Monday, February 8, 2010


The Moving Average Convergence / Divergence is a technical indicator that illustrates the difference between a fast and a slow exponential moving average (EMA), usually 12 day EMA and a 26 day EMA with a 9 day EMA used as a trigger line. The 12 day EMA will react to the market more quickly than will the 26 day EMA. Visually this results in a MACD that is slanted upwards. Conversely when prices fall or trend downwards the opposite will occur and the 12 day EMA will decrease faster than will the 26 day, creating an obvious visual slant downwards. The MACD does oscillate at what would be considered a zero line.

As is the case with trading moving average crosses, buy and sell signals derived from a MACD will come from the crossing of two lines. However, these two lines are not your two EMA lines, rather one is the combined level of the two EMA lines and the second is the signal, or trigger line (the 9 day exponential moving average of the actual MACD itself). The MACD crossing signal line from above would indicate a sell order and conversely the MACD crossing the signal line from below would indicate a buy order.

MACD as a Histogram

The histogram is a visual indication of convergence (moving average lines of MACD moving towards one another) and divergence (moving average lines of MACD moving away from one another).

As the moving average lines cross the histogram will show no lines whatsoever, indicating to traders that lines (prices) may now start in a new direction.


Most literature written on technical analysis, more specifically technical indicators, begins with Moving Averages. As its name would suggest a moving average calculates an average of price range over a specified period. For example, a 10 day moving average gathers the closing price (or the open, high or low) of each day within the 10 day period, adds the 10 prices together and then of course divides by 10. The term moving implies that as a new day's closing price is added to the equation, the day that is now 11 days back is dropped from the equation. Figure 1 shows an example of a simple moving average line placed on a candlestick chart.

The example in figure 1 outlines what would be considered a Simple Moving Average. There are at least 7 varieties of moving averages, we will focus on the following three:

  • Simple Moving Averages
  • Exponential Moving Averages
  • Weighted Moving Averages

What are moving averages trying to tell us?

It is essential that you understand what a moving average is trying to tell you. A moving average calculating the last 30 days of prices in the market essentially represents a consensus of price expectations over that 30 day period.

Understanding a moving average is at times as simple as comparing the market's current price expectations to that of the market's average price expectations over the time frame that you are viewing. The average gives us a range that traders are comfortable trading within.

When prices stray from this zone, or from the moving average line, a trader should begin to look for potential entry points into the market. For example, a price that has risen above the moving average line typically implies a market that

is becoming more bullish. Just
the opposite, when prices begin to fall below moving average lines the market is becoming visibly bearish.

Notice the angle of the moving average shown above at various points across the chart. Moving averages not only give traders a much smoother look at the true trend of the market, they also offer keen directional insight found in the angle of the moving average line. Erratic sideways markets tend to be represented by moving average lines that are flat or sideways, whereas markets that are beginning to trend strongly in one direction or another will begin that trend with a strongly angled moving average line.

Simple Moving Averages

Calculating simple moving averages is really quite simple (no pun intended). As was outlined in the beginning of this section the sum of all closing prices is divided by the number of days in the equation. With each new day the now oldest day that is no longer a part of the time frame is subsequently dropped from the equation. A simple moving average is considered a lagging indicator. In fact, the simple moving average perhaps epitomizes the meaning of lagging indicator in that its visual data often comes a bit after the fact. Nevertheless, simple moving averages are an indication of where the price range should be trading at. When prices begin to break away from the moving average line in conjunction with a sharply angled moving average line – basic mathematics is indicating a move up or down in the market. The down side when observing lagging indicators is that the prediction often comes too late; thus the reasons for other types of moving averages, averages that more heavily weigh recent data and can offer more rapid predictions.

Exponential Moving Averages

Exponential and weighted moving averages attempt to resolve the issue of lagging directional forecasts. This is done by placing greater emphasis on more recent price data. Instead of evenly distributing plotted points of a moving average across all candles in the period, a weighted or exponential moving average puts more emphasis on the most recent data; allowing the angle of the moving average to react more quickly.

Reading moving averages is about comparing an average view of the market's recent trends to an actual view of recent price data. Notice in figure 4 that the exponential average reacts more quickly to price chance than does this simple moving average.

The Moving Average Cross

The moving average cross is a tool that many traders use. As can be seen in figure 5

there are two moving average lines plotted on this chart. The idea is to combine a short term moving average with a long term moving average. For example, a 10 day moving average on top of a 20 day moving average. Of course the shorter moving average period will react more quickly to price direction, whereas the longer moving average period will be represented by a smoother less volatile line. When the two lines cross this is considered an indication of a quickly approaching trend reversal or change in price direction. As always, watch for the angle of the moving average line, particularly the shorter time frame (in this case the 10 day moving average). When lines cross with a sharp angle and an obvious separation from one another this may be an indication of a change in price direction.


