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TECHNICAL ANALYSIS

Technical Analysis is the analysis of the movement of prices, volumes and open interests – using historical data – based on the study of past behavior of currency, indices and commodities markets.

What is Technical Analysis

Technical analysis is the framework in which traders study price movement.
The theory is that a person can look at historical price movements and determine the current tradin g conditio ns and potential price move ment.
The main e vidence for using technical analysis is that, theoretically, all current marke t informa tion is reflected in price. If price reflects all the information that is out there, the n price action is all one would really need to ma ke a trade.
Now, have you ever heard the old adage, "History tends to repeat itself"?
Well, tha t's basically wha t technical analysis is all about! If a price level held as a key support or resistance in the past, traders will keep an eye out for it and base their trades around that historical price level.
Technical analysts look for similar patterns that have formed in the past, and will form trade ideas believing that price will act the same way tha t it did before.
In the world of tr ading, whe n someone says technical a nalysis, the first thing that comes to mind is a chart. Technical a nalysts use charts because they are the easiest way to visualize historical data!
You ca n loo k at past data to help you spot tre nds and patterns which co uld he lp yo u find some great trading opportunities.
What's more is tha t with all the traders who rely o n technical a nalysis out there, these price patterns and indicator signals tend to become self - fulfilling.
As more and more traders look for certain pric e levels a nd chart patter ns, the more likely that these patterns will manifest themselves in the markets.

Technical Indicators

Stochastic Oscillator
This is used to indicate overbought/oversold conditio ns on a scale 0 - 100%. The indicator is based on the o bservation that in a b up trend, closing prices for periods tend to concentrate in the higher part of the period's range. Conversely, as prices fall in a b down trend, closing prices tend to be near to the extreme low of the period range.
Stochastic calcul atio ns produce two lines, %K and %D which are used to indicate overbought/oversold areas of a chart. Divergence between the stochastic lines and the price action of the underlying ins trume nt gives a powerful trading signal.
Moving Average Convergence Diver gence (MACD)
This indicator involves plotting two mome ntum lines. T he MACD line is the differe nce between two expone ntial moving averages and the signal or trigger line which is an exponential mo ving average of the difference. If the MACD and trigger lines cross, then this is take n as a signal tha t a change in tre nd is likely.
Fibonacci numbers
The Fibonacci number sequence (1,1,2,3,5,8,13,21,34.....) is constructed by adding the first two numbers to arrive at the third. The ratio of any number to the next la rger number is 62%, which is a popular Fibonacci retracement number. The inverse of 62%, which is 38%, is also used as a Fibonacci retraceme nt number. (used with the Elliott wave theory, see hereunder)
Moving Averages
One of the most basic and wide ly used indicators in a technical analyst's tool box, moving averages help traders verify existing trends, identify emerging trends, and view overexte nded trends about to reverse. Moving averages are lines overlaid on a chart indicating lo ng term price trends wit h short term fluctuatio ns smoothed out. There are three basic types of moving averages:

  • Simple
  • Weighted
  • Exponential

A simple moving average gives equal weight to each price point over the specified period. The user defines whether the high, low, or close is used and these price points are added together and averaged. This average price point is then added to the existing string and a line is formed. With the addition of each new price point the sample set drops off the oldest point. The simple moving average is probably the most widely used moving average.
A weighted moving average gives more emphasis to the latest data. A weighted moving average multiplies each data point by a weighting factor which differs from day to day. These figures are added and divided by the sum of the weighting factors. A weighted moving average allows the user to successfully smooth out a curve while having the average more responsive to current price changes.
An exponential moving average is another way of "weighting" the more recent data. An exponential moving average multiplies a percentage of the most recent price by the previous period's average price. Defining the optimum moving average for a particular currency pair involves "curve fitting". Curve fitting is the process of selecting the right number of periods with the correct type of moving average to produce the results the user is trying to achieve. By trial and error, technicians work with the time periods to fit the price data. Because the moving average is constantly changing based on the latest market data, many traders will use different "specified" time frames before they come up with a series of moving averages that are optimal for a particular currency. For example, a trader might create a 5-day, a 15-day and a 30-day moving average for a currency and then plot them on his or her price chart. He might start out using simple moving averages and end up using weighted moving averages. In creating these moving averages, traders need to decide on the exact price data that will be used in this study; meaning closing prices vs. opening prices vs. high/low/close etc. After doing so, a series of lines are created that reflect the 5 -day, 15-day and 30-day moving average of a currency. Once the data is layered over a price chart, traders can determine how well these chosen periods keep track of the trend being followed. If, for example, a market is trending higher, you'd expect the 30-day moving average to be a very accurate trend line, providing a line of support for prices on their way higher. If prices seem too close under this 30-day moving average on several occasions without resulting in a halt in the up trend, a trader will simply adjust the time period to say a 45-day or 60-day moving average in order to optimize the average. In this way, the moving average will act as a trend line. After determining the optimum moving average for a currency, this average price line can be used as a line of support in maintaining a long position or resistance in maintaining a short position. Breaches of this line can also be used as a signal that a currency is in the process of reversing course, in which case a trader will want to pare back an existing position or come up with entry levels for a new position. For example, if you determine that a 30-day moving average has shown itself to be a good support line for USD-JPY in an upward trending market, then market closes under this 30-day moving average line could be a signal that this trend could be running out of steam. However, it is important to wait for confirmation of these signals. One way to do this is to wait for another close below the level. On the second close under the average, you should begin to pare down your position. Another confirmation involves using other, shorter term moving averages. While a longer term moving average can help to define and support a particular trend, shorter term moving averages can provide lead signals that a trend is ending before prices dip below your longer term moving average line. For this reason, most traders will plot several moving averages on the same char t. In a market that is trending higher, a shorter term moving average might signal a market reversal by turning down and crossing over the longer term moving average. For example, if you are using a 15-day and a 45-day moving average in a market that is in an up trend, and the 15-day moving average turns down and crosses over the 45-day moving average, this could be an early signal that the up trend is ending and it is probably time to begin to pare down your position.
Stochastics
Stochastic studies, or oscillators, are another useful tool for monitoring the expected sustainability of a trend. They provide a trader with information about the closing price in the current trading period relative to the prior performance of the instrument being analyzed.
Stochastics are measured and represented by two different lines, %K and %D and are plotted on a scale ranging from 0 to 100. Indications above 80 represent strong upward movement while level indications below 20 represent strong downward movements. The mathemat ics behind the studies are not as important as knowing what the stochastics are telling you. The %K line is the faster, more sensitive indicator while the %D line takes more time to turn. When the %K line crosses over the %D line, this could be an indication that a market is about to reverse course. Stochastic studies are not useful in choppy, sideways markets. At times when prices are fluctuating in a narrow range, the %K and %D lines might be crossing many different times and will be telling you nothing more than the market is moving sideways. Stochastics are most useful in measuring the strength of a trend and as augurs of a coming reversal in prices. When prices are making new highs or lows and your stochastics are doing the same, you can be reasonably certain that the trend will continue. On the other hand, many traders finds that the best trading opportunity comes when their stochastic indicator is flattening out or moving in the opposite direction of prices. When these divergences occur, it's time to book profits and/or to establish a position in the opposite direction of the prior trend. As should always be the case when using any technical tool, do not act on the first signal you see. Wait at least one or two trading sessions for confirmation of what the study is indicating before you commit to a position.

