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Monday, July 7, 2014

Forex Volatility Indicators

Volatility indicators show the size and the magnitude of price fluctuations.
In any market there are periods of high volatility (high intensity) and low volatility (low intensity).

These periods come in waves: low volatility is replaced by increasing volatility, while after a period of high volatility there comes a period of low volatility and so on.

Volatility indicators measure the intensity of price fluctuations, providing an insight into the market activity level.

Forex Volatility Indicators:

- Average True Range (ATR)
- Bollinger Bands (BB)
- Chandelier Exit
- Bollinger Bands Width
- Chaikin Volatility (CHV)

The methodology of using Volatility indicators

Low volatility suggest a very little interest in the price, but at the same time it reminds that the market is resting before a new large move. Low volatility periods are used to set up the breakout trades. For example, when the bands of the Bollinger bands indicator squeeze tight, Forex traders anticipate an explosive breakout way outside the bands limit.

A rule of thumb is: a change in volatility leads to a change in price.
Another thing to remember about volatility is that while a low volatility can hold for an extended period of time, high volatility is not that durable and often disappears much sooner.

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Monday, June 30, 2014

Volume indicator

Volume - Quick Summary

Trading with Volume indicator offers the following features:
Volume confirms the strength of a trend or suggests about its weakness.

A rising volume indicates rising interest among traders, while a falling volume suggests decline in interest.

Extreme Volume readings — Climax Volume often highlight price reversals.

Points where market trades on high volume are the points of strong support and resistance.

All various kinds of breakouts and market spikes can be validated or voided with a help of Volume indicator.

Volume indicator

Why Volume? Volume is the second most valuable data after the price itself.
Large volume signifies that there is large number of market participants involved, including financial institutions. The last ones bring the highest turnover to the market, and if they are trading, it means the interest to the price at certain point and/or to the trend overall is high.
Small volume tells that there are very little participants in the market, neither buyers no sellers have any significant interest in the price. In addition, no financial institutions will be involved, thus a market is going to be moved only by individual traders and so the move will be weak.

Volume and Trend

Volume helps to learn about the health of a trend.
An uptrend is strong and healthy if Volume increases as price moves with the trend and decreases when price goes counter trend (correction periods).

When price is going up and volume is decreasing, it tells traders that a trend is unlikely to continue. Price may still attempt to increase at a slower pace, but once sellers get the grip on it (which will be signified by an increase in volume on a down candle), the price will fall.

A downtrend is strong and healthy if volume increases as price moves lower and decreases when it begins retracing upwards.
When price is falling and volume is decreasing, the downtrend is unlikely to continue. Price will either continue to decrease, but at a slower pace or start to rise.

Volume and Reversals

To understand the nature of spike in volume before a trend reversal, traders need to know how the data for volume indicator is gathered in Forex.
Forex volume cannot be measured precisely as it is done, for example, in Equity market, where every share traded equals 1 volume, and selling 200 shares means 200 in volume. Forex by nature cannot count how many contracts and what sizes of contracts were traded at any given time, because the market is wide and decentralized. Therefore to count volume in Forex the number of ticks/changes in price is used. 1 tick measures 1 volume. As it moves up and down volume adds up.

When volume rises,  it means lots of participants are actively selling and buying currencies. When volume spikes at certain price level, traders know that there was lots of interest shown by traders to that price level. If there is a lot of interest, it means the level is an important one.
This simple observation of a volume indicator allows identify important Support and Resistance levels, which would certainly play significant role in the future.

Where Volume spikes are distinctively extreme (larger than any historical spikes around) — Climax Volume — traders should look for clues from the price itself. Candles that have a narrow range, spinning tops/bottoms, dojies, stars, other candles with extremely large tails have highest chances to become the price turning points.

Single volume spikes only bring price to a halt. A lot of stand-alone average volume spikes occur during fundamental economic announcements on daily basis. News can cause spike in volume for a single day and then volume disappears again.

Reversals, however, happen not over one day but a series of days. If higher than average volume stays on the market for several to many days a huge volume spike — volume climax — will crown a point of market reversal.

Volume and Breakouts

Volume indicator helps to validate all kinds of breakouts.
When market is consolidating on a low volume, a sudden pick up in volume would signify that a breakout is due.

Breakout occurring on rising volume is a valid breakout, while a breakout that caused no interest from traders as it is happening on a low volume is more likely a false one.

Trend lines and other breakouts are validated or voided the same way.

Reading Volume Indicator step by step

We’ll compare the weeks, not individual days.

Week 1: as price falls, volume rises compare to previous week – interest to downtrend among traders grow.

