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  Introduction

  Technical analysis –is market dynamics research, mostly through graphs, to forecast future direction of the price.

  Formulate three postulates, which, as the three pillars, «worth» Technical Analysis:

  1. Price (course) takes into account all

  Every time the price effect acting, a huge number of (fundamental) factors.

  Some of them «pressure» on the price up, others down.

  
  Price and factors influencing it.

  Price and factors acting on it . Factors such scores may be tenths or even hundreds. And they all have different meanings, different «weight» and a different meaning in the eyes of the market .... But the price under the influence of all these factors have shown some value. Ie the price at a time already «took into account» all the factors that have already responded to them! Therefore, technical analysts believe that a correct analysis elect not difficult to even incorporate the fundamental factors, as a result of their influence - the schedule price.

  2. The movement of prices is subject to trends (trend)

  The trend- is the main direction of movement of prices. The main objective of the trader - is to identify the direction of the trend as early as possible and to trade in the direction of its motion.

  3. There are three types of a trend

  
  Uptrend. Price moves upwards. This trend is called bullish historically.

  
  Downtrend. Price moves downwards. This trend is called bearish historically.

  
  Sideways trend. Price is fluctuating upwards and downwards. No distinct trend forms. This trend is called flat, whipsaw, range.

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  Dow Theory

  Initially, principles of the Dow Theory were used only for the American indices created by Charles Dow: Transportation and Industrial. Most of them, however, can be successfully applied to the foreign exchange market.

  Main principles of the Dow theory:

  • 1. Indices discount everything. According to Charles Dow any factor which influences demand and supply will be reflected in the index. These factors cannot be foreseen but nevertheless they are taken into account by the market and reflect index behaviour.
  • 2. There are three movements on the market. Uptrend is characterised by the fact that every following top is higher then the previous one and every next bottom is higher then the previous one. Downtrend is characterised by the fact that every following top is lower than the previous one and every bottom is lower than the preceding one. When the market is in the flat position every next move (up or down) is approximately at the same level as the preceding one.
    
    Dow classified market trends as follows: primary trend (it is called a broad one and lasts from anything less than one year up to several years); secondary trend (it lasts from three weeks to three months and is considered as a correcting trend to the primary one. These in-between rebounds are one-two thirds (or even half) of the range prices move during the primary trend); daily trend (a short-term movement within the secondary trend, which has very little long-term forecasting value).
  • 3. The primary trend has three phases. During the first phase all unfavourable market information has been discounted by the market and the far-sighted and better informed traders start to buy. The second phase starts when the traders who do technical analysis enter the market. Once all economic data becomes more favourable, the third, final phase begins, which is characterized by high activity on the market supported by the mass media and optimistic economic forecasts in the newspapers and on TV. Despite the positive sentiment, the final phase is the first sign that the prevailing trend is about to end.
  • 4. Indices must confirm each other in order for the signal to have authority (referred to Industrial and Rail (or Transport) indices). Charles Dow said that any significant uptrend or downtrend signal on the market must be considered together in the Industrial and Rail indices. If we applied this principle now on the basis of modern technical analysis, it would mean that a signal from one technical indicator must be confirmed by a signal from another technical indicator.
  • 5. Trade volume must confirm the prevailing trend. If prices move in accordance with the prevailing trend, it increases the volume and inversely, when there is a rebound, volume decreases.
  • 6. The primary trend remains intact until a change in that trend has been given by the theory. The last major signal remains in force until a new signal develops. Many analysts believe that a bull market must always be moving to new highs. However, the market can undergo extended periods of sideways or lackluster trading without the primary trend changing. If the last major signal under the theory is bullish, the primary bull market trend remains in force until a bear market signal is given.

        
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  Trend Analysis. The Main Notions.

  Trend is a general direction of the price.

  There are three types of trends:

  
  

  • 1. Uptrend (or bullish). Prices rise.
  • 2. Downtrend (or bearish). Prices fall.
  • 3. Flat or Range.

  Though any price movement can not be linear. Any trend consists of the periods when the price moves in the direction of the main trend (Impulsive movement) and periods of retracement (Correction). . The market moves in the wave mode. As the result tops and bottoms form on the price charts.

  Support/Resistance Levels

  Looking at the charts you can notice that tops and bottoms of the market can be almost on the same inclined (sometimes horizontal) line. Such lines are called support / resistance levels.

  Resistance: lines are drawn between the significant top points. The more tops confirm the line the stronger it becomes. That is the market shows that the price level, specified by the resistance line, is very important and the market, having reached its saturation, bounces back from it.

  

  Support: lines are drawn between the significant bottom points.
  Once the support level is broken downwards it becomes the resistance level. Once the resistance level is broken upwards it becomes the support level.