Relative Strength Index (RSI)

RSI measures the momentum of price movements. It is also plotted on a scale ranging from 0 to 100. Traders will tend to look at RSI readings over 80 as an indicator of a market that is overbought or susceptible to a downturn, and readings under 20 as a market that is oversold or ready to turn higher. This logic therefore implies that prices cannot rise or fall forever and that by using an RSI study, one can determine with a reasonable degree of certainty when a reversal will come about. However, be very wary of trading on RSI studies alone. In many instances, an RSI can remain at very lofty or sunken levels for quite a while without prices reversing course. At these times, the RSI is simply telling you that a market is quite strong or quite weak and shows no signs of changing course. RSI studies can be adjusted to whatever time sensitivity a trader feels necessary for his or her particular style. For instance, a 5-day RSI will be very sensitive and will tend to give many more signals, not all of them sustainable, than say a 21-day RSI, which will tend to be less choppy. As with other studies, try a variety of time periods for the currency that you are trading based on your trading style. Longer term, position type traders, will tend to find that shorter time frames used for an RSI (or any other study for that matter) will give too many signals and will result in over-trading. On the other hand, shorter time frames will probably be ideal for day-traders trying to capture many shorter-term price fluctuations. As with stochastics, look for divergences between prices and the RSI. If your RSI turns up in a slumping market or turns down during a bull run, this could be a good indication that a reversal is just around the corner. Wait for confirmation before you act on divergent indications from your RSI studies.
Bollinger Bands
Bollinger Bands are volatility curves used to identify extreme highs or lows in relation to price. Bollinger Bands establish trading parameters, or bands, based on the moving average of a particular instrument and a set number of standard deviations around this moving average.
For example, a trader might decide to use a 10-day moving average and 2 standard deviations to establish Bollinger Bands for a given currency. After doing so, a chart w ill appear with price bars capped by an upper boundary line based on price levels 2 standard deviations higher than the 10-day moving average and supported by a lower boundary line based on 2 standard deviations lower than the 10-day moving average. In the middle of these two boundary lines will be another line running somewhat close to the middle area depicting in this case, the 10-day moving average. Both the moving average and the number of standard deviations can be altered to best suit a particular currency.
Jon Bollinger, creator of Bollinger Bands recommends using a simple 20-day moving average and 2 standard deviations. Because standard deviation is a measure of volatility, Bollinger Bands are dynamic indicators that adjust themselves (widen and contract) based on the current levels of volatility in the market being studied. When prices hit the upper or lower boundaries of a given set of Bollinger Bands, this is not necessarily an indication of an imminent reversal in a trend. It simply means that prices have moved to the upper limits of the established parameters. Therefore, traders should use another study in conjunction with Bollinger Bands to help them determine the strength of a trend.
Fibonacci Retracements
Fibonacci retracement levels are a sequence of numbers discovered by the noted mathematician Leonardo da Pisa during the twelfth century. These numbers describe cycles found throughout nature and when applied to technical analysis can be used to find pullbacks in the currency market.
Fibonacci retracement involves anticipating changes in trends as prices near the lines created by the Fibonacci studies. After a significant price move (either up or down), prices will often retrace a significant portion (if not all) of the original move. As prices retrace, support and resistance levels often occur at or near the Fibonacci Retracement levels.In the currency markets, the commonly used sequence of ratios is 23.6 %, 38.2%, 50% and 61.8%. Fibonacci retracement levels can ea sily be displayed by connecting a trend line from a perceived high point to a perceived low point. By taking the difference between the high and low, the user can apply the % ratios to achieve the desired pullbacks.
One final word of adviceDon't get too caught up in the mathematics involved in putting together each study. It is much more important to understand how and why studies can and should be manipulated based on the time periods and sensitivities that you determine are ideal for the currency you are trading. These ideal levels can only be determined after applying several different parameters to each study until the charts and studies begin to reveal the "details behind the details."
What is the Parabolic SAR Indicator?
The Parabolic SAR is considered as one of the most useful technical indicators today because it is easy to interpret. Also known as the “stop and reversal” system, the Parabolic SAR is commonly used to determine the momentum of a currency pair of forex rates as well as the point in time when this momentum has a higher chance of reversing.
Just like Stochastics and the RSI, Parabolic SAR (Stop and Reversal) is used to determine the end of a trend. Unlike the other 2 indicators, the Parabolic SAR is not an oscillator. Instead, it places points above or below the prices on a currency pair’s chart. The positioning of the dots is used to generate trading signals. For example, if the dots are placed below the prices on the chart, then this means that traders are expecting the trend to continue in an upward direction. This is referred to as the bullish signal. On the other hand, a bearish signal is created when the dots are placed above the prices which mean that momentum is expected to continue downward.
How is the Parabolic SAR used in trading?
When the current high price has broken above the previous high, then the trader can enter a position. At this point, the SAR is placed at the latest low price. As the value of the currency increases, the dots rise as well, slowly at first and then start to gather speed as the trend progresses. As the SAR develops and accelerates, it will soon catch up with the price action. When the price breaks below the nearest dot, then a reversal can be expected. This is also considered as the sell signal and is a good position where stops can be placed. This way, many traders have been registered paper profits while those who short their positions can determine how long they can cover their short positions.
The advantages and disadvantages of using the Parabolic SAR Unlike the other indicators, the SAR is mechanical and will always assume that the trader has entered a position. It helps traders to respond to changing conditions without succumbing to human emotions. Hence, it is best used by individuals who have already developed a trading system and who wish to have money at work in the market.
On the other hand, the biggest disadvantage of the Parabolic SAR is that it can generate many false signals is price action is moving sideways or if the market is really volatile. Hence it must be used as a complement to other trading indictors such as stochastics and moving averages.

