Stochastic/Relative strength Index (RSI) indicator

Stochastic

Another important indicator is Stochastic. Stochastic indicator used to read the chart and give us an early signal when one trend may end up. Unlike MACD indicator, Stochastic can determine Overbought or Oversold market conditions as shown below.

The Stochastic scale range from 0 to 100, when the lines reach 70, it indicates the Overbought condition and the prices will go down after just leaving the scale of 70. Meanwhile, if the line reach 30 it indicates the Oversold condition and the prices will rise once again after leaving the scale of 30. You may notice that Entry & Exit Stochastic signal is preferable the time where stoch leave overbought or oversold area as shown on the chart.

% K & % D( trigger line )

Stochastic has two lines which is % K & % D and normally called trigger line, if both lines intersect with each other it can give us entry or exit signal. Unfortunately trigger signal becomes less accurate as they often give false signal.


Relative strength Index (RSI)

RSI is almost the same as the stochastic and basically we can say that RSI can tells us something about the strength or momentum of the market trend.

RSI scale range from 0 to 100, with the scale 80 as Overbought limit while 20 as Oversold limit. It’s the same on how to read RSI indicator as Stochastic indicator discussed above.

The advantage of RSI is it can be used as a confirmation of the changes of the trend. Hence RSI is often used by many traders to avoid false signal. When the RSI line just cut through 50 level then it can be say that one trend is began to occur, look at the picture above.

Note that RSI is also one of lagging indicator type; hence it also has its own disadvantages. It often occurs when market suddenly strong or suddenly weak and it can give big impact to RSI signal and may lead to false signal.

MACD indicator

MACD

MACD stands for Moving Averages Convergence divergence. It’s used to identify the Moving Averages with a new trend. MACD is also one of the most popular indicators used by trader.

By using MACD we can see 3 indicators altogether on the chart. First is the short period MA (fast), second is the long period MA (slow) and the last one is the order of the histogram or a line that describes the size of the distance between two MA's as shown in the chart.

MACD Crossover

Because both Moving Average line has a different speed, the fast MA will react more quickly to price changes compare to slow MA. When a new trend occurs, fast MA will intersect with slow MA at one point and the crossover between these lines indicated that a new trend began to occur.

The second signal occurs when MA on MACD penetrated through the MACD centerline.
The Weakness of MACD is in providing its signal. This signal is quite slow because many of MACD signal occur from the pervious average price.
The advantage of MACD is it’s rarely giving a false signal because of its smooth movement on the chart. Bare in mind that MACD signal does not indicate any overbought or oversold condition.

There are some basic MACD principles that you must know:

1. MACD will move to the highest peak until reach one critical point and vice versa.

2. There are 3 possible price movements of MACD:

• The price will move according to MACD
• Price moves opposite to MACD until one certain point and then follow the flow of MACD sign and we called this as Divergent Convergent
• Price will move sideway until the end of the MACD trend.

By using these principles we can maximize our profit with a very small loss.

Beside just using MACD indicator, Stochastic Slow 8,3,3 can be used to support the signal by determine the peak & valley of MACD/overbought-oversold area as shown below.

MACD usually determined by knowing the differences between 12-EMA and 26-EMA. When MACD has a positive value with a shortterm MA line above longterm MA line, this indicates that the price movement is towards to the top and vice versa for the negative MACD value. Most traders also concern about "0/neutral line", this method is quite similar to MA crossover discussed before where the cross over provide the buy signal while cross down give sell signal. Hope you may understand this terminology. If you still confuse you may refer back to our previous discussion about MA crossover here.

Example above shows the very basic fundamental of MACD. The cross method use here is similar to the cross method use in MA.

You must know that MACD is one of a lagging indicator; hence it should always follow market movements. As shown in the example above, we can see that MACD has a divergence characteristic. Divergence occur when MACD not following the movement of the market price.

-Best of luck-

Bollinger Bands

Bollinger Bands

Bollinger Bands Indicator is almost the same as MA. The only different here is how bands (support line) and resistance line is draw on the chart. Bands line will be over or under market. To created Bollinger Bands it requires 2 types of input / data, namely the average and standard deviation .Like MA, it need only 1 average day with upperband (overbought) and when it is almost at lowerband it can be said as "oversold."

The smaller distance between upperband and lowerband always gives an early signs to trader that the market may be strong with a breakout to one direction.

