A Very Cool Technical Indicator- Stochastic

Stochastic indicator is an oscillator ( an oscillator is an indicator that can only be at two points- overbought or oversold).

the financial analyst Dr. G. lane in the 1950's promoted the use of stochastic, he observed that in an up trend, prices may close near there high and in a down trend prices may close near there low.

stochastic has two lines one line reacts to price movement fast, while the other is slow to react to price movement, why this occurs will be discussed later.

stochastic is scaled from 0 to 100, and as stated earlier it shows when the forex market is overbought or oversold. when the faster line cross over the slower line and goes up above the 70 scale the market is overbought (at this point a lot of traders are buying so it's time to go short). when the faster line cross under the slower line and goes down below the 30 scale the market is oversold, at this point its time to go long.

just like every indicator stochastic could give wrong data, with this in mind stochastic should not be the only indicator used to trade. i believe that other fundamental and technical indicators should be used with it, and incorporated in to a reliable trading system (i will say what a trading system is later).

finally, stochastic also shows when a previous trend will end, when it shows this, it could mean that price is about to change direction.

I'm still studying this indicator and i will provide more details later.

thank you for reading.

My first trading lecture

      As I remember it, it was funny. I woke up in the morning prepared and left. on my way I was a little excited, I thought to myself  "what would I learn?" I hope it will be fun! to be honest I didn't know much about trading.

   I arrived at the hall where the class was to hold. A lady to my right was sitting on a white plastic chair with a white plastic table in front of her. she was wearing a red blouse and black trousers with a conspicuous necklace and a big bangle. she look up at me as I approach her, we exchange pleasantries, I handed her my entrance money, she gave me a slip, I walk in and took my sit waiting for the program to start.

   the teacher came in, he was wearing a light brown suit with a white shirt and black shoes. at first, I actually thought he was also a student but as he walked to the stage, i knew he was the teacher.
The hall was full! by my count I think they where up to one thousand people in the hall and more people where coming in. within 30 minutes an image from a projector flashed on the wall at the stage, the teacher welcomed everyone and with a brief introduction of himself he started the class. he introduced the basic concept of  trading- buying and selling foreign currency- and he talk about how  trading in it's early days was for only top financial institutions and big companies basically, because they had the big cash required to trade, and how little guys like us where not allowed to trade, but as the internet was invented anyone who was interested could trade.

what he was saying was interesting, than a guy touched my arm, distracting me, I turned to him wondering what could be so important. the guy started talking about the cloths the teacher was wearing, how the suit may be cheap and how on stylish the black shoes where. in my mind I said gee's this guy must be a poor jealous fashion analysis, but, openly I just laughed.

  About two hours into the class, the electricity went off . than something happened which I did not expect.

Article One: Technical Indicators-Moving Average Convergence Divergence (MACD)

Moving Avergae Convergence Divergence (MACD) indicator was invented by Gerald Appel in 1970. he used it to identify changes in strength, direction, force and period of a trend in stock prices. although MACD was originally used for stock trading it is now used for  trading.

MACD is a lagging indicator, which shows the average of historical price movement and indicates new trend formation, be it bullish (buy) or bearish (sell).

MACD usually has three numbers. the first, is the number of periods used to calculate the faster moving average. the second is the number used to calculate the slower moving average. the third, is a bar chart or signal line used to calculate the moving average of the difference between the faster and the slower moving average. the first number is the faster line while the second number is the slower line of the MACD indicator. the first line responds to price movement fast, because the number of periods used to calculate the faster moving average line is short, while the second line responds to price movement slowly, because the number of periods used to calculate the slower moving average line is long.

when the MACD moving average lines move towards each other they are said to converge and when they move away from each other they are said to diverge this gives this indicator it's name Moving Average Convergence Divergence (MACD).

This indicator is best used when the  market has a definite trend, and it may give a wrong or conflicting data when the market is ranging.