Charts

Types of Charts
Let's take a look at the three most popular types of charts:
1.Linechart
2.Barchart
3.Candlestick chart
Now, we'll explain each of the charts, and let you know what you should know about each of them.
Line Charts
A simple line chart draws a line from one closing price to the next closing price. When strung together with a line, we can see the general price movement of a currency pair over a period of time.
Here is an example of a line chart for EUR/USD:

chart

Bar Charts
A bar chart is a little more complex. It shows the opening and closing prices, as well as the highs and lows. The bottom of the vertical bar indicates the lowest traded price for that time period, while the top of the bar indicates the highest price paid.
The vertical bar itself indicates the currency pair's trading range as a whole.
The horizontal hash on the left side of the bar is the opening price, and the right-side horizontal hash is the closing price.
Here is an example of a bar chart for EUR/USD:

chart

Take note, throughout our lessons, you will see the word "bar" in reference to a single piece of data on a chart.
A bar is simply one segment of time, whether it is one day, one week, or one hour. When you see the word 'bar' going forward, be sure to understand what time frame it is referencing.
Bar charts are also called "OHLC" charts, because they indicate the Open, the High, the Low, and the Close for that particular currency. Here's an example of a price bar:

chart

Open: The little horizontal line on the left is the opening price
High: The top of the vertical line defines the highest price of the time period
Low: The bottom of the vertical line defines the lowest price of the time period
Close: The little horizontal line on the right is the closing price
Candlesticks Charts
Candlestick chart show the same information as a bar chart, but in a prettier, graphic format.
Candlestick bars still indicate the high-to-low range with a vertical line.
However, in candlestick charting, the larger block (or body) in the middle indicates the range between the opening and closing prices. Traditionally, if the block in the middle is filled or colored in, then the currency closed lower than it opened.
In the following example, the 'filled color' is black. For our 'filled' blocks, the top of the block is the opening price, and the bottom of the block is the closing price. If the closing price is higher than the opening price, then the block in the middle will be "white" or hollow or unfilled.

chart

Here at BabyPips.com, we don't like to use the traditional black and white candlesticks. They just look so unappealing. And since we spend so much time looking at charts, we feel it's easier to look at a chart that's colored.
A color television is much better than a black and white television, so why not splash some color in those candlestick charts?
We simply substituted green instead of white, and red instead of black. This means that if the price closed higher than it opened, the candlestick would be green.
If the price closed lower than it opened, the candlestick would be red.
In our later lessons, you will see how using green and red candles will allow you to "see" things on the charts much faster, such as uptrend/downtrends and possible reversal points.
For now, just remember that we use red and green candlesticks instead of black and white and we will be using these colors from now on.
Check out these candlesticks...BabyPips.com style! Awww yeeaaah! You know you like that!

chart

Here is an example of a candlestick chart for EUR/USD. Isn't it pretty?

chart

The purpose of candlestick charting is strictly to serve as a visual aid, since the exact same information appears on an OHLC bar chart. The advantages of candlestick charting are:

  • Candlesticks are easy to interpret, and are a good place for beginners to start figuring out chart analysis.
  • Candlesticks are easy to use! Your eyes adapt almost immediately to the information in the bar notation. Plus, research shows that visuals help in studying, it might help with trading as well!
  • Candlesticks and candlestick patterns have cool names such as the shooting star, which helps you to remember what the pattern means.
  • Candlesticks are good at identifying marketing turning points - reversals from an uptrend to a downtrend or a downtrend to an uptrend. You will learn more about this later. Now that you know why candlesticks are so cool, it's time to let you know that we will be using candlestick charts for most, if not all of chart examples on this site.