Charting & Charting Styles

'Charting' is essentially the most basic expression of technical analysis. There are many different charting styles and methods. We will cover three of the basics: line charts, bar charts, and candlestick charts.

Line Charts

A line chart is a simple visual representation of data. It generally plots the closing price of a given period and over the course of time connects the dots. The following image shows an example of a basic Forex line chart:

Bar Charts

Bar charts are one of the most popular types of trading charts. A Bar Chart displays a price's open, high, low and closing prices. As shown in the following image the top of the bar chart represents the highest price of the period, and the bottom of the bar represents the lowest price of the period. The opening price of the bar is shown by a short horizontal line on the left hand side of the bar. The closing price is shown by the same short horizontal line on the right hand side of the bar.

Candlestick Charts

Candlestick charting is widely believed to have first appeared sometime after 1850. Much of the credit for candlestick development and charting goes to a legendary rice trader named Homma from the town of Sakata.

The candlestick is comprised of a "body" and an upper and lower "wick". The body of the candle is typically a dark color when the close is at a lower price than was the open (a bearish candle). Conversely, if the close is at a higher price than was the open the candle will be hollow or a light color (a bullish candle). The wick of the candle represents the entire range of price for that period. The top of wick of course represents the price at its highest point, while the bottom of the wick represents the price at its lowest point.

Looking for Trends

There are certainly a few things that you are going to want to consider when looking at a chart. Ask yourself what the Forex chart on your screen is telling you, and which of the following questions are worth considering:

Is there an obvious trend or direction of the market within the time frame that you are viewing?

Are there any basic chart patterns formations such as triangles, wedges, pennants, double tops or bottoms or otherwise that might suggest a pending breakout or trend reversal?

Is the market trading within the walls of any obvious support and resistance levels, or is the market trading within a channel?

Have you considered any technical indicators?


The following chart shows an example of an upwards trend.

It takes two or more points to draw a trend line. The trend line in our example was drawn by identifying the lowest low of the trend and connecting the line to the following low preceding a new high. A solid trend line should continue in this manner until several lows followed by new highs are plotted.

Support and Resistance

Support and resistance represent key junctures where the forces of supply and demand meet.

Support is the price level at which demand is thought to be strong enough to prevent prices from declining further. Support levels are usually below the current price, though it is not uncommon for prices to dip below support briefly. Support does not always hold and a break below support levels signals that the bears (sellers) have won out over the bulls (buyers). A decline below a support level indicates a new willingness to sell and/or a lack of incentive to buy. Once a support level has been broken, another support level will be established at a lower level.

Resistance is the price level at which demand is thought to be strong enough to prevent prices from rising further. Resistance levels are usually above the current price, though it is not uncommon for prices to rise above resistance briefly. Resistance does not always hold and a break above resistance levels signals that the bulls (buyers) have won out over the bears (sellers). A raise above resistance levels indicates a new willingness to buy and/or a lack of incentive to sell. Once a new resistance level has been broken, another resistance level will be established at a higher level.


What is Technical Analysis?

"Technical analysis" sounds much more complicated than the actual process is. It could be referred to as "price analysis", as this might be a more accurate description. Through the use of charted data, traders around the world analyze their market of choice. The objective: to try and determine future price movement. To the technical analyst, this means understanding price movement patterns of the past.

The charting of price movements illustrates a visual tug-of-war between buyers and sellers. Notice how price patterns formed on the following chart tend to repeat; technical traders attempt to identify patterns of these nature, and base their trades accordingly.

Does Technical Analysis Work?

Analyzing price patterns is actually very similar to analyzing human behavior. While humans can at times be unpredictable in nature, humans are typically considered to be creatures of habit. The average human adheres to certain paradigms. If one were to observe an average person's daily routine before leaving the house for work their behavior may seem random or without purpose.

However, if one were to observe the same human day after day, within a relatively short amount of time it would not be hard to outline that person's morning routine. In fact, nine times out of ten you would probably be able to predict with impressive accuracy how your observed creature would prepare for their day, perhaps even down to the minute.

