Various Forex Techniques and Terms

Many different techniques and indicators can be used to follow and predict trends in markets. The objective is to predict the major components of the trend: its direction, its level and the timing. Some of the most widely known include:

Bollinger Bands

Bollinger Bands - a range of price volatility named after John Bollinger, who invented them in the 1980s. They evolved from the concept of trading bands, and can be used to measure the relative height or depth of price. A band is plotted two standard deviations away from a simple moving average. As standard deviation is a measure of volatility, Bollinger Bands adjust themselves to market conditions. When the markets become more volatile, the bands widen (move further away from the average), and during less volatile periods, the bands contract (move closer to the average).

Bollinger Bands are one of the most popular technical analysis techniques. The closer prices move to the upper band, the more overbought is the market, and the closer prices move to the lower band, the more oversold is the market.

Support / Resistance

Support / Resistance The Support level is the lowest price an instrument trades at over a period of time. The longer the price stays at a particular level, the stronger the support at that level. On the chart this is price level under the market where buying interest is sufficiently strong to overcome selling pressure. Some traders believe that the stronger the support at a given level, the less likely it will break below that level in the future. The Resistance level is a price at which an instrument or market can trade, but which it cannot exceed, for a certain period of time. On the chart this is a price level over the market where selling pressure overcomes buying pressure, and a price advance is turned back.

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CCI - Commodity Channel Index

CCI - Commodity Channel Index - an oscillator used to help determine when an investment instrument has been overbought and oversold. The Commodity Channel Index, first developed by Donald Lambert, quantifies the relationship between the asset's price, a moving average (MA) of the asset's price, and normal deviations (D) from that average. The CCI has seen substantial growth in popularity amongst technical investors; today's traders often use the indicator to determine cyclical trends in equities and currencies as well as commodities.
The CCI, when used in conjunction with other oscillators, can be a valuable tool to identify potential peaks and valleys in the asset's price, and thus provide investors with reasonable evidence to estimate changes in the direction of price movement of the asset.

Hikkake Pattern and Moving Averages

Hikkake Pattern - a method of identifying reversals and continuation patterns. Used for determining market turning-points and continuations (also known as trending behavior). It is a simple pattern that can be viewed in market price data, using traditional bar charts, or Japanese candlestick charts.

The hikkake pattern was first discovered and introduced to the financial community through a series of published articles written by technical analyst Daniel L. Chesler, CMT

Moving averages - are used to emphasize the direction of a trend and to smooth out price and volume fluctuations, or "noise", that can confuse interpretation. There are seven different types of moving averages:
  • simple (arithmetic)
  • exponential
  • time series
  • weighed
  • triangular
  • variable
  • volume adjusted

The only significant difference between the various types of moving averages is the weight assigned to the most recent data. For example, a simple (arithmetic) moving average is calculated by adding the closing price of the instrument for a number of time periods, then dividing this total by the number of time periods.

The most popular method of interpreting a moving average is to compare the relationship between a moving average of the instrument's closing price, and the instrument's closing price itself.

  • Sell signal: when the instruments price falls below its moving average
  • Buy signal: when the instruments price rises above its moving average

The other technique is called the double crossover, which uses short-term and long-term averages. Typically, upward momentum is confirmed when a short-term average (e.g., 15-day) crosses above a longer-term average (e.g., 50-day). Downward momentum is confirmed when a short-term average crosses below a long-term average.

MACD - Moving Average Convergence/Divergence

MACD - Moving Average Convergence/Divergence - a technical indicator, developed by Gerald Appel, used to detect swings in the price of financial instruments. The MACD is computed using two exponentially smoothed moving averages (see further down) of the security's historical price, and is usually shown over a period of time on a chart. By then comparing the MACD to its own moving average (usually called the "signal line"), traders believe they can detect when the security is likely to rise or fall. MACD is frequently used in conjunction with other technical indicators such as the RSI (Relative Strength Index, see further down) and the stochastic oscillator (see further down).

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