Support & Resistance

Support and resistance is one of the most widely used concepts in trading. Strangely enough, everyone seems to have their own idea on how you should measure support and resistance.
Let's take a look at the basics first.

chart

Look at the diagram above. As you can see, this zigzag pattern is making its way up (bull market). When the market moves up and then pulls back, the highest point reached before it pulled back is now resistance.
As the market continues up again, the lowest point reached before it started back is now support. In this way resistance and support are continually formed as the market oscillates over time. The reverse is true for the downtrend.
Plotting Support and Resistance
One thing to remember is that support and resistance levels are not exact numbers. Often times you will see a support or resistance level that appears broken, but soon after find out that the market was just testing it. With candlestick charts, these "tests" of support and resistance are usually represented by the candlestick shadows.
Notice how the shadows of the candles tested the 1.4700 support level. At those times it seemed like the market was "breaking" support. In hindsight we can see that the market was merely testing that level.

chart

So how do we truly know if support and resistance was broken?
There is no definite answer to this question. Some argue that a support or resistance level is broken if the market can actually close past that level. However, you will find that this is not always the case.
Let's take our same example from above and see what happened when the price actually closed past the 1.4700 support level.

chart

In this case, price had closed below the 1.4700 support level but ended up rising back up a bove it.
If you had believed that this was a real breakout and sold this pair, you would've been seriously hurtin'!
Looking at the chart now, you can visually see and come to the conclusion that the support was not actually broken; it is still very much intact and now even stronger.
To help you filter out these false breakouts, you should think of support and resistance more of as "zones" rather than concrete numbers.
One way to help you find these zones is to plot support and resistance on a line chart rather than a candlestick chart. The reason is that line charts only show you the closing price while candlesticks add the extreme highs and lows to the picture.
These highs and lows can be misleading because often times they are just the "knee -jerk" reactions of the market. It's like when someone is doing something really strange, but when asked about it, he or she simply replies, "Sorry, it's just a reflex."
When plotting support and resistance, you don't want the reflexes of the market. You only want to plot its intentional movements.
Looking at the line chart, you want to plot your support and resistance lines around areas where you can see the price forming several peaks or valleys.

chart

Other interesting tidbits about support and resistance:

  • When the price passes through resistance, that resistance could potentially become support.
  • The more often price tests a level of resistance or support without breaking it, the stronger the area of resistance or support is.
  • When a support or resistance level breaks, the strength of the follow-through move depends on how strongly the broken support or resistance had been holding.

chart

With a little practice, you'll be able to spot potential support and resistance areas easily. In the next lesson, we'll teach you how to trade diagonal support and resistance lines, otherwise known as trend lines.

Chart Patterns

How to Trade Chart Patterns
That's a whole lot of chart patterns we just taught you right there. We're pretty tired so it's time for us to take off and leave it to you from here...
Just playin'! We ain't leaving you till you're ready!
In this section, we'll discuss a bit more how to use these chart patterns to your advantage.
It's not enough to just know how the tools work, we've got to learn how to use them. And with all these new weapons in your arsenal, we'd better get those profits fired up!
Let's summarize the chart patterns we just learned and categorize them according to the signals they give.
Reversal
Reversal patterns are those chart formations that signal that the ongoing trend is about to change course.
If a reversal chart pattern forms during an uptrend, it hints that the trend will reverse and that the price will head down soon. Conversely, if a reversal chart pattern is seen during a downtrend, it suggests that the price will move up later on.
In this lesson, we covered six chart patterns that give reversal signals. Can you name all six of them?
1.DoubleTop
2.DoubleBottom
3.HeadandShoulders
4.InverseHeadandShoulders
5.RisingWedge
6. Falling Wedge
If you got all six right, brownie points for you!
To trade these chart patterns, simply place an order beyond the neckline and in the direction of the new trend. Then go for a target that's almost the same as the height of the formation.
For instance, if you see a double bottom, place a long order at the top of the formation's neckline and go for a target that's just as high as the distance from the bottoms to the neckline.
In the interest of proper risk management, don't forget to place your stops! A reasonable stop loss can be set around the middle of the chart formation.
For example, you can measure the distance of the double bottoms from the neckline, divide that by two, and use that as the size of your stop.
Continuation
Continuation patterns are those chart formations that signal that the ongoing trend will resume.
Usually, these are also known as consolidation patterns because they show how buyers or sellers take a quick break before moving further in the same direction as the prior trend.
We've covered several continuation patterns, namely the wedges, rectangles, and pennants. Note that wedges can be considered either reversal or continuation patterns depending on the trend on which they form.

chart

To trade these patterns, simply place an order above or below the formation (following the direction of the ongoing trend, of course). Then go for a target that's at least the size of the chart pattern for wedges and rectangles.
For pennants, you can aim higher and target the height of the pennant's mast.
For continuation patterns, stops are usually placed above or below the actual chart formation.
For example, when trading a bearish rectangle, place your stop a few pips above the top or resistance of the rectangle.
Bilateral
Bilateral chart patterns are a bit more tricky because these signal that the price can move either way.
Huh, what kind of a signal is that?!
This is where triangle formations fall in. Remember when we discussed that the price could break either to the topside or downside with triangles?

chart

To play these patterns, you should consider both scenarios (upside or downside breakout) and place one order on top of the formation and another at the bottom of the formation. If one order gets triggered, you can cancel the other one. Either way, you'd be part of the action.
Double the possibilities, double the fun!
The only problem is that you could catch a false break if you set your entry orders too close to the top or bottom of the formation.