Bollinger Bands are used to measure the level of volatility (the stability of the price movement). When prices tend to be idle the bands will be close to each others while when the prices moving upward the bands will be more widen as you can see in the below chart.

Bollinger Bands also functions as a Support & Resistance where prices tend to move back and forth between the upper limit and lower limit (Bollinger Bounce).
Bolinger Bands can be very helpful if the price is in sideway movement (consolidation), that will produced breakout signal.

Bollinger Squeezze can be used as a sign of the new trend, which is when the bands move closer it usually indicates a significant movement will occurs. When the price penetrate the limit bands it will then move continuously as shown in the chart.

Some indicators are often equipped with a central axis that Bollinger Bands can also be used as an indication of trend.

Implementation of THEORY 123, Elliott & WAVE Fibonacci and its weaknesses

Implementation of THEORY 123, Elliot & WAVE Fibonacci

All the theory discussed before can be applied simultaneously in suitable Time Frame. A basic principle of the actual breakout strategy is also a psychological price will move continuously if the record of high level or low manage to penetrate before it.

Strategy 1:
1. First, specified the price that already occurred with the perfect price (High & Low level) and make sure that the price is between High & Low level.

2. Place the stop BUY order on the High-level + 2xspread, and place a stop SELL order at the low level - 2xspread.

3. Place the Stop Loss order to both orders at the 50% Fibonacci level or at the high / low position.

4. If you want to use Target Points Expantion use fibonacci level as target points.

5. Move your unaffected entry to a new swing level which is perfectly formed. This is useful when the trend changed and prices turned its direction before reaching the target points.

Strategy 2: Trailing Stop
If the price has been cut through the Entry points and successfully reached the target as expected, then use trailing Stop to minimize the risk and that will secure the profit that you got.

Always use Stop Loss (SL). and move SL if the target has been reached.

Example:
C = the current price
B = Buy order entry
A = sell order entry
D = Target Prediction points

When C-D swing form move SL to form B
So your position will secure, risk = 0
When swing E-F form, move SL to E
At this position your profit is safe.
When G-H swing form move SL to G and so on

Strategy 3: Compounding Profit

Add entry point when the price has reached the target.

Example:
C = the current price
B = Buy order entry
A = Sell order entry
D = Target Prediction Points

When the C-D swing move SL to form B
So your position will secure, risk = 0
When swing E-F form move SL to E
At this position your profit is safe.
When prices is at G Buy stop order at F with SL at G
When G-H swing form move SL1 to G and so on.

Weaknesses in THEORY 123, Elliot & WAVE Fibonacci

Not a single theory is 100% perfect as all the theory discussed above. Although the above theory can predict the formation that will occur but it can not really determine the next direction of zigzag? Zigzag direction can occur both above and below.


If we see on the chart the price direction should be increased according to Elliot Wave principle but in reality even zigzag is form below it.

Other weakness that we can observe is that when the sideway movement occur. Sideway movement usually occurs after the existence of a very long swing. To figure out this matter we need to use additional indicators to see its momentum’s strength.
Example: (MACD indicator, Oscilator MA & Slow Stochastic)

After Swing AB occurred for a long time, it then followed by BC retracement and swing CD. At CD, it does not move far away from level B because of the weak momentum (MACD trend Up, Osma Up, Stochastic oversold). Then swing D-E form followed by swing EF where F is touching level D. 

According to the theory the price should continue to move down trend, but instead of turning back. This is because of the prices that are not in strong momentum (MACD trend Up, Osma Up, Stochastic oversold). According to the theory, before Swing FG form, once again the price will touch level E and the price should continue rising without turning back (MACD trend is still up, Osma start to decline, stochastic overbought).

When sideway is observe, traders should use additional indicators to make the decisions.

One of the fail Fibonacci example:

A = stop order BUY
B = stop order SELL
C = the current price
SL di 50%

In the above example the price touches the stop order Sell at D but instead of going down to F, the price rise up to E.

Move the stop order Buy to C with SL buy at 50% level of the new swing Fibo.

Price then observes to move back to F, move the stop order Buy to point E with the SL buy at 50% level of the new swing.

When the price level at E, sell orders that have been exposed to active will close after touching SL,
At this time only Buy order is active until it reaches point G. In this example you are at win-win position, mean your risk is at 0.

