Reading the Market Action: How to use technical Tools
2.Range Indicators
Range patterns reflect market phases where traders are unsure about the eventual direction of the price. Sometimes the news flow does not provide sufficient information to break an existing equilibrium in either direction, sometimes there is ample news, but it can be interpreted in different ways, and is of no decisive value. At other times, market liquidity is insufficient for sustaining a long-term breakout from boundaries established by stronger players (such as central banks). These, and any combination of them, along with many other possible conditions may lead to the creation of a range pattern requiring specific techniques and tools for successful exploitation.
It is generally thought that trading ranges is easier than trading trends. We argue that neither is very easy unless the trader has a clear idea on what causes a prevailing trend or range pattern to exist. Nonetheless, since the behavior of a range pattern around the boundaries (the tops and bottoms), is predictable, ranges constitute more beginner-friendly patterns. It is possible, on the other hand, that a range pattern that eventually proves solid against fluctuations will also present such a high level of volatility around the boundaries that it will be very difficult to trade it. Thus, measures of volatility, and an eye for the fundamental causes behind price movements often make trading choices much easier in range trading.
Triangles, and similar Patterns
Triangles can be encountered in any kind of market. They are frequently observed in trends as continuation patterns, but they also exist on smaller time frames as part of large scale ranges (such as hourly formations on a daily range pattern.) The advantage of triangles for range trading strategies is their predictability. A triangle will live through its lifetime and eventually breakdown in either direction, and will in the mean time provide ample opportunities for trading. The disadvantage lies in the difficulty of recognizing and exploiting them in a timely fashion. Towards this purpose, it is in general recognized that each side of a triangle should be touched by the price action for at least five times, but since this is a very arbitrary criterion, many tradeable formations exist that do not obey it as a rule.
Among triangles, the most fickle kind is the symmetrical triangle, while the descending or ascending triangles are only slightly more decisive with respect to the eventual breakout. They are traded most effectively during their development phases, without any strong assumptions about the direction of the breakout. Flags, and pennants are patterns that are generally reliable,and can be classified with triangles, but because they are difficult to recognize, and even harder to trade manually, they are not the source of a large number of trading strategies. Traders who prefer these patterns would do well to try auto-trading methods.
Oscillators
The most popular indicator class for trading ranges is undoubtedly the oscillator. Stochastics, RSI, Parabolic SAR are just three of the many tools created by traders over the years for use in ranging markets. Assuming the range pattern is well-formed, in the sense that its boundaries are easily recognized and strongly defended by a large cluster of preferably insitutional orders, ranges can be traded with great ease by the use of oscillators. All that the trader needs to do is identifying oversold/overbought levels that are registered by the indicator close to the range boundaries, and taking a counter-trend position within the range. Losses in most cases will be limited, since if the price fails to act in accordance with expectations and breaks out in either direction, it is very easy to recognize that the trade has failed. On the other hand, it is equally easy to cash out and take a profit on the basis of different strategies depending on the nature and momentum of the price action, provided that it remains within the range boundaries.
Oscillators depend on varying methods of calculation, but the vast majority are used according to the simple principle of selling at overbought levels, and buying at oversold values. The preference is to identify a signal when either of these levels are reached, and then taking a corresponding position when the price action reverses direction as anticipated.
3.Reversal Patterns
Reversals are difficult to identify in trending markets, but easy to notice in ranges. The reason is that in a trend prices tend to create bubbles, which then go on to reach fantastic values even as the price goes through reversal patterns one after the other. Eventually, the gently sloping price movement will spike up as part of a general logarithmic curve, and in this phase predicting reversals is not a very profitable activity.
A descending triangle in an uptrend, and an ascending triangle in an downtrend are generally thought to signify eventual reversals, howewer, since triangles always signal lack of decision, these guidelines should only be taken as hints, and never as a general rule that can be applied blindly to any trading scenario.