Mathematical Indicators

MATHEMATICAL TRADING INDICATORS
The mathematical trading methods provide an objective view of price activity. It helps you to build up a view on price direction and timing, reduce fear and avoid overtrading. Furthermore, these methods tend to provide signals of price movements prior to their occurring in the market.
The tools used by the mathematical trading methods are moving averages and oscillators. (Oscillators are trading tools that offer indications of when a currency is overbought or oversold). Though there are countless mathematical indicators, here we will cover only the most important ones.
Simple and Exponential Moving Average (SMA - EMA)
Moving Average Convergence-Divergence (MACD)
Bollinger Bands
The Parabolic System, Stop-and-Reverse (SAR)
RSI (Relative Strength Index)
Moving Average
A moving average is an average of a shifting body of prices calculated over a given number of days. A moving average makes it easier to visualize market trends as it removes – or at least minimizes - daily statistical noise. It is a common tool in technical analysis and is used either by itself or as an oscillator.
There are several types of moving averages, but we will deal with only two of them: the simple moving average (SMA) and the exponential moving average (EMA).
Simple moving average (SMA)
Definition
The simple moving average is an arithmetic mean of price data. It is calculated by summing up each interval's price and dividing the sum by the number of intervals covered by the moving average. For instance, adding the closing prices of an instrument for the most recent 25 days and then dividing it by 25 will get you the 25 day moving average.
Though the daily closing price is the most common price used to calculate simple moving averages, the average may also be based on the midrange level or on a daily average of the high, low, and closing prices.
Advantages
Moving average is a smoothing tool that shows the basic trend of the market.
It is one of the best ways to gauge the strength a long -term trend and the likelihood that it will reverse. When a moving average is heading upward and the price is above it, the security is in an uptrend. Conversely, a downward sloping moving average with the price below can be used to signal a downtrend
Drawbacks
It is a follower rather than a leader. Its signals occur after the new movement, event, or trend has started, not before. Therefore it could lead you to enter trade some late.
It is criticized for giving equal weight to each interval. Some analysts believe that a heavier weight should be given to the more recent price action.
Example
You can see from the chart below examples of two simple moving averages - 5 days (Red), 20 days (blue).

chart

Exponential Moving Average (EMA)
The exponential moving average (EMA) is a weighted average of a price data which put a higher weight on recent data point.
Characteristics
The weighting applied to the most recent price depends on the specified period of the moving average. The shorter the EMA period, the more weight will be applied to the most recent price.
An EMA can be specified in two ways: as a percentage-based EMA, where the analyst determines the percentage weight of the latest period's price, or a period-based EMA, where the analyst specifies the duration of the EMA, and the weight of each period is calculated by formula. The latter is the more commonly used.
Main Advantages compared to SMA
Because it gives the most weight to the most recent observations, EMA enables technical traders to react faster to recent price change.
As opposed to Simple Moving Average, every previous price in the data set is used in the calculation of EMA. While the impact of older data points diminishes over time, it never fully disappears. This is true regardless of the EMA's specified period. The effects of older data diminish rapidly for shorter EMAs than for longer ones but, again, they never completely disappear.
Example
You can see from the chart below the difference between SMA (in blue) and EMA (in green) calculated over a 20-day period.

chart

MACD (Moving Average Convergence-Divergence)
The moving average convergence-divergence indicator (MACD) is used to determine trends in momentum.
Calculation
It is calculated by subtracting a longer exponential moving average (EMA) from a shorter exponential moving average. The most common values used to calculate MACD are 12-day and 26-day exponential moving average.
Based on this differential, a moving average of 9 periods is calculated, which is named the "signal line".
MACD = [12-day moving average – 26-day moving average] > Exponential Weighted Indicator
Signal Line = Moving Average (MACD) > Average Weighted Indicator
Interpretation
Due to exponential smoothing, the MACD Indicator will be quicker to track recent price changes than the signal line. Therefore,
When the MACD crossed the SIGNAL LINE: the faster moving average (12-day) is higher than the rate of change for the slower moving average (26-day). It is typically a bullish signal, suggesting the price is likely to experience upward momentum.
Conversely, when the MACD is below the SIGNAL LINE: it is a bearish signal, possibly forecasting a pending reversal.
Example of a MACD
You can see from the chart below example of a MACD. The MACD Indicator is represented in green and the Signal Line in Blue.

chart

Bollinger Bands
Bollinger Bands were developed by John Bollinger in the early 1980s. They are used to identify extreme highs or lows in price. Bollinger recognized a need for dynamic adaptive trading bands, whose spacing varies based on the volatility of the prices. During period of high volatility, Bollinger bands widen to become more forgiving. During periods of low volatility, they narrow to contain prices.
Calculation
Bollinger Bands consist of a set of three curves drawn in relation to prices:
The middle band reflects an intermediate -term trend. The 20 day - simple moving average (SMA) usually serves this purpose.
The upper band is the same as the middle band, but it is shifted up by two standard deviations, a formula that measures volatility, showing how the price can vary from its true value
The lower band is the same as the middle band, but it is shifted down by two standard deviations to adjust for market volatility.
Bollinger Bands establish a Bandwidth, a relative measure of the width of the bands, and a measure of where the last price is in relation to the bands.
Lower Bollinger Band = SMA - 2 standard deviations
Upper Bollinger Band = SMA + 2 standard deviations.
Middle Bollinger Band = 20 day - simple moving average (SMA).
Interpretation
The probability of a sharp breakout in prices increases when the bandwidth narrows.
When prices continually touch the upper Bollinger band, the prices are thought to be overbought; triggering a sell signal.
Conversely, when they continually touch the lower band, prices are thought to be oversold, triggering a buy signal.
Example of Bollinger Bands
You can see from the chart below the Bollinger Bands of the S&P 500 Index, represented in green.