Moving Average Convergence Divergence (MACD) crossover:

in 1986 Thomas Aspray added a histogram to Geralds Appel MACD indicator. he did this so he could know when the  MACD lines cross each other.

when the lines cross it's called a crossover. MACD cross over usually indicates a new trend formation. if the faster moving average line cross under the slower moving average and goes down it could indicate the start of a new bearish trend and if the faster moving average line crosses over the slower moving average and goes up it may indicate a new bullish trend. when the lines cross, at the point they cross the difference between them is zero, this means that there is no difference between the faster moving average and the slower moving average.

NOTE: just like all indicators the MACD may give false signals which could result in loss of money. The MACD is a good indicator but it should not be used as the only technical indicator while trading. other indicators should be used to complement it, this should be coupled with a sound understanding of fundamental analysis and all the other economic activities that control the forex market.

thank you for reading.

ARTICLE ONE: FUNDAMENTAL ANALYSIS- GROSS DOMESTIC PRODUCT (GDP) and GROSS NATIONAL PRODUCT (GNP)

Many use fundamental or technical analysis to trade , and this- fundamental and technical analysis- have indicators that show when to enter a trade or when not to enter a trade. Fundamental or technical indicators could either be lagging, leading or coincident indicators. Lagging indicators show data after the market moves, leading indicators show data before the  market moves and coincident indicators move with the  market.

This and proceeding writings will discuss fundamental and technical analysis indicators. But this writing will be about Gross Domestic Product (GDP) and Gross National Product (GNP) as fundamental analysis currency indicators.
Gross Domestic Product (GDP) is a fundamental indicator of economic performance of any country. GDP measures all economic activities which is the total value of goods and services produced during a period of time.

HOW IS GDP CALCULATED? Many economists calculate a country’s GDP by adding up the value of goods and services produced or by adding up expenditure on goods and services at the time of sale or by adding producer’s incomes from the sale of goods or services.
How does GDP affect forex? A high GDP indicates a healthy economy; a high GDP indicates high interest and exchange rate of a currency.
More on this later.

GROSS NATIONAL PRODUCT (GNP)
Gross National Product (GNP) is similar to Gross Domestic Product (GDP). GNP is used to describe in monetary value the total yearly flow of goods and services in country’s economy. Basically, GNP shows how a nations economy is on a micro and macro scale. GNP is calculated by adding up all personal, governmental and investment spending by a country’s industry both nationally and internationally.
GNP is a good trading indicator, if the GNP of a country is low; it indicates a weak economy and a low exchange and interest rate of the country’s currency. Which wouldn’t be a currency to go short to go long on another currency with a higher GNP, a higher exchange and interest rate, a stronger currency.
More on this later.
Thanks for reading

WHAT YOU MAY NOT KNOW ABOUT LEVERAGE

Leverage is using a small amount of money to trade with a large amount of money. Many brokers or market makers offer leverage to Forex traders. For a small deposit one is able to trade with a large amount of money. Brokers offer many types of leverage packages like 100:1, 200:1, 300:1 or 400:1. This means that for every 1 dollar you deposit you will be giving 100, 200, 300 or 400 dollars to trade. Leverage makes trading very profitable for many traders. But there is a major disadvantage to trading with leverage.

DISADVANTAGE OF LEVERAGE

Using leverage to trade is like using a knife that allows you to cut your vegetables but at the same time if you don’t cut properly you may cut off your hand. Leverage has the ability to increase profit and while also increasing loss.

For example one may make a trade using a 100, 000K Standard lot with a 1,000 dollars deposit and make a profit on a currency pair lets say EUR/USD, lets do some calculations:

Let’s say the exchange rate of EUR/USD is 1. 2940.

And pip value is 0.0001.

Lot is 100,000 = leverage

Profit is 30 pips 

Calculation:    (0.0001 * 1.2940) * 100,000 = $ 12.94

          Profit:    12.94 * 30 pips = $ 388.2

BUT if it is a loss and not a gain than it would be a $ 388.2 loss and, since there was only a 1,000 dollars deposit, the present amount left will be:

1,000 – 388.2 = $ 611.8

That’s almost a 40% loss at a time on the used margin.

The above is not a real example, but with it one could understand how with leverage a person could loss a large portion of his or her trading money easily.

 Certainly, trading leverage may be very profitable if used properly but an uninformed use of leverage could result in a loss.