Week 2: volume peaks and begins to decrease as price move higher – sellers are still interested in downtrend, buying the currency is going on a lower volume.

3: volume is lower than previous weak, confirming that there is still very little interest in buying the pair.

4: Sellers push down, but this time volume doesn’t increase – it is about equal to week 3.

5: Both sides lost interest as the market drifts sideways on low trading range.

6: market finally finds dome buying interest as the week ends on higher than previous week volume. Buyers seem to be going active.

7: Buyers going full steam – volume rises – it is a healthy uptrend.

8: Correction came – volume drops, no one is interested in Selling the pair – confirmation of a healthy volume.

9: Volume picks up again once price finds its uptrend.

10: Exhaustion gap is seen on the chart, followed by a doji candle with a spike in volume – a highlight of a market turning point. Market ends trading on a lower volume.

11: Even Sunday was busier than usual. The new week market begins with an attempt to rise higher, however volume suggests that the interest to the upper side is much lower.

12, 13 and 14: market attempts to move upward, but volume decreases, signaling that the trend is no longer healthy and a change is coming soon.

15 and 16: some interest arises among traders as the market moves to the downside, Sellers anticipate that this is a moment of a trend change, a volume of new Short orders come.

17, 18 and 19: as the market attempts to rise, volume drops, telling that there is no interest to the upside.

20, 21 and 22: volume picks up again as Sellers take over. A pause on week 21 with a sharp rise in price is met by even higher volume on week 22.

23, 24, 25, and 26: market rises, volume drops – confirmation that remaining traders lose interest in that upward move.

27 and 28: Price begins to decline, volume picks up – interest to the downside is present.

29, mid 30: sideways pattern pause the trend and the volume with it.

30, 31 and so on – trend picks up making new lows, volume confirms healthy trend by rising when price is falling and pausing or falling when price is moving sideways or going into correction.

Download Indicator: Volumes.mq4
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Monday, June 23, 2014

Chaikin Money Flow (CMF)

Chaikin Money Flow (CMF) is another indicator developed by Marc Chaikin, a stockbroker since 1966.

The idea behind CMF indicator lies in combining price and volume in order to view the flow of the money (in or out of the market) during a chosen period. Default CMF period - 21 day.

Hence, the CMF Formula which shows the sum of the values of the 21 period

Accumulation/Distribution Line divided by the 21 period sum of volume:

sum(((( C-L )-( H-C )) / ( H-L ))*V ) / sum(V)

C- close
L - low
H - high
V - volume (21 period)

How to interpret CMF indicator

Understanding of the Chaikin Money Flow indicator is based on the theory that overall market strength is often accompanied by the price closing in the upper half of its daily high/low range on increased volume. While market weakness is often accompanied by the price closing in the lower half of its daily range on increased volume as well.

Therefore, if price consistently closes in the upper half of its daily range with increased volume, then the CMF indicator will be reading above zero - positive CMF, which suggests that the market is strong.

And vise verse: if the price consistently closes in the lower half of its daily range with increased volume, then the CMF indicator will be reading below zero - negative CMF, which indicates that the market is weak.

(Note, the zones has been colored for the illustration purposes only. We don't have such colored indicator so far; CMF_T3 version is able to show indicator as histogram, which can be switched in the settings).

How to trade with Chaikin Money Flow

1. CMF above zero - bullish signal - the indicator shows signs of buying pressure - accumulation.
CMF below zero - bearish signal - the indicator shows signs of selling pressure - distribution.

So, you'll be looking to Buy when CMF is above zero, and Sell when it's below.

2. Observation of the previous indicator readings before your trading day starts can give an idea of how long and sustainable the buying/selling pressure was. For example, extended periods of selling pressure (distribution) indicate that sentiment is more likely remain negative for the trading day.

3. Another way to examine the indicator is to look at the intensity of the Chaikin Money Flow readings. Higher readings indicate stronger pressure. For example, CMF readings above 0.10 would be significant enough to guarantee a bullish signal. While readings above 0.25 would be an indication of a really strong buying pressure.

4. CMF indicator offers good confirmation signals of breakouts for various support/resistance levels, in particular, trend lines. For example, if price has recently broken an uptrend line, to confirm it CMF will cross below its zero line after some time, showing that the market is ready to Sell.
Note, that CMF is a lagging indicator, thus it would take time to confirm a signal, which would suite conservative traders, but may not impress more aggressive traders.

5. A divergence between price and Chaikin Money Flow indicator can give early signals about underlying weakness of the move. A situation in which the price reaches new highs and the CMF Oscillator does not reach its new high creates a bearish divergence when the selling pressure begins to grow. This warns traders about a possible reversal ahead. It's similar to MACD divergence.