chart

The Parabolic System, Stop-and-Reverse (SAR)
The parabolic SAR system is an effective investor's tool that was originally devised by J. Welles Wilder to compensate for the failings of other trend-following systems.
Description
The Parabolic SAR is a trading system that calculates trailing "stop-losses" in a trending market. The chart of these points follows the price movements in the form of a dotted line, which tends to follow a parabolic path.
Interpretation
When the parabola follows along below the price, it is providing buy signals.
When the parabola appears above the price, it suggests selling or going short.
Conversely, when they continually touch the lower band, prices are thought to be oversold, triggering a buy signal.
The “stop-losses” dots are setting the levels for the trailing stop-loss that is recommended for the position. In a bullish trend, a long position should be established with a trailing stop that will move up every day until activated by the price falling to the stop level. In a bearish trend, a short position can be established with a trailing stop that will move down every day until activated by the price rising to the stop level.
The parabolic system is considered to work best during trending periods. It helps traders catch new trends relatively early. If the new trend fails, the parabola quickly switches from one side of the price to the other, thus generating the stop and reverse signal, indicating when the trader should close his position or open an opposing position when this switch occurs.
Example of an SAR parabolic study
You can see from the chart below in green the Parabolic System applied to the US DJPY pair.

chart

Relative Strength Index (RSI)
The RSI was developed by J. Welles Wilder as a system for giving actual buy and sell signals in a changing market.
Description
RSI is based on the difference between the average of the closing price on up days vs. the average closing price on the down days, observed over a 14-day period. That information is then converted into a value ranging from 0 to 100.
When the average gain is greater than the average loss, the RSI rises, and when the average loss is greater than the average gain, the RSI declines.
Interpretation
The RSI is usually used to confirm an existing trend. An uptrend is confirmed when RSI is above 50 and a downtrend when it's below 50.
It also indicates situations where the market is overbought or oversold by monitoring the specific levels (usually “30” and “70”) that warn of coming reversals.
An overbought condition (RSI above 70) means that there are almost no buyers left in the market, and therefore prices are more likely to decline as those who previously bought will now take their profit by selling.
An oversold condition (RSI below 30) is the exact opposite.
Example of RSI
You can see in red from the chart below the Relative Strength Index of the GBPUSD pair.

chart

Fibonacci & Elliot Wave

FIBONACCI ANALYSIS AND ELLIOTT WAVE THEORY
Elliott Wave Theory (EWT)
Ralph Nelson Elliott referred to three important aspects of price movement in his theory: pattern, ratio and time. Pattern refers to the wave patterns or formations, while ratio (the relationship between numbers, particularly the Fibonacci series) is useful for measuring waves. To use the theory in everyday trading, the trader determines the main wave, or supercycle, goes long and then sells or shorts the position as the pattern runs out of steam and a reversal is imminent.
The Five-Wave Pattern
In its most basic form the Elliott Wave Theory states that all market action follow a repetitive rhythm of a five waves in the directions of the main trend followed by three corrective waves (a "5-3" move).
The advance waves are denoted 1-2-3-4-5 and the retreat waves are denoted a-b-c. In the advance waves' phase, waves 1, 3, and 5 are "impulse waves" and move in the direction of the trend, while waves 2 and 4 are called "corrective waves". After the five -wave advance is completed, a three-wave correction begins denoted a-b-c. In the correction waves' phase, waves 'a' and 'c' move in the direction of the retreat, while wave 'b' heads in the opposite direction.


chart

Note: In the chart shown here an uptrend is described and therefore the advance waves are moving upwards. In a downtrend the descending waves will be referred to in the form 1 -2-3-4-5, with the ascending waves addressed as a-b-c.
Wave cycles
When a three-wave retreat is complete, another five-wave advance begins and so on, until a reversal is prompted. It is possible to see then, that each five-wave advance can be identified as a single advance wave. Similarly, when viewed from a larger perspective, and vice versa, each wave can be broken down into smaller waves.
The Elliott Wave Theory classifies waves according to cycle length, ranging from a Grand Supercycle, spanning for decades; to a subminuette degree, covering no more than a few hours. However, the eight-wave cycle remains constant.

chart

Note: The largest two waves, 1 and 2 here, can be subdivided into eight lesser waves that in turn can be subdivided into 34 even lesser waves. The two largest waves, 1 and 2, are only the first two waves in a larger five-wave advance. Wave 3 of that next higher degree is about to begin. The 34 waves that constitute a cycle can be broken down further to the next smallest degree which would result in 144 waves. Fibonacci Analysis
Fibonacci numbers provide the mathematical foundation for the Elliott Wave Theory. While the Fibonacci ratios have been adapted to various technical indicators, their utmost use in technical analysis remains the measurement of correction waves.
Fibonacci Series Characteristics
The Fibonacci number sequence is made by simply starting at 1 and adding the previous number to arrive at the new number:
0+1=1, 1+1=2, 2+1=3, 3+2=5, 5+3=8, 8+5=13, 13+8=21, 21+13=34, 34+21=55, 55+34=89,…
This series has very numerous interesting properties:
+ The ratio of any number to the next number in the series approaches 0.618 or 61.8% (the golden ratio) after the first 4 numbers. For example: 34/55 = 0.618
+ The ratio of any number to the number that is found two places to the right approaches 0.382 or 38.2%. For example: 34/89 = 0.382
+ The ratio of any number to the number that is found three places to the right approaches 0 .236 or 23.6%. For example: 21/89 = 0.236
These relationships between every number in the series are the foundation of the common ratios used to determine price retracements and price extensions during a trend.
Fibonacci Price Retracements
A retracement is a move in price that "retraces" a portion of the previous move. Usually a stock will retrace at one of 3 common Fibonacci levels - 38.2%, 50%, and 61.8%. Fibonacci price retracements are determined from a prior low-to high swing to identify possible support levels as the market pulls back from a high.
Retracements are also run from a prior high-to-low swing using the same ratios, looking for possible resistance levels as the market bounces from a low.


