XTRADE ACADEMY COURSE: Technical Indicators

Transcription

1 XTRADE ACADEMY COURSE: Technical Indicators

2 The contents of this course are 100% copyright to xtradeacademy.com Copying or redistributing of this document in any way is not allowed

3 Introduction to Trading Table of Contents 1. Why use technical indicators? 2. ATR Average True Range 3. Bollinger Bands 4. MACD Moving Averages Convergence/Divergence 5. Moving Averages 6. Simple Moving Average (SMA) vs. Exponential Moving Average (EMA) 7. RSI Relative Strength Index 8. Fibonacci Based Trading 9. Technical Indicator Traps

4 Why Use Technical Indicators! Technical analysis is concerned only with price! Technical analysis is grounded in the use and analysis of graphs/charts! Based on several key assumptions: " Price action incorporates all information " Prices move in trends or consistent patterns " History repeats itself the market has a memory! We use technical indicators to identify past activity and therefore predict future trends! At any given time, all currency pairs will be trading at a certain price. The question is, how did the pair get to this price?! The logic behind technical trading using indicators is that if the technical indicators picked up the previous patterns or trends, then using the same indicators will pick up future trends, thereby predicting future price moves.! Essentially, as a trader you will need to learn how to use indicators to understand price movement. That way, you can easily know what a good trade looks like and when to take it, just by looking at a chart.! There are literally hundreds of different technical indicators. There is no right or wrong indicator and more importantly, no one indicator will work all the time. So each trader must find the indicator, which suits his or her own trading style and personality.! It is important to use an indicator that you understand and is logical and makes sense to you. This will help you to understand why you re using it and to stick with it rather than trying to keep using new ones each time you have a losing trade.! In this course we will cover some of the more popular indicators and give you definitions and explanations of how they work. However, bear in mind that this is theoretical and the best way to learn and understand the indicators is to use them on live charts and see for yourself if you feel comfortable using them. There is nothing wrong with using more than one indicator, but don t overdo it, as they will start to contradict each other.! A great way to apply these indicators is to use the charts on xtrade.com and try each indicator as you read about it (the top of each chart has an indicator button where you can click to apply each technical tool we discuss below. Notes Why use technical indicators

5 Notes Why use technical indicators

6 ATR Average True Range! This popular indicator tells us the range of price over a certain time period.! It is always good to have an average so that you know the expected range for future candlesticks.! The standard number of candles used is 14. So, when applying ATR you will be seeing the average range how high and low the price reached over the past 14 periods.! If applying ATR to a 5 min chart, you would be discovering the average range over past fourteen 5 min candles. I applying to an hour chart would be the average range over the past 14 hours.! A great benefit of ATR is when placing a stop-loss and take-profit. This is because rather than gambling, or having to sit and watch your trade at all times, you can use ATR to know the highest likely price your instrument will reach (this is a good price to set as your take-profit if you chose to buy an instrument). Conversely, the lowest likely price will be revealed, which is a good place to set your stop-loss (in a buy situation). The opposite would be true, (low take-profit and high stop-loss) if you choose to sell.! Having a stop-loss and take-profit is an excellent way to trade smart and avoid taking a gamble rather than taking a trade. Notes ATR Average True Range

7 Notes ATR Average True Range

8 Bollinger Bands! This is a great indicator for a trader who likes to see a pattern in a very blatant and graphic way. This indicator shows it s method clearly when displayed on the chart.! The calculation includes two standard deviations, which imply that 90% of price movement should be contained within the two bands. The bands self adjust to changing market conditions and are plotted at two standard deviations above and below the moving average.! The two most common ways to use Bollinger bands are: 1. Breakouts 2. Overbought/Oversold! Most traders use this indicator to show when an instrument has been overbought or oversold. When the candles touch and break above the top of the band, graphically, it means the buyers have pushed the price too high and they have overbought and sellers should now step in. It wouldn t be a good time to buy as you would be getting in at the top and even f the buying does continue, one would expect a retracement or sell-off before the buying continues.! The opposite would apply if the candles overshot the bottom of the band, thereby showing that the sellers had oversold the market and buyers would look to step in.! The logic is that price activity should be within the bands.! Essentially, traders will want to sell when candles are at the extreme top, or buy when candles are at extreme lows. Long term traders using Bollinger bands would want to see the price continue to hug the band showing that the trend is still intact.! Breakout traders would look for sideways activity, which would keep the price/candles close to the middle band the median line watching for a breakout towards either of the outer bands.