  

  Channel Lines

  Often prices fluctuate between support / resistance levels. Such a movement is called a Chanel. In case the channel lines diverge this is an expanding channel, if they converge, then it is contracting.

  
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  Reversal Chart Patterns

  Price chart analysis starts with chart patterns. When you track price movements you may often see that these movements have predictable configurations, which are called chart patterns. Chart patterns are tools used to predict trend reversal or trend continuation.

  Head and Shoulders

  «Head and Shoulders» is the most recognizable reversal pattern.

  

  Head line is the key one when specifying this pattern. Head line is a trend line which joins two bottoms between highs. This line breakout after forming of the second shoulder signals that this is a «Head and Shoulders» pattern. This pattern has a very interesting feature for traders. The thing is that by the size of the pattern we may specify approximate (minimum) reversal movement of the market. That is, we can specify the target of the market movement as the height of the Head from the Head line, drawn from the point of the breakout in an opposite way.

   

  

  In order to confirm the «Head and Shoulders» pattern the volume patterns are used.

  

  Triple and Double Tops and Bottoms

  These are also reversal patterns. Though they are weaker than the «Head and Shoulders» pattern and less reliable as give a lot of false signals. That is why it is important to make a parallel analysis of oscillators convergence / divergence and market volume.

  

  V-Reversal Pattern (Spike)

  Mostly V-Reversal patterns (or Reversal Spikes) are formed subsequent to a rapid previous trend. There are many gaps on the chart, and support and resistance levels are indefinable. The only possible signal is a break through a very abrupt trend line. It is really difficult to find the right moment to enter the market if there is a formation of a spike. The best strategy in this circumstances is to be square (no open positions).

  

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  Triangle

  Triangle

  

  

  

  How to analyze symmetrical, ascending and descending triangles:

  • Classic triangle has five lines (three downward and two upward or vice versa);
  • If the price penetrates the triangle downwards then the price may continue to fall;
  • If the price penetrates the triangle upwards the price may continue to rise;
  • If the pattern angle is up-directed the price may move higher;
  • If the pattern angle is down-directed the price may move lower;
  • If prices remain within the triangle beyond the three-quarter point, the triangle begins to lose its potency, and prices may continue to drift out to the apex and beyond;
  • The breakout usually occurs between 1/2 and 3/4;
  • Triangle top will be the support/resistance level;
  • Typically, volume is heavy at the beginning and it contracts during the formation of a triangle. It increases again after the breakout;
  • The price continues moving in the direction of the breakout for at least a range equal to the triangle's height.

  Flag

  The pattern consists of two parts. Ideally flagpole is formed by one or two large bars. The flag is formed as a wavy corrective movement. If support / resistance lines are drawn between the tops and bottoms of this correction the picture will be very like a flag. It is usually broken out in the direction of the previous trend. The target is the height of the flagpole from the breakout point.

  

  Pennant

  The pennant resembles a small symmetrical triangle.

  

  Wedge

  Фигура похожа на треугольник. Отличие в том , что линии ограничивающие фигуру направлены в одну сторону, но под разными углами. Фигура часто образуется на коррективных движениях и прорыв происходит в сторону обратную наклону фигуры, т. е. в сторону основной тенденции. В случае образования фигуры против тенденции, то пробитие может означать разворот тренда.

  

  Rectangles

  

  The pattern is like a triangle. The difference is that the direction of the lines which restrict the pattern is the same but they are at different angles. Often the pattern is formed on the corrective movement and the direction of the breakout is opposite to the pattern skewing, that is it is in the direction of the main trend. In case the pattern forms against the trend the breakout may signal trend reverse.

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  Indicators. Trend Indicators.

  Moving Average.

  Moving average is the average of prices over a specified number of periods. It is a smoothed correlation between currency rates and time periods. The time period of any moving average defines how much it will be smoothed. For example, when a Moving Average is calculated by adding the closing prices for the last 5 bars, then it is defined as a 5-period MA.

  Simple Moving Average — SMA:

  SMA = (P1+P2+P3+….+Pn) / n
  P= Price price of i-bar. Usually closing prices are used. .
  n MA period. This is a number of bars on which the indicator is calculated.
  The main disadvantage of SMA is that it counts the price twice, when it is received and when it leaves the area of calculation. That is why improved variants of the indicator should be better used.

  Weighted Moving Average (WMA):

  WMA = (w1*P1+w2*P2+w3*P3+….+wn*Pn) / (w1+w2+w3+…+wn)
  wi — the so called weight or coefficient which is assigned to every price. The closer the price to today the larger coefficient is assigned.

  Exponential Moving Average (EMA):

  EMA(t) = EMA(t — 1) + (K x [Price(t) — EMA(t — 1)],
  where t — current time period (current bar),
  t — 1 — previous time period (previous bar),
  K = 2 / (n + 1),
  n EMA period.

