Technical Analysis Indicatorrs for FOREX

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ADVANCED INDICATOR MANUAL By FX-Strategy.com http://www.fx-strategy.com

QUOTES Real Time Java Applet FXS Indicators Real Time Tables

FXS-Adaptive Moving Average

Exotic Currencies

FXS-Divergence

Cross Rates

FXS-DMI

Forwards & Libor Currency Tools World Indices CHARTS Real Time - Netdania Real Time - FxTrek

FXS-MACD FXS-Pivot Cloud FXS-RSI FXS-Stochastics FXS-Trailing Stop

Strategic

FXS-Trend Oscillator

Market Trend

Schaff Indicators

USD Index

Schaff Trend Cycle

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Schaff Swing Indicator Schaff TC1 Indicator Schaff Trend CD Schaff Trend RSI Schaff TCD RSI Schaff TC Trigger Schaff TC1 Trigger Schaff TCTC1 Trigger

Strategy

Standard Indicators

Analysts Comments

Average True Range

Audio Analysis Expert Q&A Sessions Technical Analysis Forecasts

Bollinger B% Bollinger Bands Bollinger Band Width

Economic Indicators

Commodity Channel Index

Macro

Directional Movement Index

Economic Calendar

Detrend Price Oscillator

Interest Rates

Exponential Moving Average

FUTURES Currencies

Exponential Moving Average-Two Lines

Energies

Ichimoku Kinko Hyo

Financials

Linear Regression

Indices EDUCATION Knowledge Workshops Conventions BROKERS

Gravity Q&A SESSIONS Analysing the majors By Gabriel Leiria

Modified Exponential Moving Average Momentum Moving Average Convergence Divergence Moving Average Convergence Divergence (Histogram Format) Moving Average Envelopes Parabolic

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Price Channels

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Rate of Change

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Relative Strength Index Relative Strength Index Signal Simple Moving Averages Simple Moving Averages-Two Lines Stochastics Fast Stochastics Slow TRIX Ultimate Oscillator Weighted Moving Average Williams R%

By Doug Schaff FX-Strategy.com Tel: 845-758-2935 E-mail: [email protected]

http://www.fx-strategy.com 71 Starbarrack Road Red Hook, NY 12571 United States

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FXS-ADAPTIVE MOVING AVERAGE (FAMA) By FX-Strategy.com

QUOTES Real Time Java Applet Real Time Tables Exotic Currencies

http://www.fx-strategy.com Name:

FXS-Adaptive Moving Average

Characteristic:

Trend Direction

Cross Rates

Length

5 controls the measurement period for the average

Forwards & Libor

Factor

2 controls the placement of the bands around the average

FAMA

Adaptive Moving Average

HiBand

A band plotted above the FAMA

LoBand

A band plotted below the FAMA

Currency Tools World Indices

Plots:

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FAMA is a moving average that does not utilize a fixed number of bars in its calculation. A 10 period simple moving average takes the sum of price over the past 10 periods divided by 10. However, the nature of price varies as price either trends or consolidates and this constant fluctuation of price development affects the performance of the average. FAMA is built to distinguish the differences between each type of price development. By measuring price volatility, it automatically utilizes a different lookback period to calculate the average. This normally translates into a faster average during trending markets and into a slower average during consolidating markets. A pair of bands is added to FAMA to provide a channel that can be useful in identifying trends and broad support and resistance during consolidation. The bands are also adaptive by measuring the average variance of price from FAMA in order to attempt to provide approximate support and resistance as implied from recent price movement.

Analysts Comments Audio Analysis

Usage

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To identify trends:

In the British Pound uptrend, above, not how price broadly remained above FAMA and in this case, within the HiBand also. It is also quite possible for price to penetrate the Bands in the direction of the trend, which merely demonstrates the strength of the move. This latter effect is seen in the first decline from the uptrend high as price penetrated the LoBand on several occasions.

To identify resistance:

Once price has established a direction the bands often provide a stalling point for corrections to the underlying move. In the example above, after the initial decline after the uptrend, price moved higher and rebounded from the HiBand. The same was true in the bottom right of the chart.

To identify consolidation: Consolidation often occurs in sideways, quite choppy price action, without direction. The Bands around FAMA provide an effective sideways channel in these circumstances that can be used to sell at the high and buy at the low. It must be stressed however, that other forms of analysis must be used to support such trades and the Bands should not be the only contributor to the entry condition.

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Note how in the long sideways move in the EURUSD in late summer to early fall in 2002, that price was contained by the HiBand and LoBand. Following the break higher, price remained in the upward channel defined by FAMA and HiBand.

By Doug Schaff FX-Strategy.com Tel: 845-758-2935 E-mail: [email protected]

http://www.fx-strategy.com 71 Starbarrack Road Red Hook, NY 12571 United States

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FXS-DIVERGENCE By FX-Strategy.com

QUOTES Real Time Java Applet

http://www.fx-strategy.com Name:

FXS-Divergence

Characteristic:

Trend Reversal

Parameter Defaults:

FXS-RSI Length

14

Overbought

75

Oversold

25

Purple square

Bearish divergence

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Light blue square

Bullish divergence

Yellow dots

Bearish break level

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Pink dots

Bullish break level

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Plots:

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Momentum indicators such as the RSI and Stochastics are very popular tools that are best used as overbought and oversold in consolidating markets. During trends they will invariably be poor trading indicators because uptrending markets can stay overbought and keep rising, and downtrending markets can stay oversold and keep falling. However, there is one use of momentum indicators, called “Divergence”, that can alert traders to potential trend reversals.

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The chart above displays examples of both bearish and bullish divergences. On Click here for more the left it can be seen that price has made new highs while the FXS-RSI actually made a corresponding lower high. The opposite happens on the right of the chart. details and to register Price declines to new lows while FXS-RSI fails to confirm those new price lows. This is called a price-momentum divergence. That is, price is making a new extreme for the trend but with a lack of momentum, as shown in this case by FXSRSI.

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On the face of it, this looks like an excellent tool to spot trend reversals. However, divergences can extend for quite some time before they get “triggered”. Let us look at the dangers of relying on divergence alone.

The chart shows the weekly USDJPY market as it rallied after the historic 79.75 low in April 1995. By the end of 1995 and the beginning of 1996 the momentum of the rally had stalled and as higher price highs were recorded, FXS-RSI failed to match those new peaks. It was a classic bearish divergence, but as we can see, it never translated into a significant reversal and indeed, eventually price continued higher. The basis of a trend must be remembered at this point. An uptrend is a series of rising peaks and troughs. Until those troughs are breached, the trend cannot be said to have reversed. Clearly, in this example, the declines from each new peak never broke below the previous corrective low and therefore the divergence cannot be said to have been completed. FXS-Divergence - Usage During trading and analyzing it is quite easy to forget to spot all the different signals that arise. In the heat of the trend it is quite possible to overlook a divergence. While divergences are difficult to define mechanically due to the varied nature of spans between trend extremes and the ability to spot key reversal highs/lows, FXS-Divergences has been designed to identify a great number of them. Not only that, but bearing in mind the lesson we have learned from “counting ones chickens too early”, it also provides approximate break levels that confirm whether the divergence is valid. It must be emphasized that the break levels cannot be used without due attention to other forms of analysis such as trend lines and trailing stops. Thus it should be used within the context of a total integrated analysis.

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As we can see, used correctly the break levels prevent early exits in the development of a trend or when price has merely diverged within a period of consolidation as was evident in the center of the chart during the sideways price movement. However, they also remind us to look carefully at the right times to make sure we do not forget the potential for price reversal. Want to know more about FXS-RSI Click Here

By Doug Schaff FX-Strategy.com Tel: 845-758-2935 E-mail: [email protected]

http://www.fx-strategy.com 71 Starbarrack Road Red Hook, NY 12571 United States

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FXS-DMI By FX-Strategy.com

QUOTES Real Time Java Applet Real Time Tables Exotic Currencies Cross Rates

http://www.fx-strategy.com Name:

FXS-DMI

Characteristic:

Trend Direction

Parameter Defaults:

Length

14

Trend Level

25

Forwards & Libor Currency Tools

Plots:

ADX

World Indices

DMI+

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DMI-

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DMI was developed by Welles Wilder Junior and is comprised of ADX together with DMI+ and DMI-. ADX is created by looking at both positive and negative directional movement and identifying sustained movement in one direction. When this occurs ADX will rise (irrespective of whether the trend is higher or lower). Trend direction is identified by whether positive movement (DMI+) is above or below negative movement (DMI-). Once ADX rises above a certain level a trend can be said to have been established.

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Usage DMI is a little used indicator but is very useful in identifying trends. Momentum indicators are best used in consolidating markets as an overbought/oversold

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indicator. However, if this type of signal is used in a trend, there is a large risk of losing money. Hence, the use of ADX within the DMI group is useful in identifying when momentum indicators should be used and when they should not. The chart above shows the daily AUDUSD market. Note how the FXS-ADX regularly identifies trending price much earlier than the standard ADX. In addition, in a persistent trend that sees a minor pullback, while standard ADX often begins to decline, FXS-ADX will quickly responds to a resumption of the trend. This is evident at the left of the chart. Towards the end of a sustained trend where the final peaks are quite choppy, standard ADX will commonly fall away while FXS-ADX will remain steady.

An example of this is shown in the daily USDCHF market during the long downtrend in the first half of 2002. Note how FXS-ADX both identified the trend earlier and also continued rising throughout the entire move while the standard ADX missed half of the trending move. The second chart below displays how a combination of FXS-RSI and FXS-ADX would have provided excellent trading opportunities. During the sustained downtrend in the USDCHF identified by a rising FXS-ADX, the oversold indications from FXS-RSI could have been avoided. However, during the rest of the period when FXS-ADX was either declining or below 25, the overbought and oversold indications provided strong reversal signals at price peaks and troughs.

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Want to know more about FXS-RSI, Click Here. table border="0" cellspacing="1" cellpadding="2" ID="Table3" bgcolor="#FFFFFF"

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FXS-MACD By FX-Strategy.com

QUOTES Real Time Java Applet

http://www.fx-strategy.com Name:

FXS-MACD

Characteristic:

Trend Direction

Cross Rates

Parameter Defaults:

Length

Forwards & Libor

Plots:

MACD

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Currency Tools

Signal

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Histogram

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28

Moving Average Convergence and Divergence (MACD) was developed by Gerald Appel as a means to anticipate crossovers in moving averages that could potentially imply a reversal in price direction. The MACD line is constructed by taking two exponential moving averages and subtracting the value of the longer moving average from the shorter moving average. A signal line is then calculated by taking a 9-period exponential moving average of the MACD line.

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Usage There is no difference in usage between the standard MACD and FXS-MACD. The benefit of the FXS-MACD is that the MACD line tends to be smoother and suffers fewer whipsaws such as that shown in the daily chart of the EURUSD. Note how the FXS-MACD remained positive for the entire uptrend and avoided the three occasions when the standard MACD crossed lower. This is also seen in the histogram, representing the difference between the MACD line and the signal,

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which remains above zero for this period.

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FXS-PIVOT CLOUD By FX-Strategy.com

QUOTES Real Time Java Applet

http://www.fx-strategy.com Name:

FXS-Pivot Cloud

Characteristic:

Support and Resistance

Cross Rates

Parameter Defaults:

Length 10

Forwards & Libor

Plots:

Cloud Hi

Real Time Tables Exotic Currencies

Cloud Lo

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When used correctly, pivot support and resistance are very powerful tools to recognize potential stopping or stalling areas for price movement. In general they are used quite effectively in consolidating markets although when used in conjunction with forecasting techniques such as Elliott Wave they can provide targets in trends also. However, just as the concept of support and resistance can be applied in trends through trend lines, the concept of dynamic pivot levels can also be utilized. Usage

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FXS-Pivot Cloud provides a shaded cloud-like display on a chart that acts as support or resistance in any market, dynamically updating as a guide to distinguish breaks and reversals.