9 Notes Bollinger Bands

10 MACD - Moving Averages Convergence/Divergence! This is a momentum indicator used to confirm trends, while it also indicates reversal or overbought/oversold conditions! The MACD is calculated by taking the difference between two exponential moving averages: 26 and 12! There are 2 different ways to use MACDs: 1. Crossovers 2. Overbought/Oversold 3. Divergences! Again, this indicator can be used in a number of different ways. We believe the best use is to signal when an existing trend is coming to an end and a new reversal (new direction) is developing.

11 Notes MACD - Moving Averages Convergence/Divergence

12 Moving Averages! Moving Averages is a lagging indicator that is probably the single most used technical indicator for a number of reasons: It is logical, easy to apply and most important, easy to understand.! The basic premise is that we measure different prices from the past, average out the price, and compare the average past price with the current live price.! So, if we are on an hour chart and we put in a parameter of 10 into the MA it will mean that we are looking at the average price over the past 10 hours. If we are on a 5min chart and put in a 10, it will give us the average price over the past 10, 5mins, therefore the average price over the past 50 mins.! One way to use Moving Averages is Entry Points/Exit Points When the candle crosses the line. - Single moving average (above = buy; below = sell) - Crossover moving averages (leading indicator crosses lagging indicator) - When using two moving averages, shorter and longer, the crossover is the signal that the previous trend has ended and new/opposite trend is starting. The shorter time-frame leads the way and gives us the direction. E.g. if using 10 and 20 as our Mas, then when the 10 line crosses above the 20 line we buy, when 10 crosses below we sell.! The second way to use Moving Averages is to determine Support or Resistance Levels - There will be a correlation between the moving average perimeter and the volatility/noise

13 Notes Moving Averages

14 Simple Moving Average (SMA) vs. Exponential Moving Average (EMA)! SMA = Simple Moving Average! With a simple moving average each period carries the same importance! EMA = Exponential Moving Average! With EMA, more relevance is put on the more recent data! Which to use will depend on your trading style and risk tolerance! Using EMA means you can pick up on a price movement quickly as it is happening and act on an immediate price movement. EMAs will pick up recent data with relevance on the more current price.! However, some traders prefer to know a true average over a period rather than emphasizing the current price, thus an SMA would be their moving average of choice.! SMAs are slower to respond to price action. They give a smooth price as it is averaged over a number of candles evenly.! Try each type with your trading strategy and see which works best for you.! Don t forget that the average is always relevant to the time frame you are using. Meaning that using a parameter of 10 on an hourly chart will give us the average price over the past 10 hours. On a 5 minute chart it would be the average of the past 10 candlesticks (50 minutes).

15 Notes SMA vs. EMA

16 RSI Relative Strength Index! Commonly known as RSI, this indicator is calculated by comparing a currency pair s current performance against its past performance! It measures the strength or momentum of a currency pair! The scale is Any number above 70 is considered overbought and any number below 30 is considered oversold! There are two reasons to use RSI: 1. Identify extreme conditions 2. Indicate divergence! Like Bollinger bands, this indicator signals when a pair is overbought or oversold using numbers to signal the extremes

17 Notes RSI Relative Strength Index

18 Fibonacci Based Trading! This technique is based on a unique series of numbers: 38.2%, 50%, and 61.8%! Leonardo Pisano Fibonacci found that this series of numbers held an inexplicable mathematical relationship and are continually evident in nature! In relation to trading, after a significant trend and the rate retraces, it tends to find resistance/support at 38.2%, 50% and 61.8% of the proceeding move! There are 2 methods to use Fibonacci Based Trading: 1. Entry and exit points 2. Stop loss and entry! This indicator is a little different than the other indicators because it is forward looking.! When a trend turns we are faced with is the turnaround a natural retracement or a breather before the original trend will continue? Or is the retracement going to continue and reverse the original trend?! We expect the price to get held up at these 3 levels and then turn and travel in the original trend direction = retracement! If the price breaks through these levels, it signals that the original trend has been reversed.

19 Notes Fibonacci Based Trading

20 Technical Indicator Traps! Don t fall victim to these technical indicator traps:! Holy Grail Syndrome - No single indicator works all the time! Paralysis Through Analysis Too many signals will be contradictory. Each indicator is relevant to its own time frame! Technical indicators are not meant to tell us what to do, rather, they are intended to tell us when to act or what to watch for.! Learning how to use each one means knowing what action to take. For example: Opening or closing a trade, placing a stop loss or take profit, etc.

21 Notes Technical Indicator Traps