Download: CMF_v1.mq4
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Monday, June 16, 2014

Acceleration Bands

Acceleration Bands Quick Summary

Breakout outside Acceleration bands suggest a beginning of a strong rally or a sell-off.
Closing inside the bands afterward signals about the end of a rally or a sell-off.

The idea behind Acceleration Bands indicator

Acceleration Bands principal use is in finding the acceleration in currency pair price and benefit as long as this acceleration preserves.

How to interpret Acceleration bands indicator

Acceleration bands are set as an envelope around a 20 period simple moving average on equal distance from it. Headley, the inventor of Acceleration Bands indicator suggests using them on weekly and monthly time frames to determine price acceleration breakouts (breakouts outside the bands).
When Acceleration Bands are used for smaller time frames, upper and lower bands are treated as levels of possible support and resistance.

How to trade with AB indicator

2 consecutive closes outside Acceleration Bands suggest an entry point in the direction of the breakout. Then position is kept till the first close back inside the Bands.

The formula for Acceleration Bands

Upperband = ( High * ( 1 + 2 * (((( High - Low )/(( High + Low ) / 2 )) * 1000 ) * Factor )));

Lowerband = ( Low * ( 1 - 2 * (((( High - Low )/(( High + Low ) / 2 )) * 1000 ) * Factor )));


Download Indicator: Acceleration_Bands.mq4
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Monday, June 9, 2014

Forex Volume Indicators

Volume indicators are used to determine investors' interest in the market. High volume, especially near important market levels, suggests a possible start of a new trend, while low volume suggests traders uncertainty and/or no interest in a particular market.

In Forex Volume data represents total number of quotes for the specified time period.

Forex Volume Indicators:
- Volume Indicators Forex
- Acceleration Bands
- Market Facilitation Index
- Volume
- Chaikin Money Flow (CMF)
- Accumulation Distribution
- Volume Oscillator (PVO)
- Demand Index
- On Balance Volume (OBV)
- Money Flow Index (MFI)
- VWAP (Volume Weighted Average price)

The methodology of using Volume indicators

When Volume increases it indicates a growing interest in the market, therefore it may strengthen a main trend or start a new trend;

When Volume decreases it indicates that interest in the market  is decreasing, which calls for either a trend reversal or temporary market consolidation;

Sudden and vigorous increase in Volume may signal for an upcoming reversal, while gradual decreasing in Volume may still be supported by rapid price moves.

Sourcing: ForexIndicator
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Monday, June 2, 2014

Elliott Waves and Bollinger bands

Indicators required: Bollinger bands (period 25, shift 2)
Time frame: could be any, suggested 1 hour, 4 hour or daily.

The concept lies in easy spotting & counting Impulsive and Corrective Elliott waves
with the help of Bollinger bands channel.

Rules for an Uptrend:
1. As long as the price continuously touches the Upper Bollinger band, the Impulsive wave (1, 3 or 5) is in progress.
2. If price retraces down approaching lower Bollinger band - the corrective wave is in progress.
3. Once the price touches the lower Bollinger band - the correction will most likely be over and a new wave should follow.

Rules for a Downtrend:
1. As long as the price continuously touches the Lower Bollinger band, the Impulsive wave (1, 3 or 5) is in progress.
2. If price retraces up approaching the upper band - the corrective wave is in progress.
3. Once the price touches the upper band - the corrective wave will most likely be over and a new wave should follow.

Chart tip: To make the middle Bollinger band line invisible in MT4, draw additional bands (period 22, shift 3) and match their color to your chart background color.

Summary: Bollinger bands indicator can help with Elliott Wave count: to find impulsive waves, as well as search for patterns in during corrective waves, however, it's not recommended to build trading solely around the Bollinger bands, as you'll get many losing trades.
Use the method to count Elliott waves, and then apply additional analysis to make trading decisions.
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Monday, May 26, 2014

Elliott waves - Fibonacci application click-by-click

Fibonacci trading

Below are the actual steps of using Fibonacci tool to build retracements and projections for Elliott waves. (We'll be using MT4 platform in this example).

To draw Fibonacci levels we'll use 2 tools on our MT4 platform: Fibonacci Retracement and Fibonacci Expansion.

If you don't see either one in your current MT4 toolbox, use Right click and select "Customize" from the drop down menu, where add all necessary tools.

Clicks-by-click Fibonacci application
Wave 2

Wave 3

Wave 4

Wave 5

This turned out to be one of the ideal Elliott wave & Fibonacci proportions, which is not always the case in everyday trading. Yet, these were live charts and it's amazing how accurate the Fibonacci numbers can sometimes be!