  The main advantage of the Exponential Moving Average (EMA) is that it discounts both prices of the previous and current periods. Every subsequent value becomes more significant. MA length is better to choose for every specific instrument on which you trade and for every specific chart scale.

  Some traders believe that it is better to use Fibonacci figures.

  For example, the following ones.

  Prices chart	MA periods
  5-day	8, 13, 21
  1-day	8, 13, 21, 55, 89
  4-hour	8, 34, 55, 89
  1-hour	8, 34, 55, 89
  < 15 min.	34, 55, 144

  
  

  How to analyze Moving Averages:

  If the price line crosses the Moving Average line from below, then this is a signal to buy. If it crosses from above, then it is time to sell.

  

  The first method gives many false alarms as markets become faster each year. That is why cross-points of two Moving Average indicators of different periods are used (n1 and n2);

  

  Moving Average indicators of a greater period may specify the trend themselves. When the value of the indicator is more than 40 it becomes less sensitive to price movements and indicates only the general direction of the movement (Trend);

  

  The points of the most significant divergence of MA and the price chart indicate that the market is overheated greatly and correction is possible.

  Moving Average signals are more effective on a trend market and less effective when the market is flat. As MA is a lagging indicator, it gives many false alarms.

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  Alligator

  Bill Williams has offered this indicator, consisting of three balance lines, on the basis of the moving average (see Bill Williams' Chaos Theory on our web-site):

  Alligator's Jaw (the blue line) — Balance Line for the time period, used for a chart construction (13-period moving average at the mid price (High+Low)/2, which is offset 8 bars into the future);

  Alligator's Teeth (the red line) Balance Line for the meaningful time period, which is a period lower (8-period moving average at the mid price (High+Low)/2, which is offset 5 bars into the future);

  Alligator's Lips (the green line) — Balance Line for the meaningful time period, which is two periods lower (5-period moving average at the mid price (High+Low)/2, which is offset 3 bars into the future).

  MEDIAN PRICE = (HIGH + LOW) / 2

  With the help of the Alligator we can specify a trend or its absence on the market. If all three lines are intertwined, the Alligator is asleep and the market is range-bound. The longer it sleeps, the hungrier it gets. When it wakes up from a long sleep it chases the price much farther, therefore price movements are much stronger. When the Alligator is asleep, stay square. Once the Alligator wakes up, it opens its mouth (Balance lines diverge) and starts hunting. Having eaten enough, it goes to sleep again (Balance Lines converge), so it's time to fix profits.

  If the Alligator is not asleep, the market is either uptrending or downtrending:

  • 1. if the price is above the Alligator's mouth then it's an uptrend;
  • 2. if the price is below the Alligator's mouth then it's a downtrend.

  

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  Ichimoku Kinko Hyo

  This popular indicator is on the basis of the moving average. The Ichimoku Kinko Hyo charting technique was developed by Japanese analyst Hosoda, who wrote under the name of "Ichimoku Sanjin".

  The Ichimoku Kinko Hyo indicator consists of five lines:

  • Tenkan-sen — the average price level, (High+Low)/2, calculated over the first time period;
  • Kijun-sen — the average price level over the second time period;
  • Senkou Span A / Up Kumo — midway between Tenkan-sen and Kijun-sen, shifted forward for the length equal to the second time period;
  • Senkou Span В / Down Kumo — the average price level over the third time period, shifted forward for the length equal to the second time period;
  • Chinkou Span — current bar close, shifted backward for the length equal to the second time period.

  Senkou Span A and Senkou Span B form a "cloud" known as the "Kumo", which changes its color when these lines cross.
  If the price stays above the cloud then there is an upward trend. If it stays below the cloud then there is a downward trend. If the price is within the cloud then the market is flat. If Tenkan-sen line moves sideways then it is a signal for a flat market.

  Ichimoku Kinko Hyo indicator signals:

  When the price exits the cloud downward it is a sell signal, upward – buy signal. The price ranges before and after the cloud are often the same.

  

  When the price and Chinkou Span (green line) intersect it is a signal to make a deal. If Chinkou Span crosses the price line from below it is a buy signal, if it crosses from above it is a sell signal

  

  If Tenkan-sen (red line) crosses Kijun-sen (blue line) from above it is a sell signal, and vice versa

  

  When the price is inside the cloud it tends to move in the direction of Tenkan-sen line (red line). If the Tenkan-sen line is directed downwards then the price tends to move to the lower edge of the cloud and vice versa

  

  Kijun-sen (blue line) and cloud edges are very strong resistance/support levels.

  

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  Elder Ray Indicator

  Elder Ray indicator is a mechanical trading system which measures buying and selling pressure over a specified period of time.

  The calculation is based on the following principles:

  • Price is an agreement between sellers, buyers and square traders;
  • The Moving Average is the averaged price agreement;
  • The highest price is the maximum of the bullish force over a specified period of time;
  • The lowest price is the maximum of the bearish force over a specified period of time.