The Forex market is sometimes considered a creature of habit. Analyzing price movement can be effective because the past can teach us how the market will react to certain situations. History has shown to repeat itself. Technical analysis offers traders a certain level of expectancy when considering future price movements. There is no crystal ball for predicting the future of the market, though there are keys to understanding patterns, past, present and future in the that traders have developed over time.

Does Technical Analysis Fail?

Technical analysis can fail when traders fail to consider the fundamentals. Fundamental factors such as political events, a hike in interest rates, unemployment rates and so on will impact the Forex market more substantially than perhaps any other market. Fundamental factors often drive major price movements. A trader focused on technical analysis cannot ignore Nonfarm Payroll on the first Friday of the month and expect his or her technical indications to be as accurate as the day prior. Notice the price movement shown in figure 2. Shortly after the Nonfarm Payroll announcements, price reactions were wild; during such times technical analysis may not be able to be counted on. Purely technical traders understand that certain political factors throw all other price forecasts out the window.

Forex Risk

There is considerable exposure to risk in any currency exchange (forex) transaction. Any transaction involving currencies involves risks including, but not limited to, the potential for changing political and/or economic conditions that may substantially affect the price or liquidity of a particular currency.



Fundamental analysis is the study of the core underlying elements that influence the economy of a particular currency. This method of study attempts to predict price action and market trends by analyzing economic indicators, government policy and societal factors. Fundamental analysis is an effective resource to forecast economic conditions, but not exact currency prices. For example, you might get a clear understanding of the health of the US economy by studying an economists forecast of an upcoming Employment Cost Index (ECI), however that doesn't translate into entry and exit points.

Fundamental indicators for each currency might include, but not limited to; interest rates, central bank policy, political figures/events, unemployment/employment reports, and Gross Domestic Product (GDP). These economic indicators are snippets of financial and economic data published by various agencies of the government or private sectors for each country. These statistics, which are made public on a regularly scheduled basis, help market observers monitor the pulse of the economy. Therefore, almost everyone in the financial markets religiously follows them.

With so many people poised to react to the same information, economic indicators in general have tremendous potential to generate volume and to move prices in the markets. While on the surface it might seem that an advanced degree in economics would come in handy to analyze and then trade on the glut of information contained in these economic indicators, a few simple guidelines are all that is necessary to track, organize and make trading decisions based on the data.

The organization responsible for an indicator generally distributes its reports about an hour before the official release time to the financial news outlets (Reuters, CNBC, Dow Jones Newswires, Bloomberg). The reporters, who are literally locked in a room and not permitted to have contact with anyone outside, ask questions of the agency officials and prepare headlines and analyses of the report contents. These stories are embargoed until the official release, at which time they are transmitted over the newswires to be dissected by the Wall Street community. Most Wall Street firms employ economists to provide live broadcasts of the numbers as they run across the newswires, together with interpretation and commentary regarding likely market reaction. This is known as the hoot and "holler" or tape reading. The more an indicator deviates from Street expectations, the greater its effect on the financial markets.

Economic indicators are classified according to how they related to the business cycle. An economic indicator will do one of the following:

  • Reflect the current state of the economy (coincident)
  • Predict future conditions (leading)
  • Confirm a turning has occurred (lagging)

There is considerable exposure to risk in any currency exchange (Forex) transaction. Any transaction involving currencies involves risk. This includes, but is not limited to, the potential for changing political and/or economic conditions that may substantially affect the price or liquidity of a particular currency.


FOREX - the foreign exchange market or currency market or Forex is the market where one currency is traded for another. It is one of the largest markets in the world.

Some of the participants in this market are simply seeking to exchange a foreign currency for their own, like multinational corporations which must pay wages and other expenses in different nations than they sell products in. However, a large part of the market is made up of currency traders, who speculate on movements in exchange rates, much like others would speculate on movements of stock prices. Currency traders try to take advantage of even small fluctuations in exchange rates.

In the foreign exchange market there is little or no 'inside information'. Exchange rate fluctuations are usually caused by actual monetary flows as well as anticipations on global macroeconomic conditions. Significant news is released publicly so, at least in theory, everyone in the world receives the same news at the same time.

Currencies are traded against one another. Each pair of currencies thus constitutes an individual product and is traditionally noted XXX/YYY, where YYY is the ISO 4217 international three-letter code of the currency into which the price of one unit of XXX currency is expressed. For instance, EUR/USD is the price of the euro expressed in US dollars, as in 1 euro = 1.2045 dollar.

