower is a technique that is best served in range bound
So one of the first ways traders will use the ADX in their trading is as a confirmation of whether or not a financial instrument is trending, and to avoid choppy periods in the market where many find it harder to make money. In addition to a situation where the ADX line trending below 20, the developer of the indicator recommends not trading a trend based strategy when the ADX line is below both the +DI Line and the --DI Line.
The Parabolic SAR is an indicator that, like Bollinger bands is plotted on price, the general idea of which is to buy into up trends when the indicator is below price, and sell into downtrends when the indicator is above price. Once traders are in positions the indicator also assists in managing the position by providing guidance as to how one should trail their stop.
Why, When and How to Trade EUR USD
It's not gold, and it isn't Oil either. And while Stocks draw a lot of interest in the financial media and retirement planners, it's not stocks either. The most widely traded vehicle on the planet earth is the EUR/USD currency pairing. EUR/USD is the cross pair created from the exchange rate of the currency of the world's two largest economies. If a European country wants to make an investment in US Treasuries, they are likely going to need to make a trade in EURUSD first. Or likewise, if a US company wants to buy Greek bonds, they would need to first buy euros so that they can make the purchase. And to buy euros with their dollars, they need to go long on the euro-dollar. This massive liquidity can provide quite a few benefits.... Trading costs can be significantly lower; often a few hundredths of a cent between the buy and the sell prices. These price deviations are so small that they have their own name, commonly referred to as 'pips.' Throughout the day, prices move up and prices move down but the difference between the buy and the sell price functions like a commission on the trade. But all of this extra liquidity doesn't mean that the EUR/USD is any easier to trade than any of those other markets. Many of the same principals apply whether we're trading currencies or whether we're trading stocks or futures. Price movements can be unpredictable, and trading in any of these markets brings up a potential to lose money. As such, its often best to focus our trading activities in a manner that could be conducive to our long-term success.... So, on the euro-dollar - prices move 24 hours a day.... The market never closes. But the period of the day in which Europe is open before the United States, between 3:00AM-8:00AM can often be best for trading in this market. Once The United States opens, banks begin quoting prices across the Atlantic, and volatile price movements can increase, making it more difficult for retail traders to speculate EUR/USD. Don't feel like waking up at 4:00 AM? That's ok - most other traders feel the same way. In the forex market, we have a litany of tools that can allow you to trade in these markets without you needing to press the trigger for each and every buy and sell decision. We'll talk a little more about that in a moment... Volatility is something that needs to be expected in EUR/USD. With a representation of the world's 2 largest economies, EURUSD can often bring wild and extended price movements. This leads many traders to focus on trading what are called 'breakouts' in EUR/USD. A Breakout takes place when price makes a new intermediate-term high or low. This strategy employs an element of Newtonian logic in expecting things in motion to tend to stay in motion; and using the presumption that prices making new highs or lows will continue on to make further high or lows.
And if price doesn't go on to make higher highs or lower lows, a tight stop can be used so that the trader can exit the trade at a minimum of a loss. But, if prices can continue running, the potential reward could be huge relative to the amount of risk taken on.
28. How to Trade Candlestick Chart Formations Part 1
The first lesson in a series on how to trade candlestick chart patterns for traders of the futures, forex, and stock markets.
When thinking about this from a buyer/seller perspective, you can understand that the long body of the current candle engulfing completely the body of the previous candle to the upside is representative that the buyers have not only taken control but have taken control with force. When this white engulfing candle occurs after a small black candle the formation is given even more significance as the small black candle is already indicative of a trend that is running low on steam.
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