  Elder Ray consists of three horizontal screens:

  • 1. A chart with a 13-period exponential moving average. When the moving average rises there is a bullish trend. When the moving average falls there is a bearish trend.
  • 2. A chart with a histogram of the Bullish Force.
  • 3. A chart with a histogram of the Bearish Force.

  Bullish / Bearish Force is calculated as follows:

  Bulls Power = High — EMA,

  Bears Power = Low — EMA,

  where:
  

  High — the maximum price over the period;

  Low — the minimum price over the period;

  EMA — exponential moving average.

  If the price top is higher than the moving average, then the Bullish Force is above zero, so the bullish trend is confirmed. Otherwise, bulls are weak. If the price low is below the moving average this means that the downtrend is very strong. Otherwise, bears are weak.

  Elder Ray Buy signals.. Moving average rises and Bullish Force indicator is below zero. The best time to buy is when the Bearish Force first falls below zero and then immediately rises. If new price highs are confirmed by new Bullish Force indicator highs, then it is a good confirmation of the bullish trend. Bearish convergence is another strong signal.

  

  Elder Ray Sell signals. Moving average moves downward and Bullish Force is above zero. Bearish trend is confirmed if the price lows and Bearish Force indicator lows move downward in parallel. Bullish divergence is another strong signal.

  

  Moving Average shows the direction of a deal, and when the price approaches the moving average it is time to enter the market.

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  Envelopes (Price Channel)

  It is quite difficult to draw straight support / resistance lines as the market accelerates or slows down its pace. With the help of the indicator we can create a flexible channel which reacts to the market change rate.
  It is built on basis of the simple moving average which moves upwards or downwards at some percentage size with the most part of price fluctuations to be within these lines.

  Upper border:
  U = ( 1 + u / 100 ) x SMA (P, n);
  Lower border:
  L = ( 1 — d / 100 ) x SMA (P, n), где
  U — upper line of the price channel,
  L — lower line of the price channel,
  u — % above the moving average,
  d — % below the moving average,
  SMA (P, n) — simple moving average.

  The percentage («u» and «d») should be set so that about 95% of price activity is contained within the envelope and 5% outside it. The indicator will then be adequate to the market balance and all prices will come back to the envelope after they exit it.

  

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  Bollinger Bands

  Bollinger Band is constructed by placing upper and lower bands around a moving average, the band width is not constant but instead proportional to the standard deviation (SD-Standard Deviation) from the moving average over the specified period of time.
  BBU = МА + s*SD — upper border;
  BBL = МА — s*SD — lower border;
  SD = SQRT (SUM ((CLOSE — SMA (CLOSE, N))^2, N)/N)

  How to use BB:

  • 1. After contraction of the BB line strong market movement may be expected;
  • 2. If the market exits the borders of BB reversal may be expected soon (usually it is a corrective retracement);
  • 3. Quite often the market returns back once it reaches the moving average and only then it breaks MA;
  • 4. Bollinger Bands widen when the prevailing trend becomes stronger or at the beginning of a new trend. A good trend confirmation is when bands widen and volume rises. In a bullish market, moving average is the support level, whereas in a bearish market it is the resistance level.
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  Moving Average Convergence Divergence (MACD)

  Two lines are calculated and built in the indicator:

  MACDfast — fast line
  SIGNAL — signal (slow) line
  MACD is the difference between the fast 12-day exponential moving average (fast EMA) and the slow 26-day exponential moving average (slow EMA).
  MACDfast = EMA(12) [Price] — EMA(26) [Price];
  the results are smoothed with the help of EMA to eliminate sudden fluctuation:
  SIGNAL = EMA(9) [MACDfast],
  где Price — usually a close price.

  MACD signals:

  • If MACD is below the zero line then trend is bearish, if it is above it then the trend is bullish;
  • Divergence is the strongest signal on this indicator. This is a divergence in the direction of the waves movement of the chart and correspondent waves of the indicator. It signals early market reversal; ;

  

  Signal of the bullish trend reversal or damping

   

  

  Signal of the bearish trend reversal or damping

   

  • Crossing of the lines of the indicator in the direction of the trend may be used as a signal to open positions.
  • If MACD is below zero and there is no bearish convergence, then crossing of the lines from below signals upward correction.
  • If MACD is above zero and there is no bullish divergence, then crossing of the lines from above signals downward correction.
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  Average True Range (ATR)

  Average True Range (ATR) is a market volatility index developed and described by W. Wilder in his book «New concepts of the technical trading systems».

  True Range is the greatest among three following volumes:

  • the difference between the top and the bottom of the current bar;
  • the difference between the close of the previous bar and the top of the current bar;
  • the difference between the close of the previous bar and the low of the current bar.