To overcome the weaknesses of these theories it must be supported by other indicators, support & resistance. And do not forget to add spread in your order entry.

-good luck-

TEORI 123/TEORI ELLIOT WAVE/FIBONACCI RATIO

Theory 123 (Law of charts)

Generally, the price movement will form a zigzag pattern or common theory called 123. Where the distance 1-2 is longer than 2-3 and the price trend will continue in 1-2. This pattern can occur on the chart for several time frame scale only.

Strategic Theory 123
If the pattern 123 occurs where C is the current price then place the entry point at the point B, and Stop Loss at point C, or A. Place the target point approximately half of the AB. When TP1 is reached, move SL to C and so fourth.

Eliot Wave Theory (Patterns 5-3)
Mr. Elliot found that the price movement has a 5-3 wave pattern, which is always repeated, where the wave pattern 5 is called impulse wave while wave patterns 3 called Corrective wave. Elliot theory based on market psychology, as described below:

Elliot Wave Theory explains the following:

Wave 1
Stock prices rise up, because some people hold time to buy.

Wave 2
Stock prices falling down, because some people feel the price is high enough and the right time to take profit.

Wave 3
Prices rise again, because people want to take the profit as at wave 1, and they feel the stock can generate more profit. Usually the price moves higher than wave 1.

Wave 4
The prices go down once again because the price is high enough and the time to take profit.

Wave 5
Prices rise again, due to the tree stock without reason, after reasonable price exceeds the trend changed to the ABC pattern.

5-3 pattern can also form from smaller 5-3 pattern


If we observe more, actually this theory is the development of the  theory 123 in which Elliot found that in a price movement, pattern 123 occurs 2 times before finally turn its directions.

Fibonacci Ratio

Fibonacci ratio is the development from theory 123 and Elliot Wave which be combined with the calculation of Fibonacci ratio to determine the level of Support & Resistance.

Basically, the principle is the same as theory 123 where the long waves (1-2) called swing is followed by short wave (2-3) called a retracement. With the calculation of Fibonacci we can know the support and resistance level from the movement of retracement.

Before Fibonacci can be determined we must first defined  how swing High and swing Low is place on the chart .

#1 Fibonacci Retracement Level
Usually the movement of retracement will reach 23.6%, 38.2%; 50%, 61.8%, level and then return to the level of 0% before continue to the extension level. If the movement not be able to penetrate the price level of 0% then the price level will move to 100% and vice versa.


#2 Fibonacci Extension Level
Namely support & resistance levels that are expected to be achieved after the successful movement through the price level of 0%


Examples of Theory 123, Elliot Wave & Fibonacci in the chart are shown below.

• 1,2,3 illustrate Theory 123
• A, B, C, D, E & a, b, c describe the Elliot Wave Theory
• The blue line indicate Fibonacci level & the yellow line is the level expansion Fibonacci
  

Next we will learn on how to implement these theory in our real trading..

Bid Price/ASK Price/SPREAD

Bid Price

BID Price (Sell price) is the price where the dealers desire to buy BASE CURRENCY as the exchange with Quote CURRENCY. You can sell the currency for that price because the dealer wishes to buy it at the same time. As you can see the price was placed in SELL column.

Bid price is always lower than market value price for one currency pair. This is the distinction between bid price and spread that will be discussed shortly. Meaning, if you want to sell, your price is a few pips below actual market price.

ASK Price

ASK / BUY Price (Buy price) is the price where the "dealers" wish to sell BASE CURRENCY to exchange with you as Quote CURRENCY. Means this is the price given by the dealer to you if you want to buy one currency pair.

SPREAD

The different between BID and ASK price is called Spread.

Spread is different between one pair with another pair. It is also different among different brokers. I recommend you to choose a broker which provides smaller spread.

In the example above shows the EUR / USD pair.As discuss before Euro is BASE CURRENCY and USD is Quote Currencies. In the example above you may buy euros with the 1.3452 and at the same time you can sell the Euro by 1.3455.

Spread in this example is the distinction between BUY and SELL prices. In this example, the spread is $ 1.3452 USD - USD $ 1.3455 USD = $ 0.0003, or also known as 3 pip.

2.1 Explanation about bid and ask price

What factors driving forex market.

Although there is no convoy or men that have absolutely over the Forex market, but there are several factors that is capable to give a big impact to forex market moves.