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The chart above displays daily EURUSD history as it broke higher into a strong uptrend in the middle of 2002 at point A. Note how after initially trading within the bounds of the cloud at the extreme left of the chart, price breaks higher, even the day’s low clears the Cloud High, indicating a strong rally. Only at one point did price then breach the Cloud Low, and even then the close failed to penetrate it. The cloud continued to rise along with trend. At one point price bounced from the low, and eventually crossed below towards the center right of the chart at point B. It can be seen that the FXS-Pivot Cloud acts as an effective trailing stop loss in trending markets.

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Following this strong trend, price consolidated in quite a tight range. The majority of time price failed to penetrate the cloud on close (exceptions being at point B and point C). We must also consider the longer timeframe.

The second chart displays exactly the same period of price action on the weekly chart. Note how price broke above the weekly cloud high at point A to confirm the daily break higher. At point B on the daily chart, where the price high dipped below the daily pivot cloud, it had not even broken below the weekly cloud high and thus the daily signal would have been viewed with some caution. By point C on the daily chart, price penetrated both cloud high and cloud low. However, when seen in conjunction with the weekly chart it can be seen that the weekly cloud low was continuing to provide support during the consolidation. The break higher on the daily chart around point C was not confirmed by price low breaking above the weekly cloud.

The same concept may be utilized in different time frames. The chart shown above is the 4-hourly chart of USDCHF. Following a consolidation on the left of the http://www.fxstreet.com/education/a6.asp (2 of 3) [4/02/2004 11:27:11 AM]

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chart, a break lower is seen. After this break price declined to the 1.3230-50 area and moved sideways but without cleanly penetrating either top or bottom of the cloud. By viewing this also in the daily charts we can begin to achieve a bias to price direction and extent of move.

From this larger perspective it can be seen that the market was consolidating on a daily basis and the break lower here occurred at the same time as the 4-hourly break lower. Towards the 1.3230-50 level we can see the daily cloud declining but with price beginning to consolidate, evident from the 4-hourly chart. It would appear likely that any test higher will encounter resistance in the area of the daily cloud. Of course, it is possible (and recommended) to view the same chart on lower time frames to judge the shorter term price movement within the analysis suggested by the 4-hourly and daily charts.

By Doug Schaff FX-Strategy.com Tel: 845-758-2935 E-mail: [email protected]

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FXS-RSI By FX-Strategy.com

QUOTES Real Time Java Applet

http://www.fx-strategy.com Name:

FXS-RSI

Characteristic:

Momentum

Cross Rates

Parameter Defaults:

Length

Forwards & Libor

Plots:

RSI

Real Time Tables Exotic Currencies

14

Currency Tools

Overbought

70

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Oversold

30

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Welles Wilder’s Relative Strength Index (RSI) is one of the most widely used momentum indicators in the foreign exchange markets. There are two basic methods of using the RSI, one for consolidating markets and the other to identify trend reversals. Traditionally, RSI has been used as an overbought/oversold indicator and should be applied in consolidating markets rather than trending markets. At trend reversals there is a common tendency for price-momentum divergences to develop. (See FXS-Divergence) Usage The problem with RSI is that it has become over-used and fails repeatedly in identifying overbought and oversold conditions even during corrective or consolidating markets. The FXS-RSI is designed to overcome this problem and is more sensitive to price fluctuations.

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The chart above displays the USDJPY 4-hour market during February 2003 when the market, while having an upward bias, was quite choppy in nature and would

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appear to be in the right condition to provide overbought and oversold signals. However, Welles Wilder’s RSI reached overbought only twice during this period and never reached oversold. Indeed, the overbought signals look useful, but the RSI itself did not give any indications of timing to reverse out of any short positions. On the other hand, FXS-RSI reached overbought on four occasions and oversold on three, providing enhanced indications of when there was risk of a price reversal. While the mere existence of an extreme RSI reading is not sufficient in itself to establish a position, it does highlight the condition and brings awareness of potential reversal.

To demonstrate the more powerful signals that are generated by FXS-RSI, look at this second chart in which even the divergence signals are more pronounced. At the end of the long downtrend in daily USDJPY in July 2002 the standard version of RSI merely recorded oversold but failed to diverge. However, the FXS-RSI provided both oversold signal (although while the market was trending) and a clear divergence. This would have allowed traders to prepare for a break of a downtrend line or previous resistance area. Subsequent to that, the FXS-RSI provided more valid signals than the standard counterpart.

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FXS-STOCHASTICS By FX-Strategy.com

QUOTES Real Time Java Applet Real Time Tables Exotic Currencies Cross Rates Forwards & Libor Currency Tools

http://www.fx-strategy.com Name: Characteristic: Parameter Defaults: Plots:

FXS-Stochastics Momentum Length 14 PercentK PercentD Overbought 80 Oversold 20

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Stochastics were created by George Lane in the 1950’s and have become a popular momentum indicator due to the apparent simple nature of its overbought/oversold signals. There are two versions of Stochastics – Fast and Slow. George Lane did provide full rules as to when to use Stochastics but many find these rather difficult to apply. Essentially the basic element of Stochastics is the Percent K line. This is derived from a simple formula that measures the relative position of the current price in percentage terms against the recent range. Percent D is a form of average of Percent K and Percent Slow D is another average of Percent D.

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Another use of Stochastics is the crossover of the faster line across the slower. (%K through %D and %D through %SlowD) One of the distracting features of Stochastics, particularly the Fast Stochastic, is the number of occasions when the two lines cross, providing apparent bullish and bearish signals. All too often there is no follow through and the crossover provides a false signal. FXS-Stochastics provides a smoother Stochastic with fewer crossovers, and therefore fewer false signals.

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Usage The chart shows the 10-minute bar chart of USDCHF in the middle of February 2003. All three forms of Stochastics are plotted and it can be seen that the standard Fast Stochastic is constantly suffering crossovers of PercentK through PercentD, even to the extent of being almost every bar during the sideways consolidation around 15:30 – 17:30. The Slow Stochastic does reduce the number of signals. But at the far left, at the start of the data series both Fast and Slow Stochastics can be seen moving higher and lower without reflecting price action that well. At the same time, FXS-Stochastics provided a consistent bullish trend to price and avoided the confusion caused by the standard indicators. This same situation occurred to the right of the chart, also, as FXS-Stochastics indicated the basic bearish direction of price.

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Another feature of FXS-Stochastics is that it has been developed to cause less crossovers in trending markets, times when standard momentum indicators traditionally fail. Note how in the daily GBPJPY market FXS-Stochastics held positive throughout the entire move while the standard Slow Stochastics caused a series of crossovers. One point to appreciate is that to accommodate the feature of less whipsaws the indicator is slower than the standard version and is not totally suited to finding peaks and troughs. However, with an integrated analytical methodology the smoother features help in identifying the underlying price direction.

By Doug Schaff FX-Strategy.com Tel: 845-758-2935 E-mail: [email protected]

http://www.fx-strategy.com 71 Starbarrack Road Red Hook, NY 12571 United States

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FXS-TRAILING STOP By FX-Strategy.com

QUOTES Real Time Java Applet

http://www.fx-strategy.com Name:

FXS-Trailing Stop

Characteristic:

Trend Direction

Cross Rates

Parameter Defaults:

None

Forwards & Libor

Plots:

Trailing Stop

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FXS-Trailing Stop is an effective trailing stop loss once price is trending. However, in addition to this basic function it is also color coded to provide additional information: Blue: Light Blue: Red: Purple:

Established uptrend Upward bias Established Downtrend Downward bias

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Usage The Trailing Stop reacts only to “significant” moves and avoids the problem of whipsaws seen in the Parabolic (stop and reverse) indicator. In the chart above it can be seen in the large downtrend to the left of the chart, that price rallied sufficiently to penetrate the Trailing Stop on a close basis. At this point, the color changed to purple signifying that the rally had not reversed the trend, but that the bias remained lower. Parabolic would have reversed on this penetration and caused a bullish signal while the FXS-Trailing Stop maintained a bearish bias. Indeed, at the end of the large decline the Trailing Stop changed from “established downtrend” to “downward bias” and moved horizontally without

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changing from that status in spite of price oscillating up and down. This is a vital indication that price, while having stalled in the downtrend, had not performed a sufficient penetration above the Trailing Stop to suggest that the bearish bias had reversed. As can be seen, after over one month of sideways movement the bias did in fact change from lower to higher as the color changed from purple to light blue and this provided an early indication of a breakout from the sideways consolidation.

It is always imperative that indicators be used as part of a complete integrated analysis process. A very simple example would be the use of momentum indicators when the Trailing Stop implies a bias only and no established trend. There is an implication that if there is no trend, then signals from momentum indicators become valid. Looking at the above chart it can be seen that during periods when the Trailing Stop is colored either light blue or purple that the crossover signals from FXS-Stochastics provide excellent trading opportunities. Equally so, after the first buy signal on the left of the chart, by the time the FXSStochastics turn lower, the Trailing Stop has turned blue and this avoids the early exit from what turned out to be a very profitable trade. Want to know more about FXS-Stochastics, Click Here.

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FXS-TREND OSCILLATOR By FX-Strategy.com

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FXS-DMI

Characteristic:

Trend Direction

Parameter Defaults:

Length

14

Trend Level

25

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ADX

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FXS-Trend Oscillator is a price direction indicator. It produces one line that broadly indicates whether price is rising or falling.

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The above chart shows the same price action in CHFJPY. The Swing High and Swing Low indicators (strength of 3) have been applied to the Trend Oscillator. Only when the Trend Oscillator penetrates the previous Swing High will any buy signals be traded and only when the Trend Oscillator penetrates a Swing Low will a sell signal be traded. The result filters the signals to avoid some of the minor whipsaws. This is by no means the only filter that could be applied, but does point the way in which indicators may be used in an integrated manner to provide more powerful signals. Want to know more about Swing Highs and Swing Lows, Click Here.

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SCHAFF TREND CYCLE By FX-Strategy.com

QUOTES Real Time Java Applet

http://www.fx-strategy.com Name:

Schaff Trend Cycle

Characteristic:

Trend Momentum

Parameter Defaults:

TC Period

10

Forwards & Libor

MA1 Period

23

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MA2 Period

50

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Schaff Trend Cycle (STC) identifies trend momentum. The STC is created by running the difference between two exponential moving averages (a MACD Line) through a proprietary stochastic algorithm. The resulting oscillator measures when trend is accelerating or decelerating, showing a cycle measure of trend.

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Q&A SESSIONS The chart above shows an hourly Euro market with the Schaff Trend Cycle in the middle chart panel and a regular slow stochastic in the lower panel.

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The STC tends to be smoother and suffers fewer whipsaws such as occurs at A in the regular stochastic. The STC also reaches the 25-line and 75-line more often, giving clearer ideas of when to enter and exit positions.

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When the Schaff Trend Cycle is falling, trend momentum is falling and prices tend to stabilize or follow the trend cycle lower. When the STC is rising, trend

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momentum is rising and prices tend to stabilize or follow the cycle higher. Dotted buy and sell lines are drawn at 25 and 75 in the STC chart panel. The indicator rising above the buy line can be used to confirm trend cycle lows. The indicator falling below the sell line can be used to confirm trend cycle peaks. A powerful usage is to combine the STC with a Trend Direction indicator to identify both trend momentum and direction. Then consider trades when trend momentum and direction are in harmony.

The 4-hour British Pound chart above includes the STC and FXS-Trailing Stop. If the STC is rising or flat above 90, consider long trades if Trailing Stop is blue or light blue and rising. If STC is falling or flat below 10, consider short trades if Trailing Stop is red or magenta and falling.

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SCHAFF SWING INDICATOR By FX-Strategy.com

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Schaff Swing High Schaff Swing Low

Cross Rates

Characteristic:

Support / Resistance

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Parameter Defaults:

Strength

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The legendary technical analyst, W.D. Gann, called price peaks “swing highs” and price troughs “swing lows”. Gann liked the term “swing” because it is active; it reminded him of the market’s energy or movement. The Schaff Swing Indicator plots a dashed-line to the right of a price swing of a chosen strength. The line continues until the swing is broken or a swing of the same strength occurs at a new level.