  Average True Range (ATR) is the moving average of the true range values.

  

  Average True Range (ATR) oscillator analysis basics:

  the greater the oscillator value, the greater the possibility for trend reversal;

  the smaller the value the weaker the trend.

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  Parabolic Indicator

  Parabolic indicator (sometimes referred to as SAR) was developed by Welles Wilder in 1976 and was originally called «stop and reverse». The indicator is effective only in a trending market. It helps to define the direction of the prevailing trend and the moment to close positions opened during the reversal.

  In the indicator stops values are calculated on the grounds of the market movement in the direction of the trend. The more the movement the closer the stop loss to the current price value.

  SAR(i) = AF * ( High(i-1) — SAR(i-1)) + SAR(i-1) — when the market moves upwards;
  SAR(i) = AF * ( Low(i-1) — SAR(i-1)) + SAR(i-1) — when the market moves downwards;

  where
  SAR(i-1) — parabolic value on the preceding bar;
  AF (Acceleration Factor) — acceleration factor.

  For the first bar it is usually 0.02, and then it is calculated as follows:

  AF = 0,02 + n * 0,02,
  where n- the number of new bars.

  Parabolic signals:
  The indicator is easy to use — Parabolic SAR and trend direction are the same.

  When the price chart crosses Parabolic SAR it may be a reversal signal or may indicate temporary consolidation, hence, it is considered as a classic signal to initiate a position.

  

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  Average Directional Movement Index (ADX)

  Average Directional Movement Index (ADX) shows

  • 1. if there is a trend on the market and
  • 2. what potential it has.

  ADX represents two opposite +/-DM and ADX lines (Figure 1):

  • 1. The first goes in the direction of the price movement (line 1, +DM);
  • 2. The second goes in the opposite direction (line 2, -DM);
  • 3. The third (ADX) is the absolute difference between +/-DM lines, so the more divergence between +/-DM lines, the greater the value of ADX.

  Average Directional Movement Index (ADX) signals:

  • 1. Intersection with the extremum lines or reversal at high-low;
  • 2. +DM and -DM lines intersection precedes a new trend or strengthens the prevailing one - it is a very strong signal;
  • 3. If +DM line is above -DM line, then the trend is bullish, and vice versa;
  • 4. If lines diverge then ADX value increases and the trend becomes stronger, and vice versa;
  • 5. If ADX is below 20, then the trend is very weak.

  ADX	Trend	+DM . . . -DM	Buy/Sell
  Very low	Weak		-
  Falling	Loses strength		-
  Rises	Becomes stronger	Higher Lower	Buy Sell
  Forms local low	local low A new one	Higher Lower	Buy Sell
  Very high	Chances for a reversal are great		Take profit on some open positions
  Forms local high	Market is overbought / oversold

  

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  Relative Strength Index (RSI)

  Nowadays, it is considered to be the most popular oscillator.

  RSI = 100 — (100 / (1 + U / D))
  
  where
  U — average value of the positive price changes over a period;
  D — average value of the negative price changes over a period.

  Relative Strength Index (RSI) signals:

  • If the indicator is below the 50 line, then the market is considered to be bearish, if above the 50 level - bullish;
  • Bullish divergence / bearish convergence – the main signal of the trend weakness and possible reverse;
  • Under flat conditions exit from the overbought (oversold) area is a signal to sell (buy);
  • Moreover, different types of the trend analysis can be used to analyze Relative Strength Index (RSI): trend lines, support / resistance levels, chart reversal and continuation patterns.

  

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  Relative Vigor Index (RVI)

  Relative Vigor Index (RVI) calculation is based on the idea that in a rising market the closing price is usually higher than the opening price, and on the bearish market the closing is usually below the opening price.

  To normalize the index the price fluctuation is divided by the maximum price range within the bar:

  RVI = (CLOSE — OPEN) / (HIGH — LOW)
  
  Where:
  OPEN — open price;
  HIGH — the highest price;
  LOW — the lowest price;
  CLOSE — close price.

  ДTo eliminate occasional price fluctuations (so called «noise») the Relative Vigor Index (RVI) oscillator is smoothed by the 10-period simple moving average. A signal line is also formed as a 4-period moving average on the oscillator values.

  The basic signals of Relative Vigor Index (RVI) are:

  • Bullish divergence / bearish convergence — the main signal pointing to the weakness of the current trend;
  • A good moment to open a sell / buy position is the crossing of the RVI line by the signal line from above/below once the bullish divergence / bearish convergence has appeared on the chart;
  • In a flat market an exit from the overbought / oversold area is a signal to sell / buy.

  

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  Williams’ Percent Range (R)

  The formula to calculate Williams’ Percent Range oscillator is similar to the one used to calculate the Stochastic Oscillator:

  %R = (MAX (HIGH (i — n)) — CLOSE (i)) / (MAX (HIGH (i — n)) — MN (LOW (i — n))) * 100
  
  Where:
  CLOSE (i) — the current close price;
  MAX (HIGH (i — n)) — the highest top over the previous n periods;
  MIN (LOW (i — п)) — the lowest bottom over the previous n periods.

  The values of the Williams’ Percent Range (%R) oscillator lie between 0 and -100%. If the oscillator is between -80% to -100%, it denotes an oversold condition, whereas values in the range from 0% to -20% signify an overbought condition.

  Signals:

  • bullish divergence / bearish convergence — the main signals that point to the weakness of the current trend;
  • in a flat market an exit from the overbought / oversold area is a signal to sell / buy.

  

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  Standard Deviation (SD)

  A measure of the market volatility. This indicator characterises prices fluctuation against MA. If the value of the indicator is high the market is volatile and bars prices are different against MA. If the value of the indicator is not high the market is characterized by a low volatility and bars prices are quite near MA.

  Usually this indicator is used as a component of other indicators. Thus, when Bollinger Bands are calculated the value of the standard deviation of the instrument is added to its MA.

  Calculation

  StdDev (i) = SQRT (AMOUNT (j = i — N, i) / N)
  AMOUNT (j = i — N, i) = SUM ((ApPRICE (j) — MA (ApPRICE (i), N, i)) ^ 2)
  
  where:
  StdDev (i) &— Standard Deviation of th current bar;
  SQRT — square root;
  AMOUNT(j = i — N, i) — sum of roots from j = i — N to i;
  N — smoothing period;
  ApPRICE (j) — applied price of j-bar;
  MA (ApPRICE (i), N, i) — any MA of the current bar for N periods;
  ApPRICE (i) — applied price of the current bar.

  The market dynamics consists of successive alternation of periods of rest and moments of active trading, that is why approach to this indicator is simple:

  • if the value of the indicator is too low, that is the market is calm, a moment of active trading should be expected soon;
  • on the contrary, if the indicator is too high it means that activity may decrease soon.

  

  

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  Commodity Channel Index (CCI)

  Commodity Channel Index (CCI) calculations.

  1) Find a typical price: add high, low and close of each bar and divide it by 3
  TP = (High + Low + Close) / 3

  2) Subtract SMA of the typical prices over n-periods, SMA (TP, N), from the typical prices (TP)
  D = TP — SMA(TP, n)

  3) Multiply SMA (D, N) by 0,015
  M = SMA (D. n) * 0,015

  4) The final value of the indicator
  CCI = M / D

  The main signals for CCI:

  • Bullish divergence / bearish convergence is not always a signal of the weakness of the trend, but always quite accurately defines the beginning of the correction;
  • Under flat conditions exit from the overbought / oversold areais a sell (buy) signal.

  

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  Moving Average of Oscillator (OsMA)

  Moving Average of Oscillator (OsMA) is generally calculated as the difference between the oscillator and the moving average on the oscillator. In MetaTrader 4, MACD is used as an oscillator, and a SIGNAL (signal line) is used as a moving average:

  OSMA = MACD-SIGNAL

  

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  Stochastic Oscillator

  The aim of the Stochastic Oscillator is to determine price behaviour and reversals by monitoring close prices within the recent highs and lows.

  The method is based on the observation that when prices are rising their close levels tend to be closer to the top. If the prices keep rising whereas daily close levels start falling it signals that the trend is ready for the reversal.
  If the quotes tend to move downwards, the close is usually near the bottom.

  СThere are three stochastic lines: %K, %D, %R. They reflect current close price position against the chosen time period.

  %K = 100 ( ( C — Ln ) / (Hn — Ln) )
  
  where
  C — current close price,
  Ln — the lowest bottom within the number of bars of the chart
  Hn — the highest top within the number of bars.
  %D = SMA (%D , n1)
  n1 — the value of the simple moving average.

  The main signals for Stochastic:

  • The indicator was created in order to trade in the flat market. Now bullish divergence / bearish convergence is the main signal that shows that the current trend is weak and reversal or correction are possible;
  • In a flat market, exit from the overbought (oversold) area is a signal to sell (to buy);
  • If the solid line (%K) crosses the dashed line (%D) from below this is a signal to buy; if the solid line (%K) crosses the dashed line (%D) from above this is a signal to sell.

  Interaction between oscillators and price chart (hereinafter price is above and oscillator is below)

  Bearish convergence:

  

  middle signal

  If the end of the oscillator is near the upper edge price fall is possible.

  If the end of the oscillator is near the upper edge price fall is possible.

  

  weak signal

  We expect price stabilization with further trend change.

  

  middle signal

  If the end of the oscillator is near the upper edge trend strengthening is possible.