1. The first group is from big Corporate / Multinational Company, which they often trade and dealing with currency pair across the country.

2. Second group come from brokers themselves.  They act as a platform or medium among the individual professionals, brokers and even banks.

3. The third group is from Bank institution. Especially Central Bank of the state. Each time the government changes their internal policies often the moves of Forex market also changed.

Forex broker

As discussed before, every time we trade in forex, we actually buy or sell between the two foreign currencies. Every Forex Broker offers a foreign currency pair to be trade and we can access them on the platform or Trading Station provided by each broker.

To choose a good Forex Broker, you have to make sure they are registered under Futures Commission Merchant (FCM) and the Commodity Futures Trading Commission (CFTC) along with the National Futures Association (NFA) as the expert.

To be Forex Broker they must first get fully certificate lessen which is under guard which is very strict and difficult to obtain. Forex Broker company should meet the above requirements and follow the international regulations before they can get lessen.

Example of Forex Broker 

1. Marketiva 

2. FXCM

3. CMS Forex

4. FXCH

5. InterbankFx

6. FxSol and more

Preparation before entering forex market

Here are some tips and guides before you can enter the real world of forex especially for newbie.

1. Continuous learning and try to understand the basic fundamental of forex before start trading in real account. Continuous learning also mean you will never give up although keep losing your money. To gain more knowledge about forex market, new trader must always follow the trend of the market from any forex forum or website that gives such good information such as www.dailyfx.com and others.

2. Keep practicing using forex demo account. Frankly speaking, YES you will never fill the same as you’re trading in real account, but this is the only efficient method for newbie to learn and familiar with the characteristic of one currency pair before they can successfully trade in real account.You can open demo account for free here

3. Try to control your emotion while trading and remember that 90% to 95% forex traders often fail mainly because they cannot control their emotions while trading. My advice for forex newbie is try to trade only based on market direction and not just following your instinct. That mean, you must trade by following the signal created by the indicator. Trade like robots, without feelings and just following the signal. That the key. Your target is to get more profit than lose.

4. Self-discipline and try to familiar with one system / forex techniques before trying the others technique. 

-Matt-

Market value

Market value is the current market value of the ration which we can buy and sell the currency pair for that time. This market value will change the price and this change known as the ticks.

If the market value is increasing, we say the market as bullish, otherwise if the market is falling, we know it as bearish.Below chart show the differences between bullish and bearish:
To get more profit in forex, we first need to well understanding on how the market changes its direction for one specific currency pair whether it is in bullish or bearish trend.
If the direction of that currency pair is in bullish trend, we must take the opportunity to entry BUY position or also known as LONG and vice versa.

For an easy understanding, let me give you one example to illustrate and explain when the right condition to BUY or SELL the currency. Let me use example of goods (gold) here because if I just use the example of currency pair, you may be less understood.

BUY / LONG example: let say you are buying 1 pound of gold today because you had made the prediction that the price of gold will rise for the next day (supposing the price of gold today is $ 63,000 / kg). Fortunately as your prediction the price of gold rose to $ 67,000 / kg for the next day. You continue to sell them and you get net profit of $ 4,000. This is because you hit the market (trade with trends) which means during the market rise, you take the opportunity to buy the LONG / BUY position.

SELL / SHORT example: Suppose you heard the news that the market price of gold will fall and oil prices are suddenly rising (the price of oil and gold contrary). So, you decided to SHORT / SELL the gold or more easily to understand we use the term "Sell first, buy later". So you continue to sell gold (although you actually don’t really have it for sell) at the price of $ 69,000 / kg.

Tomorrow, the price of gold fell to $ 63,000 / kg and you buy goods with the use of gold for the night ($ 69,000). So, you have get $ 6000 as the profit.Chart below show gold price Vs oil price




*These examples is just to give you an easy understanding about the business occurring in forex

Forex Basic/Term

There are several Forex term that every trader must be familiar with.There're Lots,Currency pair,Quote Currencies,Base Currencies and pips.

LOTS



1. Forex lot is defined as a minimum amount of equity.

2. Forex currency is trade in the form of Lot to allow the homogeneity of the market price

3. For standard account, 1 lot is equal to USD1000

4. For mini account, 1 lot is equal to USD50

CURRENCY PAIR

1. In forex trading there are buy and sell of currency pair.

2. BUY: If you buy a currency pair for example GBP/USD, that mean you buy the base currency and automatically sell the quote currency.