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Swing High A price bar is considered a swing high when the high of that bar is higher than the high of a certain number of bars before and after it. The Strength input specifies the required number of lower highs that need to be on either side of the swing high before it will be plotted on the chart.

Swing Low A price bar is considered a swing low when the low of that bar is lower than the low of a certain number of bars before and after it. The Strength input specifies the required number of higher lows on either side of the swing low.

Usage Swing high and swing low bars can be used to calculate trendlines, support and resistance lines, and pivot points.

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into trading signals. In the 4-hour USDJPY chart, below, the Schaff Trend Cycle indicator and TC Trigger are applied along with swing highs and lows of strength 5.

In the middle of the chart are three green buy setup bars. They occur just below or above a swing high, which makes them more significant. Closing above a TCB setup bar and a swing high indicates that higher prices are likely. Meanwhile, the swing low that occurred before the breakout can be used as an initial stop loss level for a long trade. Why does this make sense? Breaking the swing low would change the pattern of higher highs and higher lows, thus negating a bullish forecast.

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SCHAFF TC1 INDICATOR By FX-Strategy.com

QUOTES Real Time Java Applet

http://www.fx-strategy.com Name:

Schaff TC1

Characteristic:

Trend Momentum

Parameter Defaults:

TC Period

10

Forwards & Libor

MA1 Period

23

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MA2 Period

50

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Period Len

25

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The Schaff TC1 is a measure of trend momentum, similar to the Schaff Trend Cycle. Whereas the input for the Schaff Trend Cycle is a MACD Line, the input for the TC1 is the Schaff Trend CD (See definition of Schaff Trend CD), an overbought/oversold measure of a MACD Line. The input is run through a proprietary stochastic algorithm. The resulting oscillator measures when trend is accelerating or decelerating, showing a cycle measure of trend.

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The 30-minute USDCHF chart above shows a yellow Schaff Trend Cycle in the middle chart panel and a blue Schaff TC1 indicator in the lower panel. Both are measures of trend momentum, but since each uses a different input, the resulting oscillators can vary.

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When the TC1 is falling, trend momentum is falling and prices tend to stabilize or follow the trend cycle lower. When the TC1 is rising, trend momentum is rising and prices tend to stabilize or follow the trend cycle higher. Dotted buy and sell lines are drawn in the TC1 chart panel. The indicator rising above the buy line can be used to confirm trend cycle lows. The indicator falling below the sell line can be used to confirm trend cycle peaks. The TC1 can be placed in the same chart panel as the STC to make it easier to see when both are rising or falling. Long positions can be considered when both are rising or flat above 90. Short positions can be considered when both are falling or flat below 10.

A powerful way to use trend cycles is in combination with a Trend Direction indicator. For example, the TC1 and FXS-Adaptive Moving Average (FAMA) have been applied to the 30-minute USDCHF chart, below.

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When price is below the black FAMA line and FAMA is falling, then a TC1 that is falling or flat below 10 would indicate further price declines. When price is above FAMA and FAMA is rising, a TC1 that is rising or flat above 90 would indicate additional price increases.

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SCHAFF TREND CD

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QUOTES Real Time Java Applet

http://www.fx-strategy.com Name:

Schaff Trend CD

Characteristic:

Trend Momentum

Parameter Defaults:

MA1 Period

23

Forwards & Libor

MA21 Period

50

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Period Len

25

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0-Line The Schaff Trend CD (STCD) identifies repeated high and low patterns, or cycles, within a MACD measure of trend. STCD does this by comparing trend to a moving average of itself. The input for the STCD is the difference between two exponential moving averages (a MACD Line). The resulting oscillator measures when trend is accelerating or decelerating, showing a trend cycle.

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Usage In the chart above, turns in the STCD show Trend Cycle (TC) bottoms and tops. When the Schaff Trend CD is rising, the trend cycle is rising and prices tend to stabilize or follow the cycle higher. When the STCD is falling, the trend cycle is falling and prices tend to stabilize or follow the cycle lower.

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The STCD can also be used to uncover divergence, instances where price extremes are not matched by new trend cycle extremes. In the 2-hour British Pound chart above, price makes a new high while the STCD makes a lower TC High, warning of a trend reversal, from bullish to bearish, that followed.

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SCHAFF TREND RSI By FX-Strategy.com

QUOTES Real Time Java Applet

http://www.fx-strategy.com Name:

Schaff Trend RSI

Characteristic:

Trend Momentum

Parameter Defaults:

MA1 Period

23

Forwards & Libor

MA21 Period

50

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RSI Period

9

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STR 20-Line

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80-Line

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The Relative Strength Index (RSI) is one of the most widely used momentum indicators in the foreign exchange markets. Instead of price as its input, the Schaff Trend RSI uses a MACD Line (the difference between two exponential moving averages). The resulting indicator can be used as an overbought/oversold measure of trend.

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The 4-hour EURJPY chart shows a green Schaff Trend RSI in the middle chart panel compared to a yellow standard RSI in the lower chart panel. The STR is considerably smoother compared to the choppy path of the standard RSI. In addition the STR avoids the false signals shown by early turns in the RSI. Usage The STR is generally used in combination with other indicators, such as the Schaff

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Trend Cycle. When the STR is below the 20-line, traders can wait for it to rise above 20 to confirm a Trend Cycle low. Similarly if the STR is above the 80-line, traders can wait for it to fall below 80 to validate turns in a Trend Cycle indicator. The behavior of the STR can also guide usage of the Schaff Trend Cycle (TC) Triggers. On the left side of the EURJPY 4-hour chart below, a green TCB buy setup bar forms. However, the STR is not bullish as it cannot rise about the black dotted 20-line. Without bullish confirmation by the STR, traders can ignore that TCB buy setup.

The right hand side of the chart shows a different picture. The STR is rising above 20 when price closes above the TCB buy setup bar. Even so, the long signal generates a small loss when prices close below the purple TCS sell setup bar. With the STR falling below 80, the TCS trigger is confirmed as a sell signal. The sell signal becomes profitable as prices follow the indicators down.

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SCHAFF TCD RSI By FX-Strategy.com

QUOTES Real Time Java Applet

http://www.fx-strategy.com Name:

Schaff Trend RSI

Characteristic:

Trend Momentum

Parameter Defaults:

MA1 Period

23

Forwards & Libor

MA21 Period

50

Currency Tools

Period Len

25

RSI Period

9

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STCDR 20-Line 80-Line

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The Relative Strength Index (RSI) is one of the most widely used momentum indicators in the foreign exchange markets. Instead of price as its input, the Schaff TCD RSI (STCDR) uses the Schaff Trend CD (See Schaff Trend CD). The resulting indicator has the benefit of putting the Schaff Trend CD on a scale of zero to 100, making it easier to identify potential overbought and oversold levels in a currency trend.

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The 15-minute USDCHF chart shows a purple Schaff TCD RSI in the middle chart panel compared to a yellow standard RSI in the lower chart panel. The STCDR is considerably smoother compared to the choppy path of the standard RSI. In addition the STCDR moves significantly above 80 and below 20, creating clearer turning points, whereas the standard RSI reaches 80 only once and never falls below 35.

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Usage The Schaff TCD RSI is generally used in combination with other indicators, such as the Schaff TC1 that uses the same input. When the STCDR is below the 20line, traders can wait for it to rise above 20 to confirm a Trend Cycle low. Similarly if the STCDR is above the 80-line, traders can wait for it to fall below 80 to validate turns in the TC1 Indicator.

In the chart above, the TC1 Indicator turned up twice from below the 20-line without the STCDR following. Non-confirmation by the STCDR gives reason to ignore these early turns in the TC1, thus avoiding premature long positions. The STCDR can also be placed in the same sub-graph as the Schaff Trend RSI. Both Trend RSI’s can be compared so that bullish or bearish forecasts are made only when both are rising above 20 or falling below 80, respectively. Applying a measure of Trend Direction, such as FXS-Trailing Stop, further integrates the analysis and presents a picture of Trend Direction and Momentum together. In the 15-minute USDCHF chart below, the Schaff TCTC1 Trigger is applied (with inputs of 20,23,50,25) to highlight potential trade entry and exit points.

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First Buy Point: The purple STCDR begins rising on the left side of the chart, well ahead of the green STR line. Two TCTC1 buy setup bars are ignored because they occur below FXS-Trailing Stop, which is being used as an indicator of Trend Direction. Only when price closes above Trail are all the indicators bullish. At that time Trailing Stop’s color turns light blue, showing a bullish bias. Raise Stop: A few hours later both Trend RSI indicators (STCDR & STR) start falling and a TCTC1 sell setup bar forms. At that point the initial stop on long positions should be raised to the level of the sell setup. Exit the long position if price closes below the black sell setup bar. Note that while the purple STCDR falls below 80, the green STR does not, showing a benefit, in this case, of using both together. The market does not close below the black TCTC1 sell setup bar, and so the new stop order is not executed. Second Buy Point: If you are trading European hours or wake up in North America, a second buy point occurs that can be taken advantage of. Both Trend RSI’s are rising again. USDCHF is above Trail and closes above a blue buy setup bar, signaling the second buy point.

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SCHAFF TC TRIGGER By FX-Strategy.com

QUOTES Real Time Java Applet

http://www.fx-strategy.com Name:

Schaff TC Trigger

Characteristic:

Trend Momentum

Parameter Defaults:

TC Period

10

Forwards & Libor

MA1 Period

23

Currency Tools

MA2 Period

50

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TCB, TCS

The Schaff TC Trigger marks price bars associated with key turns in the Schaff Trend Cycle indicator (STC). This occurs in a three-step process. TCB: 1. The yellow Schaff Trend Cycle indicator drops below a dotted line at 25, called the “buy line”. 2. The STC turns up. The price bar above it is colored green and is called a TCB setup bar. 3. A close above the high of the setup bar "triggers" the TCB.

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1Traders can employ different trigger rules. For intraday timeframes traders can require that a market close above a buy setup bar in order to consider it “triggered”. For a sell setup bar, traders can require that a market close below it to consider it “triggered”. For 5minute charts, two closes beyond the setup bar might be required. Another variation is to require that the market trade a certain number of points above a buy setup (or below a sell setup bar) in order to consider the setup bar triggered.

The same process, in reverse, is used to create a sell setup bar. TCS:

http://www.fxstreet.com/education/a17.asp (1 of 3) [4/02/2004 11:29:19 AM]

Forex Education - FXstreet.com. 1. The Schaff Trend Cycle indicator rises above a dotted line at 75, called the “sell line”. 2. The STC turns down. The price bar below it is colored magenta and is called a TCS setup bar. 3. A close below the low of the setup bar "triggers" the TCS. Usage Schaff TC Triggers can help pinpoint trend cycle tops and bottoms, which helps identify trend momentum. The 4-hour USDCHF chart, below, includes Schaff TC Trigger, two EMA lines and the STC. The yellow 23-period EMA is below the green 50-period EMA, showing a downtrend throughout. The green and magenta TC Trigger setup bars, however, highlight times when the downtrend is accelerating or decelerating. The trend cycle is rising from A to B and from C to D, showing bullish retracements within the downtrend. Other times the trend cycle falls, as from B to C and from D to E. The longest and strongest price moves in the chart are when trend and the trend cycle are both falling.

Note how the two buy setup bars that preceded C did not trigger. The “setup and trigger” method of trade entry has two steps. The indicator conditions that produce the setup bar did occur, but the price movement required to trigger it did not. In the first case, the market barely exceeded the buy setup bar. In neither case did it close above. This allowed traders to maintain short positions (or refrain from buying) for another 100+ points. Tactics like this help traders avoid bad trades and get more out of profitable ones. Schaff TC Triggers can be used as trading signals as part of an integrated trading strategy. In the British Pound chart, below, FXS-Trailing Stop (Trail) is used to indicate trend direction. The best trades generally have both Trend Momentum and Direction moving in their favor. Here are trade entry rules that reflect this: ● ●

Buy GBPUSD if a TCB setup bar triggers and price closes above FXS-Trailing Stop. Sell GBPUSD if a TCS setup bar triggers and price closes below FXS-Trailing Stop.

http://www.fxstreet.com/education/a17.asp (2 of 3) [4/02/2004 11:29:19 AM]

Forex Education - FXstreet.com.

What is different about the TC setup bars at A, C and E? They are all buy setup bars. But each is situated differently compared to Trail, and so should be used differently. The setup bar at A occurs with Trail horizontal and red, indicating a bear trend bias. Noting this, Traders could wait for Trail to turn light blue after the TCB triggers, before buying the market. The setup bar at C is well above Trail. And Trail is blue when the TCB triggers. That is a more bullish picture than at A. The buy trigger at E occurs below Trailing Stop. Why is this of less interest than the two previous TCB Triggers? The trigger at E shows a rising trend cycle. But with price below Trail, the trend cycle is rising in a downtrend, suggesting a retracement move. Sideways to higher prices are expected, with first resistance at FXS-Trailing Stop – not very far away. Determining both trend momentum and direction helps traders to identify higher probability trades. The sell setup bars at B and D both occur above FXS-Trailing Stop. Used with Trail, they should not be considered triggered until prices close below Trail, indicating that a downward bias in trend direction has joined a falling trend cycle. At B, price closed at Trail, not below it. At D price quickly closed below the sell setup bar, but not below Trail until four bars later. A prolonged bear move followed.

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SCHAFF TC1 TRIGGER By FX-Strategy.com

QUOTES Real Time Java Applet

http://www.fx-strategy.com Name:

Schaff TC1 Trigger

Characteristic:

Trend Momentum

Parameter Defaults:

TC Period

10

Forwards & Libor

MA1 Period

23

Currency Tools

MA2 Period

50

World Indices

Period Len

25

Real Time Tables Exotic Currencies Cross Rates

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Plots:

TC1B, TC1S

The Schaff TC1 Trigger marks price bars associated with key turns in the Schaff TC1 indicator (TC1). This occurs in a three-step process. TC1B: 4. The blue Schaff TC1 indicator drops below a dotted line at 30, called the “buy line”. 5. The TC1 turns up. The price bar above it is colored green and is called a TC1B setup bar. 6. A close above the high of the setup bar "triggers" the TC1B.

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2Traders can employ different trigger rules. For intraday timeframes traders can require that a market close above a buy setup bar in order to consider it “triggered”. For a sell setup bar, traders can require that a market close below it to consider it “triggered”. For 5minute charts, two closes beyond the setup bar might be required. Another variation is to require that the market trade a certain number of points above a buy setup (or below a sell setup bar) in order to consider the setup bar triggered.

The same process, in reverse, is used to create a sell setup bar.

http://www.fxstreet.com/education/a18.asp (1 of 3) [4/02/2004 11:29:31 AM]

Forex Education - FXstreet.com. TC1S: 4. The Schaff TC1 indicator rises above a dotted line at 70, called the “sell line”. 5. The TC1 turns down. The price bar below it is colored magenta and is called a TC1S setup bar. 6. A close below the low of the setup bar "triggers" the TC1S. Usage Schaff TC1 Triggers can help pinpoint trend cycle tops and bottoms based on movement in the Schaff TC1 Indicator. They can also be used to create buy and sell signals. Below is a 30-minute USDCHF line chart of closing prices. FXS-Pivot Cloud (input = 10) and Schaff TC1 Trigger “angle bars” (inputs = 10,100,115,10) are drawn across prices. A blue TC1 indicator with the same inputs is drawn in the lower chart panel.

TC1 Triggers can be used in combination with FXS-Pivot Cloud to produce trading signals, such as with the following Trade Entry Conditions: Sell Entry: The 30-minute Close must be below BOTH Cloud and the low of the TC1S Sell Setup Bar. Buy Entry (not shown on chart): The 30-minute Close must be above BOTH Cloud and the high of the TC1B Buy Setup Bar. Trade Exit Conditions are as follows: Sell Exit: Exit short positions if 30-minute Close is above Cloud OR above a TC1B Buy Setup Bar Buy Exit (not shown on chart): Exit long positions if 30-minute Close is below Cloud OR below a TC1S Sell Setup Bar. Note how price never closed above the green buy setup bars at 1, 2 and 3. The “setup and trigger” method of trade entry has two steps. The indicator conditions that produce the setup bar did occur, but the price movement required to trigger it did not. This allowed traders to maintain short positions (and/or refrain from buying at 2 and 3), thus turning the trade into a 100+ point winner. Traders should be prepared to act if their trigger conditions occur. Thus traders can use setup bars (as at 2 and 3) as trailing stops, to control risk and lock in profits.

http://www.fxstreet.com/education/a18.asp (2 of 3) [4/02/2004 11:29:31 AM]

Forex Education - FXstreet.com.

By Doug Schaff FX-Strategy.com Tel: 845-758-2935 E-mail: [email protected]

http://www.fx-strategy.com 71 Starbarrack Road Red Hook, NY 12571 United States

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SCHAFF TCTC1 TRIGGER By FX-Strategy.com

QUOTES Real Time Java Applet

http://www.fx-strategy.com Name:

Schaff TCTC1 Trigger

Characteristic:

Trend Momentum

Parameter Defaults:

TC Period

10

Forwards & Libor

MA1 Period

23

Currency Tools

MA2 Period

50

World Indices

Period Len

25

CHARTS Real Time - Netdania

RSI Period

9

Real Time Tables Exotic Currencies Cross Rates

Plots:

TCB, TCS

Real Time - FxTrek Strategic Market Trend USD Index Bond Yield World Stocks NEWS Latest Forex News Editor's Selection

The Schaff TCTC1 Trigger marks price bars associated with key turns in both the Schaff Trend Cycle and TC1 indicators (STC and TC1). This occurs in a three-step process. TCTC1B: 1. Either of the yellow STC or blue TC1 indicators drops below a dotted line at 30, called the “buy line”. 2. Either or both turn up with the other one rising. The price bar above it is colored blue and is called a TCTC1B setup bar. 3. A close above the high of the setup bar "triggers" the TCTC1B.

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3Traders can employ different trigger rules. For intraday timeframes traders can require that a market close above a buy setup bar in order to consider it “triggered”. For a sell setup bar, traders can require that a market close below it to consider it “triggered”. For 5minute charts, two closes beyond the setup bar might be required. Another variation is to require that the market trade a certain number of points above a buy setup (or below a sell setup bar) in order to consider the setup bar triggered.

http://www.fxstreet.com/education/a19.asp (1 of 3) [4/02/2004 11:29:38 AM]

Forex Education - FXstreet.com. The same process, in reverse, is used to create a sell setup bar. TCTC1S: 1. Either of the yellow STC or blue TC1 indicators rises above a dotted line at 70, called the “sell line”. 2. Either or both indicators turn down with the other one falling. The price bar below it is colored black and is called a TCTC1S setup bar. 3. A close below the low of the setup bar "triggers" the TCTC1S.

A TCTC1 setup bar only occurs if both the STC and TC1 indicators are moving in harmony, a stricter requirement than for either the TC or TC1 Triggers, alone. Waiting for both indicators helps to avoid early trade entry and exit. An orange square is drawn around a sell and buy setup bar that occurred next to each other. This normally indicates a short-term consolidating market that will break in one direction before long, as shown by whichever setup bar triggers. In this case the buy setup bar triggered and the market rallied to a new peak where a black setup bar appeared, providing a better sell entry. Usage Schaff TCTC1 Triggers help to pinpoint trend cycle tops and bottoms based on movement in the Schaff Trend Cycle and TC1 indicators. The triggers can also be used to create buy and sell signals.

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TCTC1 Triggers and FXS Trailing Stop (Trail) are drawn across 6-hour USDCHF prices, above. The yellow and blue lines in the lower chart panel are the STC and TC1 indicators, respectively. Trail is used to indicate trend direction. The TCTC1 Triggers show changes in trend momentum. Sell conditions are fulfilled when prices close below Trail and below a black TCTC1 sell setup bar. Buy conditions are complete when prices close above Trail and above a blue TCTC1 buy setup bar. These rules attempt to implement a strategy of trading in harmony with Trend Direction and Momentum.

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AVERAGE TRUE RANGE (ATR) By FX-Strategy.com

QUOTES Real Time Java Applet Real Time Tables Exotic Currencies Cross Rates Forwards & Libor Currency Tools World Indices CHARTS Real Time - Netdania Real Time - FxTrek Strategic Market Trend USD Index Bond Yield World Stocks NEWS Latest Forex News Editor's Selection Central Banks Currency Focus MARKET Market Reports Strategy Analysts Comments Audio Analysis Expert Q&A Sessions Technical Analysis Forecasts

http://www.fx-strategy.com Characteristic:

Volatility Indicator

Parameter Defaults: ATR Period 14 controls the measurement period for the ATR Plots:

ATR

Average True Range (ATR) was developed by J. Welles Wilder Jr to measure the underlying volatility of price. ATR is not an indication of price direction but simply the degree of price movement or volatility expressed as a number of points. His observation was that as a trending move develops, the degree of daily range tends to increase as participants react more emotionally to the trend. Likewise, during a period of directionless trading in a tight range the consequent break out from a low level of average True Range often indicates a breakout in price also. Average True Range is a running average of True Range. Wilder defined the true range (TR) as the greatest of the following: ● ●

●

The current high less the current low. The absolute value of: current high less the previous close. The absolute value of: current low less the previous close.

NOTE: The use of True Range was originally intended for futures markets where gaps between bars often occur. This does not happen often in the foreign exchange market, but the technique of measuring range remains relevant. Wilder then calculated ATR by using a running average thus: ATR = (ATRt-1 * P-1 + TrueRanget ) / P Where: P = the measurement period for the ATR

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By Doug Schaff FX-Strategy.com Tel: 845-758-2935 E-mail: [email protected]

http://www.fx-strategy.com 71 Starbarrack Road Red Hook, NY 12571 United States

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BOLLINGER B% By FX-Strategy.com

QUOTES Real Time Java Applet Real Time Tables Exotic Currencies

http://www.fx-strategy.com Characteristic:

Dynamic Momentum Indicator

Parameter Defaults:

MA Period

20

controls the measurement period for the average

Std Deviation

2

controls the placement of the bands around the average

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Plots:

BLG %B

In recent years the use of Bollinger Bands has become popular and there has been a greater emphasis on identifying the chances of one band containing price rather than penetrating the band in a trend. The identification of trend reversals is also handled by Bollinger B%. The formula is: BLG B% =

(Close – Band Low) (Band high – Band Low)

Basically this is an almost identical formula to that for stochastics – comparing the percentage position of current price within the recent range, only in the case of Bollinger B%, the range is measured by the bands rather than price. Clearly, while stochastics will always oscillate in a range between zero and 100 since price can never penetrate above the price range (else it will increase the price range itself), price does penetrate the Bollinger Bands on quite frequent occasions. Thus Bollinger B% can move above 100 and below zero, this merely indicating that the close is outside of the bands. Perhaps the most useful feature of Bollinger B% is the use of divergences. There is a common occurrence with Bollinger Bands for price to penetrate the bands during a directional move, then on a new price extreme fail to penetrate the band again. This causes a divergence of price against the indicator and can be an early signal of reversal. Also note from the chart displayed how trend lines can be drawn on the indicator itself, breach of the line indicating a change in price direction.

Macro Economic Calendar Interest Rates FUTURES Currencies Energies Financials Indices EDUCATION Knowledge Workshops Conventions BROKERS SOFTWARE http://www.fxstreet.com/education/a21.asp (1 of 2) [4/02/2004 11:29:56 AM]

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By Doug Schaff FX-Strategy.com Tel: 845-758-2935 E-mail: [email protected]

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BOLLINGER BANDS By FX-Strategy.com

QUOTES Real Time Java Applet Real Time Tables Exotic Currencies

http://www.fx-strategy.com Characteristic:

Support & Resistance and Volatility

Parameter Defaults:

MA Period

20

Std Deviation

controls the placement of the bands around the average

BLG UP

Upper Band

BLG DP

Lower Band

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Plots:

controls the measurement period for the average

Developed by John Bollinger, Bollinger Bands were and are a volatility bands drawn around a simple moving average. They are calculated using the standard deviation of price over the same period as the moving average and plotted as lines above and below the moving average. Since moving averages have been traditionally used to identify the underlying trend, Bollinger Bands combine this concept with the volatility of each individual market (the standard deviation) – to plot an envelope. In brief, standard deviation represents a normalized distribution curve, shaped rather like a bell tapering off to each side. From a sample of data it is expected that on average, a deviation of one from the mean (the highest point) on each side would represent 68% of the sample results. A deviation of two from the mean would represent 95% of the sample results. Thus, the implication is that by taking two standard deviations from a moving average it will contain 95% of price action. Prices outside of the band should only occur 5% of the time and thus any movement out side should be considered an abnormality. The distance between upper and lower Bollinger Bands is a reflection of volatility. As price forces itself away from the average, the standard deviation rises and thus the bands will fluctuate in varying amounts away from the average. During sideways periods, prices reaching the bands may indicate overbought or oversold conditions. Strong movement up through the upper band or down through the lower band may indicate the beginning of a trend.

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http://www.fxstreet.com/education/a22.asp (1 of 2) [4/02/2004 11:30:02 AM]

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The 10 minute GBPJPY chart shows how much of the price action in nontrending periods are broadly held within the bands. As the market trends, there is a persistent pattern of breach of the Bollinger Bands.

By Doug Schaff FX-Strategy.com Tel: 845-758-2935 E-mail: [email protected]

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BOLLINGER BAND WIDTH By FX-Strategy.com

QUOTES Real Time Java Applet Real Time Tables Exotic Currencies

http://www.fx-strategy.com Characteristic:

Volatility & trend indicator

Parameter Defaults:

MA Period

20

controls the measurement period for the average

Std Deviation

2

controls the placement of the bands around the average

Cross Rates Forwards & Libor Currency Tools World Indices CHARTS Real Time - Netdania Real Time - FxTrek Strategic Market Trend USD Index

Plots:

BLG BandWidth

The Bollinger Band Width indicator is a reflection of the fact that Bollinger Bands tend to widen during sharp price adjustments, seen particularly in trends, while during consolidation they tend to move closer together. This is converted into a line that represents such action. Bollinger Band Width = (Upper Band - Lower Band)/Middle Band

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The effect of trending price or consolidating price on the indicator is to force values higher as a trend develops and lower again as price begins to consolidate or move in a choppy action. Note also the ability to use effective trend lines on the indicator to try and identify when a consolidating market is breaking into a trending nature.

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http://www.fxstreet.com/education/a23.asp (1 of 2) [4/02/2004 11:30:11 AM]

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COMMODITY CHANNEL INDEX (CCI) By FX-Strategy.com

QUOTES Real Time Java Applet Real Time Tables Exotic Currencies Cross Rates Forwards & Libor Currency Tools World Indices CHARTS Real Time - Netdania Real Time - FxTrek Strategic Market Trend USD Index Bond Yield World Stocks NEWS Latest Forex News Editor's Selection Central Banks

http://www.fx-strategy.com Characteristic:

Momentum Indicator

Parameter Defaults:

CCI Period

Plots:

CCI

20

controls the measurement period for the CCI

The Commodity Channel Index is commonly used primarily to identify beginning and ending of cycles in futures markets and also to identify buy and sell opportunities. The CCI may also be used to signal overbought and oversold markets, much like an oscillator. The CCI is calculated to arrange 70-80% of all price activity falls between +100 and -100 on its vertical scale. Many users believe a long position is indicated when the CCI exceeds +100 while a short position is indicated when the CCI falls below –100 but this interpretation should be based more on an individual’s market analysis. For example, it may be decided that -125 indicates taking a short position while a +150 indicates taking a long position for the specific market being evaluated. Like other oscillators CCI may also used to signal overbought and oversold markets. Levels above the CCIlong line may indicate an overbought market and breakouts below the CCIshort line may indicate an oversold market.

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The chart of the USDCHF 4-hourly market shows a successful application of CCI as an overbought/oversold indicator. Note that price reversed on every occasion that CCI moved above 100 or below -100, although one example shows a bearish divergence.

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Because of the amount of time it spends in the neutral position (between the CCIlong and CCIshort lines) note that it is not unusual for CCI to miss the early part of a new move. Many users believe CCI crossing above or below zero identifies market conditions before the CCIlong and CCIshort lines are crossed.

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DIRECTIONAL MOVEMENT INDEX By FX-Strategy.com

QUOTES Real Time Java Applet Real Time Tables Exotic Currencies

http://www.fx-strategy.com Characteristic:

Trend Direction

Parameter Defaults:

DMI Period

14

controls the measurement period for the DMI’s

ADX Deviation

14

controls the measurement period for the ADX

MACD

Average Directional Index

DMI+

Positive Directional Movement

DMI-

Negative Directional Movement

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Plots:

DMI is another indicator developed by Welles Wilder Jr., and is comprised of three plots; ADX, DMI+ and DMI-. It was created to track and identify sustainable price direction (i.e. trend) as well as whether and directional movement exists in the market. This indicator can also be used to identify non-trending markets, or a deterioration of an ongoing trend. Positive and negative price movement (DM+ and DM-) are calculated independently and incorporated within the calculation of ADX that measure the degree and direction of movement, specifically to identify sustained movement in one direction. DM+ and DM- are plotted along with ADX to help identify the individual elements of price movement. ADX is calculated by taking the running average of the difference between DM+ and DM- and dividing the result by the sum of DM+ and DM-. A rising ADX line above the 25-30 level indicates the presence of a trend although does not identify the direction. The position of DM+ and DM- provides mathematical confirmation of trend direction and the spread between them helps to identify the strength of the underlying movement. A high reading of ADX (e.g. above 40) that begins to fall, may indicate either a slowdown in the current trend and in the case of a sharp price reversal, the end of the trend. It will be important at these times to ensure a good trailing stop is utilized.

Technical Analysis Forecasts Economic Indicators Macro

A low ADX value (e.g. below 20) normally indicates a non-directional market with low volatility, while a cross above 20 may indicate the emergence of a stronger movement that may develop into a trend (either up or down indicated by whether DM+ is greater or less than DM-).

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Although in many cases a falling ADX line above 30 may indicate the trend is complete, there are instance as shown in the chart where ADX reacts to a brief correction that causes it do decline. However, ensure that other indicators or analysis techniques are used to confirm that the trend is complete.

By Doug Schaff FX-Strategy.com Tel: 845-758-2935 E-mail: [email protected]

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DETREND PRICE OSCILLATOR By FX-Strategy.com

QUOTES Real Time Java Applet Real Time Tables Exotic Currencies Cross Rates Forwards & Libor Currency Tools World Indices CHARTS Real Time - Netdania Real Time - FxTrek Strategic Market Trend USD Index

http://www.fx-strategy.com Characteristic:

Trend Direction Indicator

Parameter Defaults:

MA Period

Plots:

DPO

14

controls the measurement period for the detrend average

The objective of the Detrend Price Oscillator (DPO) is to remove the effects of the trend from price and identify potential cyclic patterns and thus take advantage of momentum indicator readings at cyclic extremes. To do this the DPO is measured by comparing price against a moving average. However, since moving averages have a built in lag, the current price is compared to the average of (Length/2) + 1 bars earlier. DPO = Close – PMA Where PMA = Moving Average of (Length/2) +1 bars earlier

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It can be seen from the chart that in general the DPO will highlight price highs and lows with more clarity than can be taken from the bar chart. However, it is important to identify the periods of trends where the DPO will remain one side of the zero line for extended periods of time. As with momentum indicators, divergences can be identified with the DPO to assist in identifying potential reversals in trend.

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EXPONENTIAL MOVING AVERAGE By FX-Strategy.com

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http://www.fx-strategy.com Characteristic:

Trend Direction

Parameter Defaults:

EMA Period

Plots:

EMA

10 controls the measurement period for the Average

The moving average may be the most widely used indicator by traders, analysts and fund managers. The Exponential Moving Average is a more sensitive version of the simple moving average in that it calculates and plots an exponentially weighted average of prices from each of the most recent number of bars specified by the parameter used. This is done by use of the following formula: EMA = EMA

t-1

+ SF * (Pricet – EMA

t-1)

Where: SF = 2 / (1 + Length of Average) Any new value will incorporate the current price along with the value from the previous bar and weighted by a smoothing factor, thus meaning an Exponential Moving Average gives greater weight to the market’s most recent price and a reduced weighting to older prices. (Whereas, a simple moving average gives equal weight to all the prices in the series.) A moving average is generally used for identification of the underlying trend. Some users consider a rising moving average value and price positioned above the moving average would indicate an uptrend. A declining moving average value and price positioned below the moving average would indicate a downtrend.

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Note how the EMA is more sensitive to current price than a simple moving average (SMA). The above chart displays the EMA in purple along with an SMA in green. It can be seen that during the rally to the center left of the chart the EMA rises more quickly than the SMA, reacting to the acceleration in price. This is due to the fact that the weighting for recent bars is greater than those of 21 periods prior. Then, when a correction sets in, while the SMA continues higher as it gives equal weighting to all bars, the EMA flattens out quickly in reaction to the sideways move. While this does appear to be an advantage, it should also be borne in mind that sometimes if the EMA reacts too quickly, it could provide a false signal if price makes a correction but quickly resumes a trend.

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EXPONENTIAL MOVING AVERAGE - TWO LINES By FX-Strategy.com

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http://www.fx-strategy.com The moving average may be the most widely used indicator by traders, analysts and fund managers. The Exponential Moving Average is a more sensitive version of the simple moving average in that it calculates and plots an exponentially weighted average of prices from each of the most recent number of bars specified by the parameter used. This is done by use of the following formula: EMA = EMA t-1 + SF * (Pricet – EMA t-1) Where: SF = 2 / (1 + Length of Average) Any new value will incorporate the current price along with the value from the previous bar and weighted by a smoothing factor, thus meaning an Exponential Moving Average gives greater weight to the market’s most recent price and a reduced weighting to older prices. (Whereas, a simple moving average gives equal weight to all the prices in the series.) Many users will use two moving averages to dictate trading signals. The faster moving average (measured over the shorter period) may be used as a proxy for price and thereby eliminate the short-term fluctuations in price action. Many analysts will then consider the crossover of the fast average above the slow average (a Golden Cross) as bullish and the crossover of the fast average below the slow average (a Dead Cross) as bearish.

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To the right are two identical areas of price action in the 15minute GBPJPY market. In the top chart two SMAs have been applied, 10 and 20 periods in length. In the bottom chart two EMAs have been applied, again 10 and 20 periods in length. Note how the two sets of averages provide different signals. At point A the 10 period EMA is already reacting to a rise in price and the general expectation is that it would cross over the 20 period average quickly. However, since the longer average is also reacting to the rise in prices, it also rises and by the time they cross at point B, the SMAs have also crossed. Note the complete difference in spread between the different moving averages at C. While using a simple crossover as an entry signal would have caused a loss using SMAs, it is very unclear whether there would have been any benefit from using the EMAs. However, as expected, subsequent to this sideways move the EMAs provided a buy signal 3 or 4 days prior to the SMAs crossing. Thus there are benefits to using an Exponential Moving Average but as with any indicator it is important to understand how they react in different circumstances.

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GRAVITY By FX-Strategy.com

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Momentum Oscillator

Parameter Defaults:

Length

Plots:

CoG1

Plots:

CoG2

10

controls the measurement period for the Center of Gravity

The Center of Gravity indicator was introduced by John F Ehlers in the May 2002 issue of Technical Analysis of Stocks and Commodities. Based on his worked with adaptive filters, Ehlers described the indicator as a unique new oscillator that it is smoothed and has essentially zero lag. The smoothing enables clear identification of turning points, and the zero lag aspect means action can be taken early in the move. The Formula is given as:

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COG = -1 * NUM / DEN Where: n

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NUM =

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DEN =

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∑

(Price)i

i=0

Strategy Audio Analysis

[PRICE[i] * (i + 1)]

n

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∑ i=0

and: PRICE[i] = the price of the ith bar back. PRICE[0] = price of current bar. PRICE[2] = price 2 bars back, etc. Essentially the numerator calculates a weighted sum of price while the numerator calculates the sum of price and the ratio represents the strength of movement in one direction.

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Note how with the correct parameter how well Gravity can track price. It is often wise to use a break filter, looking for any signaled reversal by Gravity to be confirmed by a break higher or lower in price.

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ICHIMOKU KINKO HYO By FX-Strategy.com

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http://www.fx-strategy.com Characteristic:

Support & Resistance Indicator

Parameter Defaults:

ST Period

26

controls the measurement period for the Kijun Sen

TL Period

9

controls the measurement period for the Tenkan Sen

DL Period

52

controls the measurement period for the Senkou Span

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ST

Kijun Sen

(Base Line)

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TL

Tenkan Sen

(Conversion Line)

Strategic

DL

Chikou Span

(Lagging Span)

Market Trend

Span 1

Senkou Span

(Leading Span 1)

S2

Senkou Span 2

(Leading Span2)

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Plots:

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The term “Ichimoku” can be translated from Japanese as “instant view’ or “one glance”, “Kinko” is the equivalent of “equilibrium” or “balance” and “Hyo” means “chart”. Hence the full name “Ichimoku Kinko Hyo” actually means “one glance cloud chart” or more appropriately “Instant view of the balance chart”. Goichi Hosoda developed Ichimoku Kinko Hyo in the early Showa era (1926-1989) and copyright is owned by Kabushiki Kaisha Hendou Souken. However, Hosoda, a Japanese newspaper writer, only published his findings in 1969 and from that point forward Ichimoku Kinko Hyo has become a permanent feature in Japanese trading rooms. The series of lines are very similar to moving averages and are based upon high and low prices. The two Senkou Span (leading) lines are pushed forward in time to represent past support and resistance – similar in concept to the idea that once established, support will continue to provide support until broken when it becomes resistance. The area between the two Senkou Span lines is shaded to make it look like a cloud. This “cloud” not only defines the trend but acts as support and resistance for price. A very basic precept is: if price is above the cloud then the trend is higher and vice versa.

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However, the relative positions of the Kijun Sen and Tenkan Sen are also important. (“Sen” is the same word that is used in “Shinkansen” – the Japanese Bullet train – having the meaning “line”) Broadly, a crossing of the Tenkan Sen above the Kijun Sen is bullish and a crossing of the Tenkan Sen below the Kijun Sen is bearish. To the positions of price against the cloud and the crossing of the Tenkan Sen and Kijun Sen the relative position of today’s price against that of 26 periods prior determines the strength of the signals. The Chikou Span (lagging span) is today’s price moved back 26 periods. If the Chikou Span (today’s price) is below that of 26 periods ago and a sell signal occurs, it is a stronger signal than had it been above the close of 26 periods ago. Equally the opposite is true for buy signals. The chart above is of the daily USDCHF market during the long US Dollar decline starting in March 2002. The Tenkan Sen crossed below the Kijun Sen while price was still above the cloud but with the Chikou Span being below price of 26 periods ago. It was a weak sell signal. However, subsequently price declined below the cloud and then rallied into the middle of the cloud which provided resistance. The following move lower again caused both Tenkan and Kijun Sen to move lower with the Chikou Span being well below the price of 26 periods ago. This added to the bearishness of price. Later, when the Tenkan Sen crossed above the Kijun Sen the Chikou Span was not clearly above the price of 26 periods prior and provided only a weak buy signal. Indeed, price moved sideways for some time.

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LINEAR REGRESSION By FX-Strategy.com

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http://www.fx-strategy.com Characteristic:

Trend Direction Indicator

Parameter Defaults:

LR Period

Plots:

LR

9

controls the measurement period for the regressionl

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Linear Regression is a statistical technique that uses the least squares method to fit a straight line through scattered data points. By taking these points in a dynamic manner on each price bar, a line similar to a moving average is created and plotted. The Linear Regression Line indicator was developed to statistically help determine where a market’s price might be in the near future using current and past price history. Some users believe that when prices rise above or fall below the linear regression line, they are overextended and will begin to move back towards the line. It may therefore be used to suggest that a retracement in a directional price action may occur. If prices trend upwards, linear regression attempts to statistically calculate what the upward bias of the price may be relative to the current price. If prices trends downwards, it will attempt to statistically calculate the downward bias of the price.

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On a chart a Linear Regression line is basically the same as a moving average but it will be noted that it reacts very quickly to changes in price direction and holds closer to price action displaying the tendency for prices to move back towards the regression line if there is any larger move away.

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While Linear Regression may be used in the same way as a moving average it must be understood that the speed of reversal can cause whipsaws to occur.

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MODIFIED EXPONENTIAL MOVING AVERAGE By FX-Strategy.com

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Trend Direction

Parameter Defaults:

MEMA Period

Plots:

MEMA

10 controls the measurement period for the Average

The Modified Exponential Moving Average is very similar to the standard exponential moving average and differs only in the manner in which the smoothing factor is calculated. The smoothing factor is the element in the formula that converts the number of bars to be considered into a decimal that represents that length. In a standard exponential moving average the formula is as follows: EMA = EMA t-1 + SF * (Pricet – EMA t-1) Where: SF = 2 / (1 + Length of Average)

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The formula for the modified version is essentially the same, but the smoothing factor is calculated as follows: SF = 1 / Length of Average The effect of the different smoothing factor basically slows the average but there will be equivalents. For example, let’s take the case of a 19 period standard moving average. The smoothing factor will be: SF(standard) = 2 / (1 + 19) = 0.10000 We can calculate the modified smoothing factor by substituting the result of the standard smoothing factor into the modified equation thus: 0.1000 = 1 / Modified Length => Modified Length = 1 / 0.1000 = 10 Thus a 19 period standard exponential moving average will be the same as a 10 period modified exponential moving average.

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The chart above shows a 10 period standard exponential moving average in yellow, and a 10 period modified moving average in green. Slightly hard to see, but a 19 period standard moving average has also been added but is identical to the 10 period modified moving average.

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MOMENTUM By FX-Strategy.com

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http://www.fx-strategy.com Characteristic:

Momentum Indicator

Parameter Defaults: Momentum Period 12 Plots:

controls the measurement period for momentum

Momentum

The Momentum Indicator is the most basic form of measurement of price direction and velocity. It is an exceptionally simple formula that merely represents price movement from the one bar to a bar “x” periods prior. Momentum = Pricet – Pricet-1 By subtracting the price of (say) 12 periods ago from the current price it will produce a number of points that will be above zero (if price is now higher) or below zero (if price is now lower). From this we can deduce: •

Momentum below zero and moving lower

– price is accelerating lower

•

Momentum below zero but rising

– price is generally moving lower but at a slower pace

•

Momentum above zero and rising

- price is accelerating higher

•

Momentum above zero but declining

- price is generally moving higher but at a slower pace

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MOVING AVERAGE CONVERGENCE DIVERGENCE (MACD) By FX-Strategy.com

QUOTES Real Time Java Applet Real Time Tables Exotic Currencies

http://www.fx-strategy.com Characteristic:

Trend Direction

Parameter Defaults:

First EMA Period

12

controls the measurement period for the short average

Second EMA Period

26

controls the measurement period for the long average

Signal EMA Period

9

controls the measurement period for the signal average

MACD

The MACD line

MACD_Signal

The signal line for MACD

MACD_Hist

The spread between the MACD and Signal

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The MACD indicator was developed by Gerald Appel and is simply a method of identifying the potential for two exponential moving averages to cross. MACD is calculated using a short length and a long length exponential moving averages (defaulted to 12 and 26) and calculating the difference between these two averages. In other words, it is the spread between the two averages. A signal line is then derived by calculating an exponential moving average of the MACD. This is plotted as the MACD Signal. Finally, the difference between the MACD and the MACD Signal is calculated and plotted in a histogram as the MA Hist.

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The MACD is often used as a trend-following indicator, and may be interpreted similarly to other moving averages. That is, when the MACD crosses above the MACD Signal, an uptrend may be beginning, indicating a buy signal. Similarly, when the MACD crosses below the MACD Signal, a downtrend may be beginning. As an oscillator, the MACD can signal overbought and oversold conditions though there is no method to identify overbought and oversold conditions. However it must be noted that while MACD is often used as a trending indicator, when price direction slows it will result in the spread between the two exponential moving averages reducing, thus causing the MACD line to decline in the case of an uptrend or rise in the case of the down trend. This will cause losses if MACD is utilized for crossovers of MACD line across the Signal line.

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The point A displays and example of how MACD can rise even though for a while both averages are declining, but the spreads is narrowing. A similar event occurs at point B where it can be seen that MACD is diverging against price while both averages are pointing lower. Note at point C how the MACD Hist is displaying a slowing of the rise in the spread between MACD and Signal and on a break of the trend line price reverses lower. Finally, Point D gives another example of a bullish divergence between MACD and price.

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MOVING AVERAGE CONVERGENCE DIVERGENCE (MACD HISTOGRAM FORMAT) By FX-Strategy.com

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Characteristic:

Trend Direction

Parameter Defaults:

First EMA Period

12

controls the measurement period for the short average

Second EMA Period

26

controls the measurement period for the long average

Signal EMA Period

9

controls the measurement period for the signal average

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Plots:

MACD

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The MACD indicator was developed by Gerald Appel and is simply a method of identifying the potential for two exponential moving averages to cross. MACD is calculated using a short length and a long length exponential moving averages (defaulted to 12 and 26) and calculating the difference between these two averages. In other words, it is the spread between the two averages. Normally s signal line is then derived by calculating an exponential moving average of the MACD. In this case, it is omitted and the MACD is displayed as a histogram – a series of vertical bars above and below a zero line.

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This presentation of MACD ignores the signal line and suggests trades on the crossing of MACD through zero (as shown in blue rings). While in trending conditions this can provide good profitability, caution should be exercised in consolidating periods. An alternative method of assessing trade signals is to take the most recent

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sizeable correction in MACD and extend this point to the right until MACD penetrates this level. This can provide earlier signals than waiting for a move through the zero line. Occasionally this may cause an early signal as shown in the center of the chart.

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MOVING AVERAGE ENVELOPES By FX-Strategy.com

QUOTES Real Time Java Applet Real Time Tables Exotic Currencies

http://www.fx-strategy.com Characteristic:

Support and Resistance Indicator

Parameter Defaults:

MA Period

9

controls the measurement period for the average

Percent Width

2

controls the percentage distance of the envelope from the MA

MaEnv_T

Envelope top

MaEnv_B

Envelope bottom

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Plots:

Moving Average Envelopes are calculated by taking a moving average, and calculating upper and lower trading bands as a fixed percentage above and below the moving average respectively. These are considered to suggest extreme overbought or oversold conditions, and to identify trading ranges by the assumption that price should not deviate from the average of the underlying price element (high or low) by the percentage utilized. However, it is important to ensure that price is not trending otherwise false signals will be generated.

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The chart above displays the daily USDCHF market with touches by price of either envelope in either dark red or magenta. Where marked in dark red it can be seen that price is not making new extremes. It is important to remember that a trend is defined as higher highs and higher lows (uptrend) or lower lows and lower highs (downtrend). At each of the points where the price touch is ringed in dark red it can be seen that price is still moving within recent price ranges and not establishing new extremes. At these points a reaction is seen against the main direction of price. This may not be sustained, but there is sufficient movement to provide a short term trade and profit.

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At each of the points where the price touch is ringed in magenta it can be seen that price is establishing new extremes beyond the recent range. These trades provide greater risk and should be avoided.

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Forex Education - Parabolic (SAR) - FXstreet.com.

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PARABOLIC (SAR) By FX-Strategy.com

QUOTES Real Time Java Applet Real Time Tables Exotic Currencies

http://www.fx-strategy.com Characteristic:

Stop and Reversal Indicator

Parameter Defaults:

Acceleration

0.02

controls the acceleration of the trail

AF Max

0.20

controls the maximum acceleration of the trail

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Plots:

SAR

Parabolic was developed by Welles Wilder Jr. initially as a “Stop And Reverse” indicator and suggested that trades were implied by the parabolic moving above or below price. However, it is probably better utilized as a trailing stop in a trending move. The Parabolic takes into account the relationship between a price and time, using this relationship to determine acceleration of the parabolic. This is determined by an acceleration factor that starts at 0.02 (or the input acceleration factor as inserted by the user) and increases by the same amount every time a new price extreme is reached (a new high in an uptrend or a new low in a downtrend). The difference between price and the previous parabolic is then used to calculate the parabolic for the next bar. The acceleration factor increases until it reaches a “maximum step” defaulted to 0.20. Once price touches the parabolic, the position of the parabolic reverses and begins at the extreme of the previous move. (the highest high in a reversal from a move higher or the lowest low in a reversal after a move lower. The indicator may also be used to determine stop points.

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The above chart shows that Parabolic performs well as a trailing stop in a trend.

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However, during consolidating markets it tends to suffer from whipsaws and from this point of view is not recommended as a signal to establish a position.

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Price Channels - Forex Education - FXstreet.com.

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PRICE CHANNELS By FX-Strategy.com

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http://www.fx-strategy.com Characteristic:

Price Breakout Indicator

Parameter Defaults:

Length

Plots:

Upper

10 controls the measurement period for the channel

Lower Middle Price channels are a graphic representation of channel breakouts. Some fund managers work on rules in which they will buy and sell only when price has penetrated a channel. They wish to avoid all the noise of shorter term time frames and look for the bigger trending opportunities. The breakout points are commonly derived of a break of the highest high or the lowest low for a particular period. They will either use these signals on their own and will always carry a position as a new trade exits the previous trade. The alternative is to enter a trade and use a trailing stop to organize the exit, then only enter again when the opposite channel is broken.

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Additionally they will consider a correction against the direction that breaks clearly through the central line (High Band + Low Band divided by 2) as an indication of a slowing of the trend. The chart above displays a 40 period channel on a 2-hour chart. It can be seen that a simple reversal on opposite channel break will “give-back” much of the profit. Thus a strategy using a trailing stop is aimed at retaining as much profit as possible. Also note how divergences can be used effectively with channel reversals.

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By Doug Schaff FX-Strategy.com Tel: 845-758-2935 E-mail: [email protected]

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Rate of Change (ROC) - Forex Education - FXstreet.com.

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RATE OF CHANGE (ROC) By FX-Strategy.com

QUOTES Real Time Java Applet Real Time Tables Exotic Currencies Cross Rates Forwards & Libor Currency Tools World Indices CHARTS Real Time - Netdania Real Time - FxTrek Strategic Market Trend

http://www.fx-strategy.com Characteristic:

Momentum Indicator

Parameter Defaults:

ROC Period

Plots:

ROC

5

controls the measurement period for the rate of change

The Rate of Change indicator calculates and plots the net change (expressed as a percent) between a bar’s price, and that price a specified number of bars ago. Essentially it is no different to the basic Momentum indicator but expresses price movement as a percentage around 100 rather than a number of points around a zero line. The formula is expressed as:

USD Index

ROC = 100 *

Bond Yield

(Pricet – Pricet-1) Pricet-1

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The ROC formula will produce a value that will be above 100 (if price is now higher) or below 100 (if price is now lower). From this we can deduce:

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•

ROC below 100 and moving lower

– price is accelerating lower

•

ROC below 100 but rising

– price is generally moving lower but at a slower pace

•

ROC above 100 and rising

- price is accelerating higher

•

ROC above 100 but declining

- price is generally moving higher but at a slower pace

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Note from the above chart how the Momentum plot and ROC plot are identical but with different values.

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Relative Strength Index (RSI) - Forex Education - FXstreet.com.

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RELATIVE STRENGTH INDEX (RSI) By FX-Strategy.com

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http://www.fx-strategy.com Characteristic:

Price Breakout Indicator

Parameter Defaults:

Length

Plots:

Upper

10 controls the measurement period for the channel

RSI is a popular indicator commonly used to confirm price movement and help identify turning points in the market. It was created by Welles Wilder Jr. The RSI calculates a value based on the cumulative strength and weakness of price over a specified period. For that period, RSI accumulates the points gained on periods with higher closes and the points lost on periods with lower closes. The sum of number of the points gained is divided by the sum of the points lost and this is normalized between 0 to 100. The direction of RSI is considered to confirm price movement, i.e. a rising RSI confirms rising prices. The formula is: where:

RS =

RSI = 100 -

( 100 ) ( 1 + RS )

Sum of positive closes Sum of negative closes

RSI has traditionally been used to help identify turning points in two ways: In consolidation periods when RSI reaches above 70 (overbought) or below 30 (oversold)

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The chart above shows how well RSI can be used to identify overbought and oversold conditions in a consolidating market as the value reached above 70 and

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Relative Strength Index (RSI) - Forex Education - FXstreet.com.

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below 30. When there are non-confirmations or divergences. For example, a new price high without a new high in RSI or in the case of a new price low without a new low in RSI may indicate a false breakout.

In the chart above it can be seen that at the end of the downtrend in price with successive lower lows, RSI failed to confirm the price lows, registering higher troughs in the RSI value. This is a bullish divergence. Then, after price had reversed higher, the opposite occurred. While price confirmed an uptrend through successive higher highs, RSI failed to confirm those price highs.

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Relative Strength Index Signal (RSI Signal) - Forex Education - FXstreet.com.

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RELATIVE STRENGTH INDEX SIGNAL (RSI SIGNAL) By FX-Strategy.com

QUOTES Real Time Java Applet Real Time Tables Exotic Currencies

http://www.fx-strategy.com Characteristic:

Momentum Indicator

Parameter Defaults:

RSI Period

14

controls the measurement period for the RSI

RSI Signal

9

controls the measurement period for the average of RSI

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Plots:

RSI Signal

RSI is a popular indicator commonly used to confirm price movement and help identify turning points in the market. It was created by Welles Wilder Jr.

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The RSI calculates a value based on the cumulative strength and weakness of price over a specified period. For that period, RSI accumulates the points gained on periods with higher closes and the points lost on periods with lower closes. The sum of number of the points gained is divided by the sum of the points lost and this is normalized between 0 to 100. The direction of RSI is considered to confirm price movement, i.e. a rising RSI confirms rising prices. In general RSI is used either as an indicator of overbought or oversold market conditions in consolidating markets or to identify divergences at trend exhaustion. The basic direction of RSI is said to dictate the underlying direction of price. However, there are many occasions when the RSI fails to reach the opposite extreme and reversal occurs earlier. In addition, RSI does not produce a straight line and the many small turns can cause confusion as to price direction. Some traders will therefore calculate a simple moving average of the RSI as an indicator of price direction and may also use the crossing of the RSI across its average as buy or sell signals.

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Simple Moving Averages- Forex Education - FXstreet.com.

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SIMPLE MOVING AVERAGES By FX-Strategy.com

QUOTES Real Time Java Applet Real Time Tables

http://www.fx-strategy.com

Characteristic:

Trend Direction Indicator

Parameter Defaults:

SMA Period

Plots:

SMA

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10 controls the measurement period for the average

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Moving Averages are commonly used as a tool for trend identification. It calculates and plots a simple arithmetic average of prices for a specified period.

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SMA =

Sum of “x” period closes X

Many users will consider the direction in which the average is moving and the relative position of prices and the moving average. A rising moving average values and prices above the moving average would indicate an uptrend. Similarly, a declining moving average values and prices below the moving average would indicate a downtrend. It is important to consider the lag in the moving average caused by the fact that it is taking historic data into consideration. Several lengths of the moving average should be considered.

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The chart displays the basic use of identifying price/trend direction. However, it does also highlight the weaknesses of moving averages – the lag in identifying price direction changes and the problems caused in consolidating markets when

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the close can oscillate around the average, providing no clear direction in price.

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Simple Moving Averages - Two Lines - Forex Education - FXstreet.com.

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SIMPLE MOVING AVERAGES - TWO LINES By FX-Strategy.com

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http://www.fx-strategy.com Moving Averages are commonly used as a tool for trend identification. They calculate and plot a simple arithmetic average of prices for a specified period. Many users will consider the direction in which the average is moving and the relative position of prices compared to the moving average. Since one of the basic uses of moving averages is to define the underlying direction of prices and whether price rises or falls through the average, it is also possible to use two moving averages. The faster moving average (measured over the shorter period) may be used as a proxy for price and thereby eliminate the short-term fluctuations in price action. Many analysts will then consider the crossover of the fast average above the slow average (a Golden Cross) as bullish and the crossover of the fast average below the slow average (a Dead Cross) as bearish.

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Some traders will use this as the basis for a system, but adding in controls over profit and loss.

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When considering utilizing two moving averages to determine trading signals, it must be understood that since the averages are based on the close price, that the signals provided will imply entries on the close of the bar of crossover. On a simple visual look at the crossover points it can occasionally be misleading to look at the actual point where the averages cross. By the time this has occurred price has often moved quite some distance away from the averages. Consider the chart above which actually provides only two profitable trades with a probable third. The first is the initial sell order on the left although the profit is not that great and the second is the buy signal to the right center of the chart which occurred just as price was trending higher. The final sell signal looks as if it will produce a profit.

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However, all other trades provide losses since the movement of price has outstripped the moving averages and by the time reversal is made, the market has exceeded the entry price. This is quite normal with moving averages and it must be understood that the optimum lengths of the averages cannot be established ahead of the fact. In general a dual moving average system will make strong profits during a trending market, but the losses can be substantial during consolidation.

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Stochastics Fast - Forex Education - FXstreet.com.

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STOCHASTICS FAST By FX-Strategy.com

QUOTES Real Time Java Applet Real Time Tables Exotic Currencies

http://www.fx-strategy.com Characteristic:

Momentum Indicator

Parameter Defaults:

%K Period

5

controls the measurement period for the K% line

%D Period

5

controls the measurement period for the D% line

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Plots:

FastK FastD

Stochastics were developed by George Lane in the 1950’s and are based on the assumption that as price rises the close of the bar will tend to be towards the high of the recent range. Equally, as price declines the close of the bar will tend to be towards the low of the recent range. It is often used to confirm price movement or identify turning points in price. The high and low of the number of periods requested by the input parameter is taken to establish a range, and the current price is then compared to this range and expressed as a percentage. The resulting calculation is then indexed and plotted as Percentage FastK. A type of smoothed average of Percentage FastK, known as Percentage FastD, is also plotted. %FastK and %FastD plot as oscillators with values from 0 to 100. The direction of the Stochastics reflects confirm recent price movement, i.e Rising prices confirms rising Stochastics and the potential for further moves in that direction. Formulae: (Position of close in ( Close - Lowest Low of “x” periods ) range) %K = 100 * (Highest High for “x’ Periods – Lowest (Range) Low of “x” periods ) %D = 100 *

“y” period sum of the numerator “y” period sum of the denominator

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As can be seen from the chart displayed, Fast Stochastics produce a very choppy FastK line with an equally choppy FastD line. The general method of using Stochastics is as an overbought and oversold indicator in consolidating markets, but it can be seen that Fast Stochastics tend to produce many extremes where price continues in the direction of the extreme. There are other usages of the FastK and FastD lines. 1. To identify the crossing of %K across %D in the direction of the %D movement. In other words, the only crossovers of %K across %D that Lane accepted were those where %K crossed below %D while %D was itself declining. Two of these examples are shown in the above chart, ringed in green. 2. The occurrence of the condition in point 1 is not that frequent. Thus there are other types of signal involving a cross or near cross, this being the “kiss” of %K on %D. Where %D is rising a decline of %K to (or close to) %D and then a subsequent rise the next bar completes a “kiss” and often produces profitable results. Conversely, if %D is declining and %K rises towards (or close to) %D and then rises again the next bar the result is often a solid rally. These examples are shown in the above chart, ringed in blue. 3. If using the crossover of %K across %D it is a stronger signal if the crossover produces a movement that takes out the highest high (or lowest low in the case of a cross lower) of the past 5 bars. Until that point the crossover is not valid. These examples are shown in the above chart, ringed in pink.