chart

Fibonacci Price Extensions
Fibonacci price extensions are used by traders to determine areas where they will wish to take profits in the next leg of an up-or downtrend. Percentage extension levels are plotted as horizontal lines above/below the previous trend move. The most popular extension levels are 61.8%, 100.0%, 138.2% and 161.8%.
Advice
In reality it is not always so easy to spot the correct Elliott wave pattern, nor do prices always behave exactly according to this pattern. Therefore it is advisable for a trader not to rely solely on Fibonacci ratios, but rather to use them in conjunction with other technical tools.

FAQ

How do I open live account?

Live accounts can be opened using our website. You will need to fill an online application, which only takes few minutes to complete.

What are the necessary documents I need to submit?

After completing the online application, you will need to submit: - Valid ID with photo identification - a proof of address with your name on it. You can send theses documents to [email protected] We will review your documents and account application before approving your account. Once your account is approved, we will notify you via email with your user name and instructions for accessing your account.

How long does it take for my account to get approved?

Once all documents are submitted, it usually takes up to 1-2 business days to fully activate your account. Once your account gets approved, we will notify you via email with your user name and instructions for accessing your account. If your account hasn’t been approved after 3 business days, please contact our accounts department @ [email protected]

What is the minimum initial deposit?

The minimum deposit is 300 USD. Currently, we only offer US dollar denominated accounts.

What currencies can I use to deposit funds into my account?

Currently, we only accept US dollars.

When will my funds be posted onto my account?

Once you deposited your funds, it takes 1 to 3 business days to be posted on your account depending on the funding method

What are TMFX spreads?

We try to offer our clients the lowest spread rate available in the market. Our spread starts from 1-1.6 pips on classic (Market execution/Variable spreads) & 0-0.4 on pro which is DMA (Direct market access / market execution) 6$ per round in all currency. Please see our account types page for more information regarding our spreads.

What is DMA?

DMA is direct market access where we directly give the liquidity flow what we get from our multi banks. Where give you the live experience of trading with bank directly without any mark up in spreads and we make profit from charging 9$ per round transaction on all 44 currency pair that we offer.

Is all the trades are STP?

With TMFX we never intervene on client’s trade and we direct our orders to bank and hedge all our orders with liquidity providers. On which we can offer price improvement which is also called as positive slippage where you will make more profit than your take profit limit. Is facility are available only with STP brokers.

What is the difference between STP (Non- Dealing desk) and Market makers (Dealing Desk)?

Under STP all the trades are passed on to Liquidity providers (banks, ECN, Mutli-dealing platform, E-trading venues) so all your profit that you generate are guaranteed and no dealer intervention such as stop out hunt or closing you deals if excess profit and so. Broker profits from the spreads mark-up.
Under Market makers the deals aren’t hedged with the Liquidity providers, if the client profit the brokers takes that risk and if the clients looses the broker generates profit. There is nothing wrong in market maker unless they do not intervene you trade or doesn’t process you withdrawals.
In TMFX all you trade are hedged with 16 multiple liquidity providers from top tier 1 banks to ECN and e-trading venues.

What is Price Improvement?

When an order fills at a better or more favourable price than the price you request, it is considered a Price Improvement. For example, if you create an entry order to buy EUR/USD at 1.3470 and the order fills at a more favourable price of 1.3465, you have received a 5 pip Price Improvement. Other way you with get positive slippage in take profit.

What is the most likely way to receive a Price Improvement?

Price Improvements most frequently occur during fast moving market conditions. The two most notable trading times where you can benefit from Price Improvements are during:
1) Weekend Gaps*
2) News Releases*

What are your trading hours?

There are no defined trading hours. Forex traders can trade the market hours, which is from 6:00pm EST Sunday to 5:00PM EST Friday.

What is your scalping policy?

We have no restrictions on scalping.

How can I withdraw my funds?

You can directly withdraw from your web portal .In Order to withdraw funds manually from your account, you must fill out a withdrawal form and send it to [email protected] Your funds will be transferred to the bank account specified on the withdrawal form. Withdrawing process usually takes 3 to 5 business days. If you did not get your funds within 10 business days, please contact our financial department @ [email protected] Please note that the bank account must be under your name.

Can I withdraw money even if I have open positions?

Yes. However, your free margin must exceed your withdrawing amount plus all payment charges. Your free margin should be enough to maintain your open positions. If you do not have sufficient free margin in your trading account, your withdrawal request will not be completed until you submit another withdrawal form with the correct amount.

Is there a fee for withdrawing funds from my account?

No. TMFX does not charge any fee for withdrawing funds, but you are required to pay the bank fee. The bank fee varies depending on the type of transaction. The bank fee for domestic wire transfer is on average $20 and $40 for international wire transfer.

EXECUTION

What type of execution does TMFX offers?

