Moving Averages
Type: Trend Following
Best used: In combination
To start off, a simple
moving average shows the average value of price over a certain period of
time.
Moving averages is known or
commonly used to highlight the direction of a trend and smooth out price to
avoid
false breakouts, and noise.
The best way to utilize moving averages is by combining it with another
one.
For example, when the 50
day moving average crosses above the 200day moving average this is considered
a
“golden cross” the upward
momentum was confirmed once the short term moving average (50-day) crossed
above the longer term moving
average (200-day) When the opposite occurs and the 50 day moving average
crosses below the 200 day moving average
this is considered a death cross as the momentum in price action is declining.
Here are a few examples of
moving average crossovers.
EURUSD 50sma crosses below
the 200sma signaling a death cross. Price fell over 200 pips before closing
back
over the 50sma.
EURJPY 50sma crossed above
the 200sma indicating the trend is bullish with a golden cross. Price action
climbed
over 500 pips before
falling back below the 50sma
2 ) MACD
(Moving Average Convergence Divergence)
Type: Trend Strength/New Trend
Best Used: For confirmation with other indicators
The MACD is best used as a
confirmation indicator. What I mean by that is that it should be combined with other
indicators to maximize its
potential. The MACD has 3 main parameters, 12 (which represents the
previous 12 bars
of the faster moving
average) 26 (which represents the previous 26 bars of the moving average) and 9
(which
represents the previous 9
bars of the difference between the two moving averages, this is plotted as a
histogram.
In essence when the faster
moving average crosses above or below the slower moving average it indicated a
new
bullish or bearish
trend is forming. Sounds familiar? This is similar to our moving averages
crossovers that we
discussed previously. Now
to best use MACD is to look for a bullish or bearish crossover with the moving
averages,
once we confirm a crossover
we are looking to confirm the trend with a MACD crossover above or below the 0
line
with the histogram in favor
of our trend. Here are some examples of combining the two to make for a dual
threat.
After receiving a bearish
crossover with the moving averages we also received confirmation of the
downtrend after the MACD crossover to the
downside below the 0 line adding further strength to a short position.
AUDJPY shows an early MACD
bullish crossover hinting at the possibility of a new trend. Later we received
a
bullish crossover when the
50sma crossed above the 200sma. To confirm the uptrend the MACD gave us another
bullish crossover which
occurred above the 0 line.
3) RSI (Relative Strength
Index)
Type: Overbought/Oversold measurement
Best Used: Pick Tops/bottoms /Profit taking
The RSI is similar to that
of the Stochastic. It is a price following oscillator that ranges between 0 and
100. There are
3 main zones with the RSI
(Upper overbought zone ranging from 70%-100%, Lower oversold zone ranging from
0%-30% and middle or
neutral zone ranging from 30%-70%. We can help use these zones to pick up
potential tops
and bottoms depending on
the market being in an overbought or oversold position. Along with
determining tops and
bottoms the RSI can also be
used to locate and confirm a trend. Here are a few examples on how to use the
RSI.
EURUSD shows price dropping
impulsive manner causing the RSI to dip below 30 signaling that there might be
no
more sellers left in the
market and the impulsive move could be over. Price action then reversed and
headed towards its bullish direction. This happen twice showing the
effectiveness of the indicator.
After GBPUSD made a new
high it also showed the RSI in overbought territory indicating the possibility
of a decline. We received the decline in price action in conjunction with a
bearish trend line keeping sellers in the trade as price
dropped over 500pips
4) Bollinger Band
Type: Measures Volatility
Best used: When Market Consolidates and breakouts
Bollinger bands consist of
an upper band, middle band, and lower band. When the Bollinger bands tighten
and
contract the pair is
trading under low volality and when it expands there is a great deal of money
being pumped into
the pair. Bollinger
bands differ in the way you can use them in your trading plan here are a few
examples on how to
trade with Bollinger bands.
BOLLINGER BOUNCE
Traders can look to buy and
sell at the top and bottom Bollinger bands. This method is most effective when
the
market lacks a trend. Look
for the wick of a candle to bounce off one of the Bollinger bands.
BOLLINGER SQUEEZE
Once we see bands squeeze
together we look for a breakout with an impulsive candle. Price broke above the
top
band and continued climbing
to the upside giving traders a chance to catch the trade as early as
possible.
5) Parabolic SAR
Type: Identify end of Trend
Best Used: Exit Strategy/Stop Loss
Parabolic SAR is a simple
tool to use, when the dots are below the candle it is considered a buy signal
and when
the dots are above the
candle it is a sell signal. It is best to combine the Parabolic SAR with
another indicator and
avoid using it during a choppy
market. The indicator is best used when the market is trending.
5) Parabolic SAR
Type: Identify end of Trend
Best Used: Exit Strategy/Stop Loss
Parabolic SAR is a simple
tool to use, when the dots are below the candle it is considered a buy signal
and when
the dots are above the
candle it is a sell signal. It is best to combine the Parabolic SAR with
another indicator and
avoid using it during a choppy
market. The indicator is best used when the market is trending.
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