3. SELL: if you sell a currency pair for exmple GBP/JPY, you actually sell the base currency, and automatically buy quote currency of that currency

4. According to world Conversion, base Currencies is more strong when compare to quote Currencies. Example: EUR / USD, USD / JPY, GBP / USD


Base currencies / Quote Currencies

Forex currency can be divide into 2 main categories which is base currency and currency quote. Each currency has two prices: a bid price at which a trader is willing to buy and an offer price at which a trader is willing to sell.

1. The base currency is the first currency in a currency pair .The rate able value is usually greater than U.S. Dollar. For example Euro (EUR) and Great Britain Pound (GBP) currency.

2. The second currency is quoted currency. The rate able value is usually lower than U.S. Dollar. For examples Japan Yen (JPY), Swiss France (CHF) and the Australian Dollar (AUS) currency.

PIPS.

If you are new to forex trading, you must first understand what pips are.


Pip is the smallest decimal value in one currency pair. For example, the buy price for the pair GBP / JPY is 1.6570. If the pair is changed to 1.6571, then the change is only 0.0001. The change of 0.0001 is equal to 1 pip.



The pips value is not constant and it depends on the pair and the type of account that you’re using. For example, 1 pip profit for the pair GBP / USD is at the same U.S. D1 (mini account) or USD10 (standard account)

Forex indicator: Moving Average (MA)

Moving Average(MA) is one of the most popular indicators. There are several types of moving average such as Simple Moving Average (SMA or MA only), Exponential Moving Average (EMA), and weighted Moving Average (WM A). MA is basically an average closing market price for one time frame that has been set. MA is just like a ruler which will move up or down according to the market direction.

It is an average closing price movement in a period of time. With MA, we can see the trend of the price. If it's moving to the top it simply means that the trends are growing up and vice versa. When prices penetrate MA mean trend is changing.



Below is an example of 100MA and 50MA. All calculation will be made by a computer program. One of the main functions of MA is to recognize the trend. MA is a kind of indicator of "lagging”. It moves according to the price and not a proactive motion prediction which means it does not predict anything but only clarify the trend whether uptrend or downtrend.



"Momentum" or the strength of trend can be changed by using smaller MA. The smaller average values of MA the stronger its momentum. MA that is less than 20 days may be classified into short-term, 20-100 to be medium-term and above 100 to be long term trend.

Traders often use more than 1 MA to see the movement of market as a whole, in terms of short, mid and long term MA may also be used for the "level" that can be considered as a support and resistance.

Note the example below. MA (200 days) acts as a powerful support line. Price will rise again when approaching this line. This opportunity should be taken by entry the LONG / BUY position.



In other ways, MA also can act as a barrier (resistance) if the price falls below MA line. Another function of MA is to set our SL value. The characteristic of MA that can be support or resistance can be the "tool" that we can use to minimize our risk during our trade. Note the example below:



In this example, we assume MA200 as support and has a long open position. By knowing that, we can set our SL under this support line.

One of the disadvantages of MA is that it cannot be used when the market is in correction phase or the "Consolidation”. Examples below indicate the disadvantages of MA when the market is not in trend; uptrend or downtrend.



Be careful with the "lag" of MA. Because all of the MA indicators are lagging, the signal provided by the MA is often slow even though the market has made its movement. This phenomenon often occurs when using MA.

Crossover is one of the principle when using MA;when the market moves from the top to the down of MA, or vise versa.



Another method of “crossover" is using more than 1 MA. This type of "Crossover" is valid when "shortterm" MA across above "longterm" MA.

This method is use to identify the "momentum" or the strength of the market movement. Long signal generated when the shortterm MA cross above long term MA while short signal generated when shortterm MA cross below longterm MA.

Example below shows the signal to entry position LONG result of crossover




"Triple crossover" is a way of using 3 types of MA all together. For example MA5, MA10 and MA20 cross between one another. By adding more MA, the false signals may be reduced.

Example of buy signal:



When MA5 cross with the MA10 and ascended to the top, this shows the buy signal was created. However, traders may wait until MA10 and MA20 cross once again and rise to the top. The crossing between MA10 with MA20 can be used to confirm the buy signal generated by initial signal of the MA5 and MA10.