Unlike stocks and futures exchange, foreign exchange is indeed an interbank, over-the-counter (OTC) market which means there is no single universal exchange for specific currency pair. The foreign exchange market operates 24 hours per day throughout the week between individuals with forex brokers, brokers with banks, and banks with banks. If the European session is ended the Asian session or US session will start, so all world currencies can be continually in trade. Traders can react to news when it breaks, rather than waiting for the market to open, as is the case with most other markets.

Average daily international foreign exchange trading volume was $1.9 trillion in April 2004 according to the BIS study.

Like any market there is a bid/offer spread (difference between buying price and selling price). On major currency crosses, the difference between the price at which a market maker will sell ("ask", or "offer") to a wholesale customer and the price at which the same market-maker will buy ("bid") from the same wholesale customer is minimal, usually only 1 or 2 pips. In the EUR/USD price of 1.4238 a pip would be the '8' at the end. So the bid/ask quote of EUR/USD might be 1.4238/1.4239.

This, of course, does not apply to retail customers. Most individual currency speculators will trade using a broker which will typically have a spread marked up to say 3-20 pips (so in our example 1.4237/1.4239 or 1.423/1.425). The broker will give their clients often huge amounts of margin, thereby facilitating clients spending more money on the bid/ask spread. The brokers are not regulated by the U.S. Securities and Exchange Commission (since they do not sell securities), so they are not bound by the same margin limits as stock brokerages. They do not typically charge margin interest, however since currency trades must be settled in 2 days, they will "resettle" open positions (again collecting the bid/ask spread).

Individual currency speculators can work during the day and trade in the evenings, taking advantage of the market's 24 hours long trading day.

Compiled using Wikipedia materials.


Foreign Exchange Market is a market where traders buy and sell currencies with the desire of attaining a net profit when the values of the currencies convert in their favor. Folks are establishing huge sums from Forex trading. The Forex Market has a large potential for everybody, ranging from large corporate firms to average, day-to-day people like you and me.

It is a very exciting trade with a huge money-making potential. Just imagine yourself sitting comfortably in your pajamas at your computer… you turn on the internet and make a few quick transactions and by the time that you get up to get a cup of coffee, you are several hundred bucks rich! Would you like that? I would!!

I can hear you say, “Wait a second!! This sounds just like another one of those puzzling markets like stocks, options or traditional futures, so what makes this market any different?”

Aaah! Great question! So, in response to your question, here are ten fine (if not great) reasons to enter the Forex Trade:

1. 1st and foremost, Forex trading allows for small-scale investments. You do not have to be able to invest 1000s of dollars to get started with this trade. You can start trading Forex with as little as $300 to $350 and could be well on your way to earning more than that on your first twenty-four hours.

2. The Forex markets are always open! You are able to trade anytime and from anywhere in the world. No waiting for the stock exchange to open. The market is ongoing, with generally only minor breaks on the weekends.

3. The funds that you invest are liquid; you can cash them anytime you want. No waiting for days to get your stocks converted into hard cash.

4. The value of the Forex Trading market is COLOSSAL: it is 30 times larger than all of the US equity markets combined. It is the largest market in the world with daily reported volume of 1.5 to 3.0 trillion dollars. This massive value makes it a lucrative and desirable trade to invest in.

5. It is a highly stable trade and offers greater strength over other markets. Countries and people are ALWAYS going to need currency. Although the value of different currencies goes up and down, the fluctuations are not as dramatic as stock prices and generally follow a predictable trend.

6. You do not have to worry about commissions, exchange fees nor any hidden charges when you trade Forex. Forex brokers make only a small part of the bid and there are very respectable and free brokers available as well. Is that not marvellous for you?

7. You make profits no matter which way the currency is working. You will not worry about a falling currency value if you know what to do with it and make good gains.

8. Forex is a very vaporous market. Unlike equity markets, where analysts have an unfair advantage over the layperson because of their insider knowledge, the pertinent information for Forex is equally available to every one through global news. Therefore, all Forex traders are in a position to make appropriate decisions according to the current market situations.

9. Forex market is super quick! It takes not more than 1 to 2 seconds to finish your transactions because it is all done electronically, online and in Real Time.

10. The last dandy news is that you do not need any formal training, licensing, diploma or degree to trade Forex. All you need is the formula of how it works, trading strategies and some tips and techniques and you can be on your way to earn big profits.

Forex trading online may be the fleetest path to financial freedom and an end to all your financial worries. It truly is an superior, if not the best home business opportunity for average people.You owe it to yourself to give it a test!!!
Successfulness and happiness to all!

Learn more about Forex Trading . Stop by Todd Schuyler’s site where you can find out all about Forex Trading Software and what it can do for you.

Article Source: