About 80% of Forex traders suffer losses, which are caused by mistakes made by them when making decisions. The lack of financial analysis tools or the knowledge necessary to interpret its results affects the rationality of their actions. Moreover, a wide variety of tools for technical analysis of the foreign exchange market can confuse a novice investor.
Technical Analysis Tools
Effective data analysis tools will help to understand the market dynamics, among which trend change indicators stand out. Their goal is to reflect the trend in the dynamics of the currency market rates. A trend indicator can indicate its direction (upward, downward and lateral), strength and reversal. The following indices are distinguished:
- trend indicator;
- moment or rate of change in the course of the past period to the course of the current;
- volatility or volatility of the course;
- trading volume;
- support and resistance.
Trend indices
The best trend indicators are as follows:
- moving averages (Eng. moving averages, MA), simple SMA, exponential EMA and weighted WMA;
- moving average divergence-divergence MACD (eng. MA convergence / divergence)
- TRIX (English triple EMA, triple EMA);
- directional movement (DX);
- Medium DX (ADX)
- trend line indicator;
- Commodity Channel (CCI);
- parabolic SAR (English stop & reverse, stop and reversal);
- SMI (English smart money index, an index of "smart" money);
- vortex (Vortex indicator, VI);
- Ichimoku trend indicator.
Trend indices help to trade in its direction, while maintaining long positions in an uptrend and short for a downtrend. The disadvantage of these indicators is the delay at the time of market trend reversal.
Moment indices
You can avoid lag with the help of moment indicators. They help to establish a reversal of the course near the lower or upper boundaries of the horizontal channel of the trend, moments of resale and re-purchase. The disadvantage of moment indicators is the premature signaling of a sale with a growing trend and of a purchase with a falling one. These include indicators:
- stochastic;
- force (English force index, FI);
- True Strength Index (TSI)
- Relative Strength Index (RSI)
- ultimate (English ultimate oscillator, UOS);
- cash flow (English money flow index, MFI);
- the percentage range of Williams (Eng. Williams% R,% R).
There are also psychological Forex indices: agreement of players to increase (English bullish consensus), engagement index (English commitments of traders, COT), which assess the general situation in the market, its tendency to fall or increase quotes.
The trend and moment indices often do not coincide in the forecasts. For example, with a long-term increase in the rate, the trend direction indicator rises, signaling a purchase. At the same time, the oscillators of the moment give a signal about re-purchase, offering to sell. The reverse situation is observed during a long fall in prices, when the trend direction indicator drops, signaling a sale. At the same time, indicators of the rate of change in prices insist on buying.
Trend strength indicator
The strength of a growing trend can be estimated by its volume, direction and distance. When the closing rate is higher than the previous one, the strength of the trend is positive. And vice versa. The more the course has changed, the stronger the trend. The trend strength indicator is calculated by the product of the difference of the last and previous prices when closing by the volume of the currency. Thus, the strengthening of the trend is determined by an increase in price or trading volume. Changes from -100% to 100%.
RSI indicator
Relative Strength Indicator RSI is calculated as the ratio of the moving average of positive changes in the closing rate for the period to the sum of the moving average of positive and negative changes of the same price, multiplied by 100. When the index approaches 100%, the indicator signals overbought currency, and to 0% - about its overselling. The extremum of the index chart, opposite to the direction of the price movement, is an indicator of a trend reversal. Conversely, if the price chart shows a new maximum on an uptrend, but the index does not change, then a reversal is expected. To determine the trend change to the indicator chart, you can apply technical analysis figures. Also, a trend reversal signal is the convergence and divergence of the indicator and price chart - the price follows in the direction of the relative strength index.
For example, a trader enters a long position if the MA50 exceeds the MA200, and the 3-day RSI falls below the set value of 20%, which indicates overselling. Conversely, a trader enters a short position if the MA50 is lower than the MA200 and RSI3 rises above a predetermined level of 80%, signaling overbought currency.
MACD indicator
The MACD trend indicator is based on the difference of the exponential moving averages of a smaller and a larger period. Usually use 12 and 26-day moving. By MA intersections, the trend changes of different time periods are judged, and by the distance and relative position - the stability of the upward or downward trend. Subtraction from the short-term moving long-term gives an oscillator that visually takes into account these features. The indicator is a type of analysis of two averages.
There is a histogram and a linear MACD indicator.
The MACD histogram indicator is calculated by the formula: MACD = EMA 9 [A], where A = EMA 12 [i] - EMA 26 [i], where i is the price.
There are 3 types of signals :
- the passage of the maximum or minimum MACD is a signal that should be reacted to upon receipt of several additional ones;
- MACD crossing the established border is the basis for opening a position;
- crossing the middle MACD also requires additional signals.
The signals confirming the signals of the MACD histograms are volume indicators. It is also advised to wait for the change in the direction of the forecast.
Linear MACD consists of a smooth and non-smooth A. These lines repeat the dynamics of the course.
The intersection of the 12-day line with the 26-day from top to bottom signals a sale, from bottom-up - a purchase.
The value following the minimum or maximum of the 12-day line is a warning requiring confirmation by the intersection of the MACD lines.
The intersection of a linear MACD with value boundaries requires at least 2 confirmation signals.
The indicator should be used on charts no less than daily. It can be very late.
Parabolic SAR
The parabolic SAR, when the exchange rate enters a new extremum when the market trend changes, changes the stop margins MA to short-term (from 50 to 5 days), and the stop and reversal rates converge with the trend. The indicator repeats the trend until the intersection of the SAR level with the closing of the current position and the opening of the opposite.
The initial course is equal to the previous minimum (maximum) course. Then the SAR is calculated as follows: SAR n + 1 = SARp + AF (M - SAR n ), where:
- SAR n + 1 is the stop price of an open position,
- SAR n is the SAR of the previous period,
- AF - acceleration, increasing, starting from 0.02 to 0.02 when the course reaches the value of M.
- M - the new maximum (minimum) rate.
The parabolic system is used both to determine the moment of closing a position, and to open positions.
Channel indicator
The commodity channel indicator is an indicator of the momentum of the price and is calculated as the quotient of the difference between the price and its moving average from the absolute deviation of the price, multiplied by the reduction coefficient.
- CCI = (P n - SMA (P n )) / 0.015D, where:
- P n is a typical price;
- SMA (P n ) - moving average of a typical price;
- D is the average of the absolute difference of the average rate and its SMA.
CCI values range from +/- 100. Moreover, an excess of 100 indicates an overbought currency, and -100 indicates oversold, and this is an indicator of a trend reversal.
It is generally accepted that going beyond the borders of 100 is not random and creates the opportunity for a deal. Buy should be in excess of CCI 100, and sell when the index falls below 100. It is recommended that you open a short position when the CCI index is less than -100 and close is above -100.
MA indicators
Moving averages are simple, weighted and exponential.
Simple MA corresponds to the arithmetic average rate for the period.
This is the simplest and most popular indicator showing the trend. For example, the 200-day SMA for decades has remained a popular and effective tool for analyzing Forex quotes. It is calculated by summing the closing rates for the past 200-day period and dividing its number of days. Analysts simplified the calculation by compiling 40-week closing rates and dividing the result by 40.
To calculate the next MA value, it is necessary to subtract the value of the closing rate 40 weeks ago, add the last closing rate and divide by 40.
The intersection of MA lines of different periodicities allows you to calculate the moment of a trend reversal. For example, the intersection point of SMA9 and SMA14 signals a trend change.
The disadvantage of this method is the constant delay of signals, and its advantage is the simplicity and the ability to use SAM lines as resistance and support lines.
WMA Index
Weighted moving averages give each course of the period a weight that decreases with distance from the current day:
- WMA = 2∑ (ni) P ti / (n (n + 1)), where:
- P ti - course value at the moment, remote at i intervals from the current;
- n is the number of intervals.
Giving late courses more weight is thought to be more informative than SMAs. For long periods apply SMA, and for short (no more than an hour) - WMA or EMA.
EMA Index
The exponential average is also calculated by assigning weights to courses, taking into account all courses of the previous period:
- t = t-1 + ( [Pt - t-1 ]), where:
- K = 2 / (n + 1), where n is the average period.
This smooths the moving average curve relative to the courses.
MA responds to 1 course change twice - upon receipt and disposal of a value. EMA reacts once upon receiving a course, which makes the indicator more preferable. EMA also allows you to open positions on time.
When analyzing, one should find the intersection of the average and the graph of the course, find the points after the maximum or minimum of the average, maximum discrepancy between MA and price. And also follow the direction of the MA indicator, which indicates the direction of the trend.
Stochastic oscillator
The stochastic oscillator is an indicator of the rate of change in price. It is calculated by the ratio of the difference between the current closing price P t and the minimum price L n for the period n to the difference between the maximum H n and the minimum price of the period L n multiplied by 100%:
-% K = 100 (P t -L n ) / (H n -L n ).
The three-day moving average of the last three% K values is calculated as follows:
-% D = 100 ((K 1 + K 2 + K 3 ) / 3).
In addition to the simple average, both exponential and weighted average can be used.
When discarding old data, the indicator can change stepwise, which leads to instability and the supply of erroneous signals. Therefore, if an accurate trend indicator is required, then this oscillator is not the best choice.
If the% K and the rate diverge, a trend reversal is expected. If the rate reaches the next maximum without the maximum% K, then we can expect that the downtrend will replace the uptrend. Conversely, if the rate reaches a minimum, and% K is not, then it is necessary to expect an upward trend reversal in the course.
The signal to buy is the rise of% K over% D, and for sale - the% K falls below% D. According to the developer, the signal is more reliable if% D, before crossing% K, has already turned in the direction of a new trend. The most reliable are the buy signals in the region of 10-15% and the sale signals in the region of 85-90%.
Trend reversal indicator without redrawing
The indicator calculation algorithms use historical data. Each new price removes the first price of the settlement period. Even the best trend indicators, recounting values from a new history, can change their previous values. Such a change in values when new data arrives is called redrawing the indicator.
This effect is observed in most Forex indices, therefore, to reduce the impact of such changes, a trend reversal indicator is needed without redrawing.
The absence of redrawing always needs to be checked independently due to the fact that the expression "lack of redrawing" has gained popularity and is used without sufficient reason by the developers of free and paid indicators for advertising their products.
There are two ways to visually verify the absence of redrawing:
- monitoring the indicator on a small timeframe;
- use on the timeframes of M30 and higher to speed up the testing software of the trading platform, which can accelerate the indicator tracking time.
A trend reversal indicator without redrawing is an interesting and profitable technical analysis tool, but keep in mind that redrawing is not always a drawback. It becomes a consequence of changes in the market situation, and the “lost” signal could be false.
Williams fractals are an example of how redrawing can be useful. When the indicator appears, you should wait for its confirmation: if the fractal includes 5 candles, then it is recommended to open the transaction if it is not redrawn for the next two candles. And a trend indicator without redrawing will deprive the trader of such an instrument, or, instilling in him a false sense of reliability, will lead to losses.