Download indicator: FiboRetracement3.mq4

This indicator will draw Fibonacci retracement levels automatically.
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Monday, May 19, 2014

Elliott Waves and Fibonacci

Fibonacci numbers play an huge role in Elliott Wave trading.
Elliott didn’t discover the Fibonacci relationships himself, but this was brought to author's attention by Charles J. Collins who had published Elliott's "The Wave Principle" and helped introduce Elliott's theory to Wall Street.

Using known Fibonacci ratios (38.2%, 50%, 61.8%, 161.8% and so on) traders can project the length of waves, the depth of corrections, move extensions etc.

Wave 1
The first impulsive wave, which Elliott traders don't use for trading, but rather for analysis of the wave 2.

Wave 2
Wave 2 should not retrace below the beginning of wave 1.
Normally the retracement is from 50% to 61.8% of Wave 1. At times it can go below the 61.8% due to the fact that wave 2 retracement is quite aggressive since many traders don't acknowledge the change in the main trend yet.
The minimum retracement to expect is 38.2%.

Wave 3
Wave 3 is never be the shortest among waves 1, 3 and 5.
At the very least it should be equal to wave 1 in length.
Wave 3 as the longest wave normally tend to be 161.8% of wave 1.
If goes beyond 161% - the next target is 261.8%, and rarely extended target - 425% of wave 1.

Wave 4
Wave 4 is one of the shallowest waves: at this stage many traders take profits, while there are few others who are willing to trade counter-trend.
It often retraces slowly for an extended period of time and reach normally only 38.2% of wave 3.
It rarely retraces to 50% of wave 3.

Wave 5
Wave 5 should move at least 61.8% of the length of wave 1.
If wave 3 is greater than 161.8% of wave 1 in length, the targets for wave 5 will be 100% of Wave 1,
or 161.8% of wave 1, rarely 261.8% of wave 1.
If wave 3 is less than 161.8% of wave 1 in length, wave 5 will often be extended with targets of:
61.8% of wave 1 + wave 3
100% of wave 1 + wave 3
or 161.8% of wave 1 + wave 3

Tips: Fibonacci projections - completion of wave 5 
As you can see, as soon as wave 1 is completed we can already make a projection of the first possible target for wave 5.
To do so we multiply the height of wave 1 by 161.8% and project the result from the end of wave one.

Later when wave 3 is completed we can add yet another projection of the second possible price target for wave 5. To do so we have to examine wave 3: if wave 3 is greater than 161.8% of wave 1, the targets for wave 5 will be 100% of Wave 1, or 161.8% of wave 1. If wave 3 is less than 161.8% of wave 1 in length, wave 5 will often be extended with targets of at least 61.8% of wave 1 + wave 3.

In the end, the closer are the results for wave 5 targets calculated by different methods the higher will be the chances to see a trend reversal in between those levels.

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Monday, May 12, 2014

Elliott Wave Rules

The 3 main rules of Elliott Wave count

1. Wave 2 should not break below the beginning of Wave 1.
2. Wave 3 should not be the shortest wave among Waves 1, 3 and 5.
3. Wave 4 should not overlap with Wave 1.

These are the only 3 unbreakable rules that can't be altered. The rest of the Rules, and there is a considerable number of them, can have alterations, substitutions etc, which again explains the fact that markets can't be totally predictable.

4. The Principle of Alteration

Waves 2 and 4 within an Impulsive wave will unfold in different forms: if wave 2 is a simple ABC form ( zigzag), the 4th wave is likely to be a complex wave (triangle, double three etc.)

Over years Elliott followers tried to collect the rules and improve the interpretation of the waves. As a result, today we can find hundreds of new Elliott wave rules and guidelines, which try to cover every aspect of the price behaviour.

Below is the most detailed Guidelines we've ever come across:

Download: CyclePro_Elliott_Wave_Rules.pdf

But is it possible to put every price move to the rules? Will such classification be worth studying, or will it simply be a description of every possibility in the market, which we don't need to read about to know that it exists? It's up to you to decide.

Just keep in mind that Elliott wave trading is not about being right and knowing the next move every single time. Elliotticians make mistakes and they make a lot of them, even most experienced professionals like Robert Prechter aren't correct every time*. What's important is that they are ability to accept being 100% wrong and re-do the analysis while accepting losses when necessary.

*Prechter's record at the end of the twentieth century has not been so perfect: his book "At The Crest Of The Tidal Wave" (1995), calling for the end of the great bull market in 1995, was nearly five years off the target.

Download Indicator Elliot
Sourcing: Elliot Wave Rules
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Economic Calender