We offer both Instant execution and market execution with DMA access.

What is Instant execution?

Instant Execution – When a client trades on Instant execution, he is requesting to either buy or sell at the rate that he clicked on (traders requested price). If the price in the market allows the broker to cover at a better rate then the client will receive his fill at his requested price, if the price in the market will not allow the broker to cover at a better rate then the client will get rejected. There is no Slippage on these types of trades (the only exceptions are stop losses, entry stops and stop outs executed under instant execution).
Example:
A trader is interested in buying 0.1 lots of EURUSD at 1.4122
If the market rate is 1.4123/25 then the trade will be re-quoted
If the market rate is 1.4117/19 then the trade will be approved at 1.4122

What is Market execution?

Market Execution – When a client trades on Market execution, he is requesting to either buy or sell at the any rate, the rate clicked on (traders requested price), is for indication purposes only. If the price in the market allows the broker to cover at a better rate then the client will receive his fill at the better price, i.e. market price, if the price in the market will not allow the broker to cover at a better rate then the client will receive the worse rate in the market – this is known as slippage. Under Market execution it is possible to get a positive or a negative slippage. The advantage of Market execution is that there are no rejections; the disadvantages are that in general clients hate it. Retail clients do not like to receive slippages and EA's (Expert Advisors or Robots) do not manage well with Market execution at all, since the robot is expecting to fill at one rate and gets filled at another, they do not know how to handle this, this is why 90% of all brokers offer Instant execution.
Example:
A trader is interested in buying 0.1 lots of EURUSD at 1.4122
If the market rate is 1.4123/25 then the trade will be approved at 1.4125 (3 pip slippage)
If the market rate is 1.4117/19 then the trade will be approved at 1.4119 (3 pip positive slippage)

What is Automatic Execution (demo environment)?

Automatic Execution is an immediate authorization of the client trade, this is generally found in demo platforms; this is a major reason why clients are generally successful in demo platforms and not in live platforms.
That’s why most EA’s are successful in demo environment and not successful in real environment, since the order has to be passed on to liquidity provider and the quotes may change due to available volatility and experience (“invalid price””off quotes”) under instant execution and ”slippage ” under market execution.

CLIENT’s FAQ

Do I need to pay tax for my profit?

This answer depends on which country you are situated in we are in some countries whatever income you make you must pay taxes on you income. On which you auditor is the right person give correct answer to your taxes.

How do I deposit funds from margin trading restricted countries?

TMFX is a regulated broker and have license to accept funds all over the world expect US clients. For margin trading restricted countries in accordance to LRS they can do wire transfer for investments in equity shares aboard as foreign equity investments. Where TMFX offers non margin trading products such as equities, indices and commodities. Therefore absolutely no issue in transferring funds to TMFX from India, China, Japan, Dubai and many countries. TMFX offers shared vault so you can trade any instrument in it.

What does 'segregated' mean?

Client money is held entirely separate from TMFX own money, ensuring that in the unlikely event of default by TMFX, client funds will be returned to the clients rather than being treated as a recoverable asset by general creditors TMFX.
The money is 'ring-fenced' in separate bank accounts which are held in trust with the clients as the beneficiaries, and is not held with TMFX own funds.

Are my funds held on a segregated basis?

When a client opens an account with TMFX, they will be categorized as either: a retail client, a professional client or an eligible counterparty - and TMFX LIMITED will inform them of this categorization. All client funds will be segregated in separate accounts with our bankers..

How are my funds protected with TMFX?

Funds transferred from an individual client to TMFX will be received directly into a segregated client bank account.
TMFX does not pass client money to any part of the business as working capital. TMFX has no exposure to corporate or sovereign debt. TMFX limited is debt-free, with substantial liquidity and capital reserves

TMFX MetaTrader 4:

How can I change the time zone in MT4?

You cannot change the time zone in MT4. The time zone in MT4 is always GMT +2.

How can I see my trading history?

Order to view your trading history, please open the “Terminal” window (Ctrl+T) and select the account history tab.

What happens to my open positions when I log out of MT4?

Your open positions will not be affected whether you log in or log out of MT4. All open positions and pending orders stay in the system even if you are offline. However, trailing stops and Expert Advisors become inactive once you log off or close MT4.

What happens if I can’t log in to my account?

If you have trouble logging in to Metatrader 4, please contact our support team @ [email protected]

Why do I receive a message “Trade context is busy” when I place/close orders?

You may receive this message if you have placed more than two or more orders simultaneously. In order to resolve this issue, you need to restart your MT4.

Why do I receive “OFF QUOTES” when I place/close orders?

You will receive OFF QUOTES only in Instant execution, Please check regarding Instant execution under Execution FAQ.
OFF QUOTES will occur due to latency or invalid price, this happens because when you manually or automated EA execute a trade, it goes to the server with our liquidity providers and check for the available price. If the price moves quickly due to high volatility you may not get your fill price. This will trigger a message as off quotes and protect you from giving you worst price or slippage.
Example:
Instant Execution at 1.2500 BUY EURUSD
With Liquidity provider under market execution we see price 1.2499 BUY EURUSD your order will be filled
If the price 1.2501 BUY EURUSD it triggers off quotes.

What are the system requirements for using MT4?

Windows XP SP2 (Home and Professional) or Vista
Processing Speed: 1 GHz or higher
Monitor resolution set at 1024 x 768 or higher
512MB of RAM
Hard Drive: 100 MB of free space
Internet Explorer v6.x or higher, Firefox v1.x or higher
NET 2.0 Framework
Internet Connection:Broadband

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