  If the end of the oscillator is near the lower edge price rise is more possible.

  If the end of the oscillator is near the mid price fall and stabilization are equally possible.

  Bullish divergence:

  

  middle signal

  If the end of the oscillator is near the lower edge price rise is possible.

  If the end of the oscillator is near the mid price fall is more possible.

  

  weak signal

  We expect price stabilization with further trend change

  

  middle signal

  If the end of the oscillator is near the lower edge trend strengthening is possible.

  If the end of the oscillator is near the upper edge price stabilization is possible.

  If the end of the oscillator is near the mid price rise and stabilization are equally possible.

  Parallelism:

  

  middle signal

  Strong trend upwards

  

  weak signal

  Trend change is expected

  

  middle signal

  Strong trend downwards

  Final note

  When the trend is strong oscillators should be treated carefully. As a rule, false signals indicate the trend strengthening.

  If the trend is upward oscillators are mainly in the overbought area and vice versa if the trend is downward oscillators are mainly in the oversold area.

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  Volume Indicators

  The main principles of using volume indicators:

  • When volume decreases it means that there is less interest, so it may be time for a reversal or price consolidation.
  • When volume increases it means that there is more interest, so it may strengthen the prevailing trend or a new trend may appear.
  • Sometimes gradual decreasing in volume is accompanied by rapid price movements.
  • Volume highs signal that it may be time for a reversal.

  On Balance Volume — OBV

  1) If the current close price is above the preceding one, that is C( i ) > C(i — 1), then: OBV(i) = OBV(i-1) + Volume (i)

  2) If the current close price is below the preceding one, that is C( i ) < C(i - 1), then: OBV(i) = OBV(i-1) - Volume (i)

  wnere
  C( i ) - current Close;
  C(i - 1) - Close of the previous bar;
  Volume (i) - current bar volume.

  

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  Accumulation / Distribution Indicator

  A/D = SUM (((Close — Low)-(High — Close)) * Volume / (High — Low) , N )

  Accumulation / Distribution (A/D) indicator is similar in most aspects to the On Balance Volume (OBV) indicator but it is more complex.

  Accumulation / Distribution indicator signals:

  • if a new price high is confirmed by a new Accumulation / Distribution (A/D) indicator high this means that the bullish trend is strong;
  • if a new price bottom is confirmed by a new Accumulation / Distribution (A/D) bottom this means that the bearish trend is strong;
  • bullish divergence warns of the weakness of the uptrend;
  • bearish convergence warns of the weakness of the downtrend;
  • breakout of the trend line drawn on Accumulation / Distribution (A/D) indicator warns of the high possibility of the breakout of the trend line on the price chart.
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  Force Index

  RFI = Volume * (Close — Close(-1))
  FI = MA (RFI , n)

  where
  Volume — current volume value;
  Close — the close price of the last bar;
  Close(-1) — the close price of the previous bar;
  MA — moving average.

  

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  Money Flow Index – MFI

  It is calculated as follows:

  1) Define a "Typical Price" (TP) for the specified period:
  TP = (High + Low + Close) / 3

  2) Calculate "Money Flow" value (MF):
  MF = TP * Volume
  
  If "Typical Price" is higher than the preceding one then "Money Flow" is positive. If "Typical Price" is lower than the preceding one then "Money Flow" is negative.

  3) Calculate "Positive Money Flow" and "Negative Money Flow":
  MR = PMF / PMF

  4)."Money Ratio" (MR) is calculated as follows:
  MFI = 100 — (100 / (1 + MR)
  
  Where
  С — current bar close price;
  С (-1) — Close of the previous bar;
  Volume — current bar volume.

  

  Money Flow Index (MFI) signals:

  • if a new price high is confirmed by a new indicator high it means that the bullish trend is strong;
  • if a new price bottom is confirmed by indicator bottom is means that the bearish trend is strong;
  • bullish divergence warns of the weakness of the uptrend. Bearish convergence warns of the weakness of the downtrend.
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  Market Facilitation Index (BW MFI)

  Market Facilitation Index (BW MFI) is calculated as follows:

  BW MFI = (HIGH — LOW) / VOLUME
  
  Where:
  HHIGH — the highest price of the current bar; LOW — the lowest price of the current bar; VOLUME — volume of the current bar.

  Signals:

  • When both BW MFI and Volume rise at the same time, it means that the market is moving primarily in one direction and that more people are participating in the market (volume increases). It is a good time to be already in the market.
  • When both BW MFI and Volume decrease at the same time, it means that traders' interest starts to fade. Often it occurs toward the end of the trend.
  • When BW MFI is pointing higher and Volume is pointing lower, it means that the market primarily moves in one direction but there are no new participants to generate higher volume. Price movements are the result of speculation.
  • When both BW MFI goes down and Volume goes up, it means that there is a battle between bulls and bears (large volume) and their forces are almost equal (the price does not change significantly). This typically occurs prior to a significant move in the opposite direction. Close attention should be paid to the direction that the price moves when breaking out of this slowdown. Bill Williams called this a squat bar.