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Stochastics Slow - Forex Education - FXstreet.com.

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STOCHASTICS SLOW By FX-Strategy.com

QUOTES Real Time Java Applet Real Time Tables Exotic Currencies

http://www.fx-strategy.com Characteristic:

Momentum Indicator

Parameter Defaults:

Fast %K Period

5

controls the measurement period for the %K line

Fast %D Period

5

controls the measurement period for the %D line

Slow %D Period

5

controls the measurement period for the Slow%D line

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Plots:

SlowK SlowD

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Stochastics were developed by George Lane in the 1950’s and are based on the assumption that as price rises the close of the bar will tend to be towards the high of the recent range. Equally, as price declines the close of the bar will tend to be towards the low of the recent range. It is often used to confirm price movement or identify turning points in price.

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The high and low of the number of periods requested by the input parameter is taken to establish a range, and the current price is then compared to this range and expressed as a percentage. The resulting calculation is %FastK. A type of smoothed average of %FastK, known as %FastD, is also calculated and renamed %SlowK. Finally %SlowD is calculated by taking a running average of %SlowK. %SlowK and %SlowD are plotted as oscillators with values from 0 to 100. The direction of the Stochastics reflects confirm recent price movement, i.e Rising prices confirms rising Stochastics and the potential for further moves in that direction. Formulae:

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%K =

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%D =

100 * ( Close - Lowest Low of “x” periods ) (Position of close in range) (Highest High for “x’ Periods – Lowest Low (Range) of “x” periods ) (Range) 100 * “y” period sum of the numerator “y” period sum of the denominator

%SlowD = “z” period running average of %SlowK

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The slow form of Stochastics is used more as an overbought and oversold indicator in consolidating markets. However, they must be used wisely and it is often a good filter to endure that price moves through the highest high (in the case of a cross higher) or below the lowest low (in the case of a cross lower) for the past few periods to confirm price is reacting to the momentum change. Slow Stochastics also provide bullish and bearish divergences against price at trend reversal that indicate that the underlying price direction is slowing.

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http://www.fxstreet.com/education/a45.asp (2 of 2) [4/02/2004 11:36:19 AM]

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TRIX - Forex Education - FXstreet.com.

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TRIX By FX-Strategy.com

QUOTES Real Time Java Applet Real Time Tables Exotic Currencies Cross Rates Forwards & Libor Currency Tools World Indices CHARTS Real Time - Netdania Real Time - FxTrek Strategic Market Trend USD Index Bond Yield

http://www.fx-strategy.com Characteristic:

Trend Direction

Parameter Defaults:

Length

Plots:

Trix

9

controls the measurement period for the exponential averages

TRIX was developed by Jack Hutson, a past editor of the Technical Analysis of Stocks and Commodities magazine. TRIX is a triple exponential moving average of the log of price. It may be used an oscillator used to identify oversold and overbought markets but its strength is more in its ability to track basic market direction. It oscillated around a zero line which some traders use as a trading signal itself, although this may provide a late entry. As a momentum indicator it does provide divergences at trend reversal and as with most indicators it is best utilized with other techniques that confirm price direction, or reversal in direction.

World Stocks NEWS Latest Forex News Editor's Selection Central Banks Currency Focus MARKET Market Reports Strategy Analysts Comments Audio Analysis Expert Q&A Sessions Technical Analysis Forecasts Economic Indicators Macro Economic Calendar Interest Rates FUTURES Currencies Energies Financials Indices EDUCATION Knowledge Workshops Conventions

The chart above displays several uses of TRIX. The first on the left displays that similar to the momentum indicator, a rising TRIX above zero suggests acceleration higher while a declining line above zero indicates higher prices but at a slower pace, or the beginning of a reversal. When used in conjunction with other techniques such as simple trend lines and support and resistance lines, the full effect of TRIX can be achieved. The second example displays a mild bearish divergence and as TRIX declines (but above zero) price breaks below the trend support line. Later, as TRIX remains negative price support is broken to confirm lower prices.

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Q&A SESSIONS Analysing the majors By Gabriel Leiria Click here for more details and to register

TRIX - Forex Education - FXstreet.com.

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By Doug Schaff FX-Strategy.com Tel: 845-758-2935 E-mail: [email protected]

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http://www.fxstreet.com/education/a46.asp (2 of 2) [4/02/2004 11:36:26 AM]

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Ultimate Oscillator - Forex Education - FXstreet.com.

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ULTIMATE OSCILLATOR By FX-Strategy.com

QUOTES Real Time Java Applet Real Time Tables Exotic Currencies

http://www.fx-strategy.com Characteristic:

Trend Reversal Indicator

Parameter Defaults:

Period 1

7

controls the measurement period for the short ATR

Period 2

14

controls the measurement period for the medium ATR

Period 3

28

controls the measurement period for the long ATR

Cross Rates Forwards & Libor Currency Tools World Indices CHARTS Real Time - Netdania

Plots:

Real Time - FxTrek

Developed by Larry Williams, the Ultimate Oscillator indicator is calculated by taking the sums of the True Range of the number of bars specified by the three input parameters. These three sums are divided into the sums of the distance from the close to the low. This value is weighted for the three lengths and plotted on the chart.

Strategic Market Trend USD Index

Ult_Osc

Bond Yield World Stocks NEWS Latest Forex News Editor's Selection Central Banks Currency Focus MARKET Market Reports Strategy

Many users believe divergences in the Ultimate Oscillator as well as a breakout in the trend of the indicator are significant signals. For example, a bullish divergence is said to occur if market prices reach a new low but the indicator does not follow. Conversely, a bearish divergence is said to occur if market prices reach a new high but the indicator does not follow. Williams recommended that you initiate a trade following a divergence and a breakout in the Ultimate Oscillator's trend. These can be summarized: Buy

Analysts Comments Audio Analysis Expert Q&A Sessions

● ●

Technical Analysis Forecasts

A bullish divergence occurs. The Oscillator rises above the highest point reached during the span of the bullish divergence. This is the point at which you buy.

Sell

Economic Indicators Macro Economic Calendar Interest Rates

● ●

A bearish divergence occurs. The Oscillator falls below the lowest point reached during the span of the bearish divergence.

FUTURES Currencies Energies Financials Indices EDUCATION Knowledge Workshops Conventions BROKERS SOFTWARE http://www.fxstreet.com/education/a47.asp (1 of 2) [4/02/2004 11:36:36 AM]

Q&A SESSIONS Analysing the majors By Gabriel Leiria Click here for more details and to register

Ultimate Oscillator - Forex Education - FXstreet.com.

MONEY MANAGERS LOGIN

By Doug Schaff FX-Strategy.com Tel: 845-758-2935 E-mail: [email protected]

http://www.fx-strategy.com 71 Starbarrack Road Red Hook, NY 12571 United States

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http://www.fxstreet.com/education/a47.asp (2 of 2) [4/02/2004 11:36:36 AM]

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Weighted Moving Average - Forex Education - FXstreet.com.

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WEIGHTED MOVING AVERAGE By FX-Strategy.com

QUOTES Real Time Java Applet Real Time Tables Exotic Currencies Cross Rates Forwards & Libor Currency Tools World Indices CHARTS Real Time - Netdania Real Time - FxTrek Strategic Market Trend USD Index Bond Yield World Stocks NEWS Latest Forex News Editor's Selection Central Banks Currency Focus MARKET Market Reports

http://www.fx-strategy.com Characteristic:

Trend Direction

Parameter Defaults:

WMA Period

Plots:

WMA

10 controls the measurement period for the Average

One of the features of a simple moving average is the lag in reacting to changes in price direction. Since it allocates equal weighting to each price point in the equation it implies that the price point ‘x’ periods ago has equal importance as the current bar. This will result in the simple moving average reacting quite slowly to price reversals. Some analysts and traders feel that the current bar is more important than the first bar in the measurement range and the weighted moving average is one method of allocating more weighting to recent price movement. It does this very simply by incorporating a series of multipliers to each price point, the largest to the most recent bar and the least to the first price in the series, then dividing the sum of these by the sum of the multipliers. WMA5 = (Closet * 5 + Closet-1 * 4 + Closet-2 * 3 + Closet-3 * 2 + Closet-4 * 1) / (5 + 4 + 3 + 2 + 1) The result is an average that turns much quicker as price reacts in the opposite direction. This does enable traders to spot price reversals much sooner, but also has the counter-effect of providing “false signals” at times when the pullback is brief and the trend resumes.

Strategy Analysts Comments Audio Analysis Expert Q&A Sessions Technical Analysis Forecasts Economic Indicators Macro Economic Calendar Interest Rates FUTURES Currencies Energies Financials Indices EDUCATION Knowledge Workshops Conventions BROKERS SOFTWARE

http://www.fxstreet.com/education/a48.asp (1 of 2) [4/02/2004 11:36:44 AM]

Q&A SESSIONS Analysing the majors By Gabriel Leiria Click here for more details and to register

Weighted Moving Average - Forex Education - FXstreet.com.

MONEY MANAGERS LOGIN

By Doug Schaff FX-Strategy.com Tel: 845-758-2935 E-mail: [email protected]

http://www.fx-strategy.com 71 Starbarrack Road Red Hook, NY 12571 United States

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http://www.fxstreet.com/education/a48.asp (2 of 2) [4/02/2004 11:36:44 AM]

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Williams R% - Forex Education - FXstreet.com.

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WILLIAMS R% By FX-Strategy.com

QUOTES Real Time Java Applet Real Time Tables Exotic Currencies Cross Rates Forwards & Libor Currency Tools World Indices CHARTS Real Time - Netdania Real Time - FxTrek Strategic Market Trend USD Index Bond Yield World Stocks NEWS Latest Forex News Editor's Selection Central Banks Currency Focus

http://www.fx-strategy.com Characteristic:

Momentum Indicator

Parameter Defaults:

William %R Period

Plots:

WLR

14

controls the measurement period for the %R line

Williams PercentR was developed by Larry Williams. It produces a plot that is the replica of George Lane’s Fast%K but is plotted as values below zero rather than above. Just as Fast%K is a measurement of the position of the current price in relation to the recent range and expressed as a percentage, Williams Percent R reflects the same concept. Note the main difference between the two formulae is that Fast%K has a numerator as: Close - Lowest Low of “x” periods, Williams Percent R has: Close - Highest High for “x’ Periods which produces a negative result. Formulae: (100 * ( Close - Highest High for “x’ (Position of close in range) Periods) %K = 100 (Highest High for “x’ Periods – (Range) Lowest Low of “x” periods ) (Range) The indicator may be used in the same manner as Fast Stochastics.

MARKET Market Reports Strategy Analysts Comments Audio Analysis Expert Q&A Sessions Technical Analysis Forecasts Economic Indicators Macro Economic Calendar Interest Rates FUTURES Currencies Energies

Q&A SESSIONS

Financials

Analysing the majors By Gabriel Leiria

Indices EDUCATION Knowledge

Click here for more details and to register

Workshops Conventions BROKERS SOFTWARE

The chart above displays both George Lane’s Fast%K and Williams Percent R and can be seen as being essentially the same.

http://www.fxstreet.com/education/a49.asp (1 of 2) [4/02/2004 11:36:50 AM]

Williams R% - Forex Education - FXstreet.com.

MONEY MANAGERS LOGIN By Doug Schaff FX-Strategy.com Tel: 845-758-2935 E-mail: [email protected]

http://www.fx-strategy.com 71 Starbarrack Road Red Hook, NY 12571 United States

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http://www.fxstreet.com/education/a49.asp (2 of 2) [4/02/2004 11:36:50 AM]

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