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There are many different periods from which moving averages can be based. For example, a ten period moving average on an hourly chart will show you the average price for the previous ten hours. A ten period moving average on a weekly chart shows you the average price for the previous ten week. In general, traders use moving averages are a means for identifying trend direction.
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When trading strategies are backtested and are shown to be successful over long periods of time, there is a greater probability that the same strategy will work in future markets. It is impossible to track all of the historical data manually, so traders tend to run software programs which open and close positions when certain conditions and requirements are met within the market. Backtesting is a technical analysis practice and is not generally used by fundamental traders.
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The term underlying asset is sometimes used interchangeably with financial asset, financial instrument, etc. The underlying assets are the items being traded and everything about trading is based on them. Without the underlying asset, there is no basis for trade on the financial markets. For a trade to be valid, there must be a financial asset.
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Returns on every investment are subject to taxation. In order to attract a reasonable level of foreign investment, some countries and territories offer very low levels of taxation as an incentive to attract such investment, while at the same time, offering other conditions to keep such investment such as good corporate governance. Tax havens also have secrecy laws which prevent financial institutions from disclosing details of the monies held in their coffers by foreign individuals and corporations. This has led to several points of conflict between tax havens and the countries which depend on tax revenue of its citizens for income (e.g. the US). An example of a tax haven is the Cayman Islands.
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The concept of the strike price is key to a trade in the options market or in the binary options markets. Whenever a trade is contracted, it is based on a delivery of the security purchased at a pre-agreed price on a future date. This pre-arranged price between the dealer and the trader is known as the strike price. Traders use this price to hedge against future price fluctuations, and dealers use this as a means of guarding against price manipulations by traders on the actual exchanges where the exchange of the physical commodities being traded is done.
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The concept of the stop loss is for the protection of a trader’s account from devastating losses if an active trade is in a losing position. There are different ways to apply a stop loss order. On some broker platforms, the stop loss can be applied as a limit order or OCO (order cancels order). On the MT4 platform, this is a lot simpler as all a trader needs to do is to select the stop loss as part of the modify/delete trade order mechanism, which only functions on an active trade. Whichever style your broker presents to you, the stop loss order carries the same function. It automatically closes a trade at a pre-determined level when the position has moved against the trader. A stop loss does not always work; if there is abnormal volatility in the market such as the one that occurred after the September 11, 2001 attacks on the World Trade Center, the massive contrarian pressure on prices will produce a slippage and the stop loss will be taken out without the trade being closed. This situation also occurs after a weekend gap if the trader is on the wrong end of the trade.
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On some broker platforms, the term stop-limit order is used to signify both a stop order and a limit order, both of which are pending orders. The MetaTrader4 platform simplifies order types for traders, but considering that most ECN brokers do not use MT4 platforms, traders who want to get the most direct access to pricing from the liquidity providers have to get used to this terminology and know how to apply it on the proprietary trading platforms. For example, if a trader wants to sell the USDJPY at a particular price, but still feels that the price of the currency will edge up to a stronger resistance before heading downwards, he will place the order at his preferred level using a stop limit order.
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There are two types of stop entry orders used in the forex markets. These are: Limit Entry: A limit entry is a trading instruction to the broker to open a trade when prices are more favourable to the trader. The premise here is that if a trader wants to sell for example, he will prefer to do so when the price will be closest to a resistance point than away from it. As such, a limit entry for a sell order will aim the entry price to be above the current market price, so that he can make the maximum number of pips from the trade. The same argument holds for a buy trade, where a trader will want the trade to get as close to a support level as possible before buying. On the MT4 platform, you will see this displayed as Buy Limit and Sell Limit orders. Stop Entry: A stop entry is a trading instruction to the broker to open a trade when prices are less favourable. The premise here is that the trader has probably missed the early move and is just wishing to catch a continuation of that move. This will leave him with less pips than desired, but still something to take home. As such, for a sell trade, entry price will be below market price, and for a buy trade, entry price will be above market price. On MT4, this is shown as Buy Stop and Sell Stop orders.
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Any trader who wants to make money from trading the financial markets knows that the markets function by timing. In the markets, timing is everything, and what a trader does is to look for indications that the price action of the underlying asset is about to behave in a particular manner. Such indications are given by using technical and fundamental indicators for analysis.
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Resistance levels are not usually a fixed price point. Rather, it is more correct to say that there is a zone of resistance. Usually, the highest point in that zone is assumed to be the maximum point of resistance. You can identify resistance levels when an upward swing of prices have reached a certain point and then stalled, before retreating. For a zone to qualify to be a resistance point, the prices must have tested that level several times. After the resistance has been tested several times, two things may happen. Prices may reverse fully, or eventually break through this point in an upwards direction to continue with the pre-existing trend.
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NASDAQ is the second largest exchange in the world in terms of market capitalization. NASDAQ is mainly used to track what are known as the technology stocks. This is where you will find stocks such as Google, Apple, Microsoft, etc. NASDAQ was originally the acronym for National Association for Security Dealers Stock Quotations, but NASDAQ is now the adopted name of the exchange. NASDAQ has three levels of dealings. Traders can trade the individual stocks on the NASDAQ exchange, or can be traded as a stock CFD on broker platforms.
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Market makers operate dealing desks that serve as intermediaries between the liquidity providers and the traders. By the virtue of this operation, market makers can be said to boost liquidity in the market because they are prepared to buy or sell from traders who do not have large capital, thus boosting liquidity levels. Market makers can then pass on these orders to the liquidity providers. Usually, market makers mark up the prices given to traders; that is the primary source of their profits. However, many market makers have been implicated in unethical price manipulations such as stop hunting. But their role in the markets is what makes it possible for traders with small capital to participate in the market.
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MACD is used to spot price divergences at tops and bottoms. It is composed of two lines (MACCD line and signal line) and a histogram. When the MACD line is above the signal line, the histogram is positive (crosses above 0 into positive territory) and this is a buy signal. When the MACD line crosses below the signal line, the histogram is negative (crosses below 0 and into negative territory) and this is a sell signal. On its own, the MACD does not give reliable signals and it must be combined with other indicators to produce a reliable signal.
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The composition of the Federal Open Market Committee is as follows: the 7 members of the Federal Reserve Board of Governors, and 5 of the 12 Federal Reserve Bank Presidents. The FOMC is headed by the Chairman of the Federal Reserve Board (Ben Bernanke presently). The FOMC sets interest rates either directly by altering the discount rate (the rate at which the Federal Reserve lends to banks) or through the use of open market operations (by purchasing and selling government securities).
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The Federal Reserve Board is made up of 7 members who oversee the 12 Federal Reserve Banks, establishes monetary policy such as interest rates, and monitors the economic health of the United States. Together with 5 presidents of the 12 Reserve banks, they constitute the Federal Open Market Committee (FOMC).
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E-Mini contracts are available to trade different futures contracts, especially the contracts of the stock index futures such as the NASDAQ100, S&P500 and Russell 2000. The e-mini S&P500 futures contract is 20% of the size of the full S&P futures contract. This means that the e-mini contract of the S&P500 is $50 per pip. The advantages of the e-mini contracts are that they provide greater liquidity and are more affordable to the trader. In addition, e-mini contracts can be traded round-the-clock by traders since they are traded electronically. This is in contrast to the full futures contracts which are traded using the open outcry system on the floor of the Chicago Mercantile Exchange, which can only be done during the official trading hours.
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The key element in trade executions done by ECN is that it brings market participants together without a dealing desk or market maker functioning as an intermediary. This allows traders to get the most transparent pricing possible. It requires the existence of plenty of liquidity; as a result, traders can only have access to ECN trading if they have account balances that start from $50,000 and above. In addition, spreads are not fixed as dealers jostle to offer competitive pricing, and the direct nature of trading operations in an ECN system also means that orders are executed speedily and without re-quotes.
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Discount brokers are different from full-service brokers in that they scale down the services provided to customers. They do not provide advisory or research services, and leave trade executions in the hands of the customer by providing trading platforms. As such, they are able to pass on the reduced cost of operations to clients by reducing the cost of trading.
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This order is sometimes known as the “Good for Day” (GFD) order. This is in contrast to a Good till Cancelled (GTC) order which stays active even after the trading day until the order is fulfilled. A day order is used by intraday traders who take positions on underlying assets based on the analysis of the market for the day. It is the order to use if a trader is not sure of what the conditions in the market will be in the immediate future. So in order not to expose the trading account to unpredictable risk, the trader can use the day order.
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In the options market, there are two parties to a deal: the trader and the dealer. If a trader purchases an option, that option has to be exercised on a particular day not exceeding three months. This will involve the exchange of the commodity and the cash settlement. So the date of maturity will refer here to the date at which the obligations to that contract are settled between the dealer and the trader.
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Daily trading limits can occur as a result of the inherent behavior of the underlying asset, or they can be fixed artificially by the regulatory authorities by setting a price floor and a price ceiling. Some stock exchanges like the Nigerian Stock Exchange operate a daily trading limit where the maximum rise or fall of an underlying asset is pegged at 5%. This is an example of an artificially induced daily trading limit. Some currencies tend to trade within a range. The Hong Kong Dollar and Singaporean Dollar is an example, but again this is a function of the actions of the central banks of these countries. Intraday traders are usually advised to trade with caution on assets that have daily trading limits as the restrictions on the daily movements of the underlying assets restrict profitability on intraday trades.
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Sometimes, a trader may make a mistake in placing an order. He may click “buy” when he actually meant to sell (and vice versa) or he may use a lot size that he actually did not mean to. In these circumstances, a trader has a short window of opportunity (in seconds) to cancel the order by clicking the “Cancel” order on their trading platform. Most of the time, the order will have already sailed through and if this is the case, the cancel order is ineffective.
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In this article we will discuss about a widespread, well-known key element of technical analysis. Why do you think technical analysis especially some elements work so well for financial markets? Why do you think Fibonacci levels are usually strictly followed? Because thousands and billions of traders and computer programs for trading use these elements. This way everybody acts the same at the same time… This is why we decided to present in the category of technical analysis, the most used and well-known methods of predicting financial evolution. These methods are easy to understand and are very efficient. We will discuss about the MACD indicator. We will find out what MACD means is and how it is calculated. We will use it in our charts and we will see how it acts. We will discover how useful the MACD indicator is and, at the end, we will draw the conclusions. We will use the MACD indicator daily in our analyzing and trading system. What is MACD? Developed by Gerald Appel, Moving Average Convergence/Divergence (MACD) is one of the simplest and most reliable indicators available. MACD uses moving averages, which are lagging indicators, to include some trend-following characteristics. These lagging indicators are turned into a momentum oscillator by subtracting the longer moving average from the shorter moving average. The resulting plot forms a line that oscillates above and below zero, without any upper or lower limits. MACD is a centered oscillator and the guidelines for using centered oscillators apply. 1. How is it calculated? The most popular formula for the "standard" MACD is the difference between a security's 26-day and 12-day Exponential Moving Averages (EMAs). This is the formula that is used in many popular technical analysis programs, and quoted in most technical analysis books on the subject. Appel and others have since tinkered with these original settings to come up with a MACD that is better suited for faster or slower securities. Using shorter moving averages will produce a quicker, more responsive indicator, while using longer moving averages will produce a slower indicator, less prone to whipsaws. For our purposes in this article, the traditional 12/26 MACD will be used for explanations. Later in the indicator series, we will address the use of different moving averages in calculating MACD. Of the two moving averages that make up MACD, the 12-day EMA is the faster and the 26-day EMA is the slower. Closing prices are used to form the moving averages. Usually, a 9-day EMA of MACD is plotted along side to act as a trigger line. A bullish crossover occurs when MACD moves above its 9-day EMA, and a bearish crossover occurs when MACD moves below its 9-day EMA. The histogram represents the difference between MACD and its 9-day EMA. The histogram is positive when MACD is above its 9-day EMA and negative when MACD is below its 9-day EMA. MACD measures the difference between two Exponential Moving Averages (EMAs). A positive MACD indicates that the 12-day EMA is trading above the 26-day EMA. A negative MACD indicates that the 12-day EMA is trading below the 26-day EMA. If MACD is positive and rising, then the gap between the 12-day EMA and the 26-day EMA is widening. This indicates that the rate-of-change of the faster moving average is higher than the rate-of-change for the slower moving average. Positive momentum is increasing, indicating a bullish period for the price plot. If MACD is negative and declining further, then the negative gap between the faster moving average (blue) and the slower moving average (red) is expanding. Downward momentum is accelerating, indicating a bearish period of trading. MACD centerline crossovers occur when the faster moving average crosses the slower moving average. 2. Chart examples for Dow and e-mini S&P 500. a. In the next imagine we have the evolution between March and July 2006. After analyzing the histogram step by step, observing he histogram going below and above zero and correlating the new information with the ones about the trend lines we realize that we could have performed numerous positive transaction in this period. Analyze each setup… b. Another example is for the time period January – April 2005. we have the same setups and resembling profiles. c. We have here 5 clear patterns to follow and make profit. 3. Conclusions 1. Correctly used and followed, the MACD along other technical analysis and astrological analysis methods can offer complex and correct information for profitable transactions. 2. Trading methods based only on MACD can be found and can work very well. These methods can be harmoniously correlated with other methods of financial analysis resulting in a complete and complex trading system approaching financial reality. 3. We often use MACD amongst other various methods of analysis that we will describe later. Dharmik Team
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Your major focus in trading should the softer side of trading, the business and psychological side of it; the harder side which relates more to the technical side is a secondary thought, however in this article I am combining the two because one of my favourite patterns is an ideal pattern for the impatient trader who does not like to hold on to trades for too long. Impatience is not a good trait to have in the markets when trading or investing. It breeds laziness when it comes to research, planning and analysis, it causes some to exit trades too early, and it causes other’s to constantly monitor their positions. To add to this, trades that linger on can incur costs such as time premium erosion for options traders, and interest costs for CFD traders or stock traders using margin, to name a couple. Weaknesses are a part of human nature; your job is to ‘manage’ them, not to try and eliminate them or even turn them into strengths. We were brought up to take our weaknesses and try and turn them into strengths which I believe is the wrong approach. Build on your strengths and manage your weaknesses is the best motto I ever heard. Some traders who don’t like to be in trades for too long will use an exit strategy that will force them out of the trade if the particular stock or market consolidates and moves sideways for a few days, which is a good strategy. Let’s look at an entry technique which is the trading pattern for the impatient trader. This pattern signals a turning of the market. It does not necessarily signal a top or bottom, it will sometimes just signal a correction, either way; it tells you that a swift and sharp move the other way is imminent, and usually enough to give a good reward to risk. The emphasis here is ‘swift and sharp’, because this is what the impatient trader is looking for. The pattern unfolds in 5 waves with the highs and lows of the waves overlapping each other to the point where the 5th wave ends in a spike. Here is a diagram showing what to expect at the end of a run up, and the end of a run down. This is what you need to see and how to trade it: 1. You join the highs of wave 1 and 3 together, and the lows of wave 2 and 4 together if in an up market, and these lines need to converge [or lows of waves 1 and 3, and highs of waves 2 and 4 if in a down market]. 2. You want the high of wave 5 to break the upper line and spike [low of wave 5 to break lower line and spike]. 3. The break of the lower line is your entry [the break of upper line is your entry]. 4. Your stop goes on the other side of the 5th wave. 5. You want your exit or your first profit target to be within the range between the low of wave 1 and wave 2. 6. You shouldn’t take the trade if this range does not offer you at least a reward to risk ratio of 1:1, however this is obviously a personal choice This is an example that occurred on the SP500 index in July 2008 on a 30 minute chart. Elliott Wave users will be familiar with this pattern, known as an ending, leading and 5th wave diagonal; others may know it as three drives pattern, and others may just say it’s a wedge pattern. The point I wanted to make in this article, so as to benefit you is that when these patterns occur they produce swift and sharp moves and this is an obvious benefit to those who don’t like spending too much time in the markets, whether it’s due to being impatient or because of trading instruments that are time sensitive. Dean Whittingham -
Picture this: you live outside the US, let’s say Australia, you think the price of Oil is going to appreciate over the next month or two. Your options are to buy the commodity through the futures markets, buy a CFD, or buy an ‘oil’ based ETF. Either way, you will be buying an oil based asset and in which currency? The US dollar. What happens? Well the price of Oil appreciates, and low and behold, so too does your purchase (whichever that may be), in fact it appreciates 20% over two months. Nice! Then something strikes you. You look at your financial statement only to be reminded that your sale price has been converted back to Australian dollars; naturally, this is where you live and so too does your broker. So, what do you do, you flip back through your statements to the day when you made the initial purchase to see what it cost you in Australian dollars and then Whammo!, it hits you, as you realize your purchase price in Australian dollars was 10% more than what you just received. You didn’t make a 20% gain, you made a 10% loss! The Australian dollar appreciated during those two months. The famous investor Jim Rogers was on CNBC one morning, so I decided to email a question to Martin Soong, to be directed to Jim Rogers, and the question simply was in general, “in your investing of commodities, all of which are priced in US dollars, how do you account for the fluctuations in your own currency?” You can see the interview, my question (around the 58 second mark), and his response here: News Headlines . Admittedly, I was a little disappointed with his answer, as his investment horizon is far more longer term than mine and as such I would have thought it an even more crucial factor for him than me, but it may also be that being as seasoned as he is, it may be something he does more instinctively or at a subconscious level. Anyway, the point is, currencies can be volatile and can appreciate or depreciate massive amounts against other currencies at breakneck speed, and unless you are prepared for it, you may face losses in what appear to be good trades. We will look at a simple rule of thumb approach, as there are always other factors, including time, leverage and interest costs associated with that leverage. The most general way to look at it if you are looking at overseas markets, and provided your trade ends up being correct, is that if you feel your own currency is going to strengthen, you are better off finding markets to short. If you feel your currency is going to weaken, then look for markets to go long. If you think your currency will be range bound, then you are a lot safer to play either way (long or short). If you go long a market and your currency also strengthens, this will reduce your profit potential (or even create losses as per example above). If however, you go short a market and your currency also depreciates, you have what is called a double whammy in your favour. Let’s look at some simple examples to demonstrate this (these examples are not taking into account brokerage costs, or the use of leverage), and let’s for illustrative purposes, give the Australian dollar the value of exactly one US dollar at the point of the initial transaction and show the changes from there. You purchase a US stock for $100. This will cost you $100 in US dollars, and obviously, $100 in Australian dollars. Look at what happens over a period of time, when the stock goes up 10%, and when the Australian dollar changes. Purchase price $USD 100 100 100 AUD/USD Rate 1.00 0.90 1.10 Sale price in $USD 110 110 110 Value in $AUD 110 122.22 100 Percent change +10 +22.22 0 We used a simple 10% change in the AU dollar, and a 10% appreciation of the US stock. When the AU dollar appreciated by 10%, the trade ended up being a no profit in AU dollars, even though it went up 10% in US dollars. However, when the AU dollar, depreciated by 10%, the trade ended up being a 22.2% gain in AU dollars, even though it was only 10% in US dollars. So I hope this illustrates how the change in currency exchange rates does affect the overall performance of any overseas trade on your financial statement.