  

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  Mechanical Trading Systems

  Alexander Elder's Triple Screen Trading System is a vivid example of mechanical trading systems.

  Alexander Elder's Triple Screen Trading System

  The idea of the Triple Screen Trading System is based on the concept that the market is moving in waves just like waves in the ocean. Every powerful wave consists of smaller ones, which consist of even smaller waves. To trade successfully a trader should choose the moment when waves are moving in the same direction to enter the market.

  First Screen - Market Tide

  It identifies the long-term trend (e.g. on the weekly chart). The main trend is identified on the basis of the weekly chart and MACD histogram. When histogram is down it is better to open short positions. The selling signal will be stronger when the histogram is below zero. When the histogram is up the best decision is to enter into a long position. Long position opening will be more effective in case the histogram is above zero. The tendency on the first screen is like a tide. And it is better not to swim against the tide.

  Second Screen – Market Wave

  It identifies the mid-term trend (e.g. on the daily chart). The mid-term trend is indicated with the help of oscillators, such as stochastic, RSI and other indicators created on the daily chart. If the first screen points at the bullish market and oscillators are in the oversold area this is a good signal to buy. And vice versa on the weekly bearish trend when the oscillators are overbought on the daily chart there is a good chance to sell. Waves are signals of the second screen. The Triple Screen Trading System considers only the waves which do not contradict the tide.

  Third Screen

  It identifies short-term trend, fixing breakouts of highs and lows of the previous day. If price reaches a new high comparing with the previous day, weekly trend increases and daily oscillators fall to the oversold area buy signal forms. If price reaches a new low comparing with the previous day, weekly trend is falling and daily oscillators rise to the overbought area it is high time to sell. The third screen identifies the ripple of the market.

  Elder Ray Indicator

  Elder Ray Indicator is an additional instrument of the Triple Screen Trading System. Its aim is to measure bullish and bearish force at every moment of time.

  The calculation is based on the following principles:

  • Price is an agreement between sellers, buyers and square traders;
  • The Moving Average is the averaged price agreement;
  • The highest price is the maximum of the bullish force over a specified period of time;
  • The lowest price is the maximum of the bearish force over a specified period of time.

  Elder Ray consists of three horizontal screens:

  • 1. The first chart is a chart with a 13-period exponential moving average. When the moving average rises there is a bullish trend. When the moving average falls there is a bearish trend.
  • 2.The second chart is a chart with a histogram of the Bullish Force. Bullish Force is calculated as follows:
    
    Bulls Power = High — EMA, where:
    High — the maximum price over the period;
    EMA — exponential moving average.
    
    If the price top is higher than the moving average, then the Bullish Force is above zero, so the bullish trend is confirmed. Otherwise, bulls are weak.
  • 3. The third chart is a chart with a histogram of the Bearish Force:
    
    Rears Power = Low — EMA, where Low — the minimum price over the period.
    
    If the price low is below the moving average this means that the downtrend is very strong. Otherwise, bears are weak.

  Elder Ray Main Signals

  • Buy Signals. Moving average rises and Bullish Force indicator is below zero. The best time to buy is when the Bearish Force first falls below zero and then immediately rises. If new price highs are confirmed by new Bullish Force indicator highs, then it is a good confirmation of the bullish trend. Bearish convergence is another strong signal.
  • Sell Signals. Moving average moves downward and Bullish Force is above zero. Bearish trend is confirmed if the price lows and Bearish Force indicator lows move downward in parallel. Bullish divergence is another strong signal.
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  Main Types of Charts

  Quite unusual charts are used to show price movement.

  1. Bar Charts

  This is the most common type of charts. It consists of vertical bars which show the range of the price change within some definite period of time.

  

  For example, on the 1 hour price chart each bar corresponds to the price change range within 1 hour.

  

  In this Picture 1 hour price movement is given.

  

  Then this movement will be shown in the shape of such a bar

  • Open — opening price, in this case 1 hour opening price. That is the first price of an hour.
  • Close — closing price, in this case 1 hour closing price. That is the last price of an hour.
  • Higf — the highest price within this period of time.
  • Low — the lowest price within this period of time.

  

  Chart for several hours looks like this

  2. Candlesticks or Candles.

  This is also a very popular type of charts. It is built just like a bar chart. The distance between the opening and closing prices is given in the shape of the triangle.
  If Close is higher than Open the body of the candle is colored in light (in white color).
  If Close is lower than Open the body of the candle is dark.

  

  Candlesticks

  

  Japanese Candles Chart

  3. Line chart

  

  The line is drawn through the closing prices