Head and Shoulders Patterns
The head shoulders pattern is one of the most common reversal patterns. As its name implies, the pattern looks like a head and two shoulders either side of it, like a mountain chain with a lofty middle section. This pattern generally arises at the end of an uptrend, signalling that the bulls are unable to break through a certain resistance level, even as they manage a false breakout as a breach of the middle section is achieved for some short time. The mirror image of this pattern, the reverse head and shoulders, occurs at the end of downtrends in the same role. Sellers attempt to break through a certain support level three times, and achieve a fake breach in the second attempt, but eventually give up and hand over control to bulls, or just to profit taking.
Head and shoulders patterns are common, and do not constitute strong signals in the absence of confirmation from other channels.
Conclusions
The best results in technical trading are acquired when intricate planning of details is combined with a strong understanding of the overall strategy, and complemented by solid money management methods. That kind of skill is only gained through frequent practice. As with mathematics, one cannot be a spectator and claim to learn how to trade. Patient practice with careful application of risk controls will in time lead to the acquisition of trading intuition that is the basis of all kinds of successful trading methods.
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Reading the Market Action: How to use technical Tools
Article written by http://www.forextraders.com
Many beginners choose to jump into trading right away after learning a little a bit about a handful of indicators. But the truth of the matter is that no indicator in itself is enough to trade any price pattern. The key to profitable technical trading is combining the various technical tools in an overall plan, without obscuring the underlying price action too much by so-called overanalysis. To be able to achieve this aim, traders must first acquire a good understanding of indicator classes, and their relationship with different price patterns, before it is possible to exploit them in individual trading scenarios that arise during the day. In this article we perform an introductory study with the aim of uncovering these relationships.
1. Trend Indicators
The main trend indicators are trend lines, moving averages, and sometimes channels. Although a large number of tools can be used in general to analyze trends and determine entry/exit points, the simple toolbox consisting of trend lines and moving averages will do the job well in most cases.
Trend lines represent the shifting of support resistance levels with the passage of time. In other words, as new information becomes available to traders, they move their stop losses, and take-profit orders to different levels which are captured by the use of trend lines. Moving averages are in general more accurate than trend lines because they incorporate actual price data in the calculation of the indicator value, instead of the arbitrary choices that are determine the levels of a hand-drawn trend line. The problem with moving averages is their lagged nature. It takes a while before a moving average will emit the necesary trade signals recognizing a potential trade. Oscillators are rarely of much use in trading trends. Nonetheless some, such as the MACD are highly popular with traders.
Moving Averages
Moving averages compute the artihmetic average of the price action over a specified time period. The simple MAs add prices together (often the closing prices), without any weighting or other modification. Other kinds, such as the exponential MA, add a weighting factor to the computation, emphasizing various phases of the price action under examination according to the vision of the designer. They are valuable as trend indicators because they can define trends in a much less arbitrary way than typical trend lines. Longer term MAs with a period of 100, or even 200, can be exceptionally useful for capturing trend changes, and major directional shifts in the market action. They also provide excellent choices of entry/exit points, especially on strong, well-established trend patterns.
The main problem with them is their lagged nature. MAs can be too late in capturing a trend, and trading highly volatile patterns with them can lead to whipsaws.
Oscillators
One can use any kind of oscillator to trade trends, but since their use often implies some kind of top or bottom-catching, optimal trading strategies will aim to limit their use as much as possible. The difference between using an oscillator in a trending market and using one in a range pattern lies in the identification of oversold/overbought values and the determination of indicator periods. For example, a range trader may be content with using the RSI as an oversold indicator whenever it falls below 30, while a trend trader will only consider an oversold value tradeable after the indicator has remained below 20 for, let`s say, a whole week, before he will initiate a trade on the same basis. Since oversold/ overbought values are very fluid and blurry in trending markets, traders must discard any short term signals in favor of longer lasting, stronger price movements so as to avoid whipsaws and false signals.
Common oscillators favored by trend followers include the MACD, Commodity Channel Index, and Williams Percent Range Oscillators.