Thank you for reading

2 SIMPLE MONEY MANAGEMENT TIPS

Every Forex trader needs simple effective money management to trade properly. This is because, if one is not able to use his or her trading money properly, one may loss it, which may would not be good. Before I give the money management tips, what is money management?

 WHAT IS MONEY MANAGEMENT? Money management involves determining risk to profit maximization on potential trade positions. It sounds technical but, that’s how I understand what money management is.

 Tip one: Read Money Management Books:
 Reading trading money management books is the best way to manage your trading money. This books contain the thoughts and techniques of experienced  traders which will be very helpful to you. Tip two: Be Realistic:

Been realistic about how to manage your trading money is also very important. Being realistic involves not expecting to win big in the market with an under-capitalized trading account, may be trying to use leverage with a small amount of money, with hopes that with just one miraculous turn of events that your trading money will triple. Although it does happen, but lighten striking in one spot twice is more frequent, than that happening. The best option is to build your account slowly being realistic about your trading capital and ignoring the people who are out for quick wealth. No such thing.

 Been realistic also involves using common sense, using your two eyes to analyze how your spending your money, avoid opening trading positions based on impulse, may be trying to get the market back for stopping you out on a trading position. More  money management later. 

 Thanks for reading.

2 VERY IMPORTANT TECHNICAL ANALYSIS INDICATORS- LAGGING AND LEADING INDICATORS

LAGGING INDICATORS

Lagging indicators are indicators that are used to predict future price movement based on passed price activities. Lagging indicators are also called momentum indicators. One very important feature of lagging indicators is that it can be used to spot trends in the Forex market once the trends have been established but with one disadvantage. Lagging indicators only show how the market was not how it is presently, so there could be possible delay of entry. In simple terms lagging indicators follow the market, and only showing any data after the market moves.

TYPES OF LAGGING INDICATORS

       ·Simple Moving Average (SMA)

       ·Exponential Moving Average (EMA)

       ·Moving Average Convergence Divergence (MACD) 

There are other lagging or momentum indicators but for now I will discuss this.

Simple Moving Average (SMA)

Simple moving averages is basically used to forecast future currency prices, this is done by adding up the last “x” periods closing prices and than dividing the number by “x”. for example if I was plotting a 20 period simple moving averages on an  hour chart, I would add up the closing prices for the last 20 hours and divide that number by 20.

 Moving averages smooth out price action, if the moving average lines are very smooth it will be slower to react to price movement, whereas, if the moving average line is very ruff or choppy it will react to price movement quickly.

The simple moving average gives me an overall sentiment of the  market at a point in time and not the current price of the market.

Exponential Moving Average (EMA)

Exponential moving averages is an indicator that gets close to what the current price of the Forex market is and it shows what other traders are doing presently. Although, exponential moving average is a lagging indicator, it gives more current information than the simple moving average, which may be showing what traders did last week, last month or even last year, this data though important, may not be accurate compared, to what is happening in the market now, which is shown by the EMA.

`Moving Average Convergence Divergence (MACD)

This indicator is very interesting and I'm still studying it. The Moving Average Convergence Divergence (MACD)  is an indicator that identify moving averages that show a new trend, this trend could be a bearish or bullish trend.

The MACD indicator on a Forex chart usually shows 3 numbers. The first number is the number of periods that is used to calculate the faster moving average. The second number is the number of periods that is used in calculating the slower moving average. The third is the number of bars that is used to calculate the moving average of the DIFFERENCE between the faster and slower moving averages.

The lines of the MACD, that Is the two lines that are drawn are NOT moving averages of the price. They are the moving average of the DIFFERENCE between two moving averages.

The third line of the MACD is usually a histogram; this histogram plots the difference between the fast and slow moving averages. When the moving averages move separates the histograms expands, this is known as divergence. When moving averages moves towards each other, the histogram becomes small, this is known as convergence.  

LEADING INDICATORS

Leading indicators are indicators that are ahead of the market. Leading indicators are also called oscillators, this indicator main shows two data BUY or SELL; it indicates when the market is over bought or over sold. There are many leading indicators or oscillators but, I will only write on.

       ·Stochastic

<     ·Parabolic SAR
       ·Relative Strength Index

Stochastic: stochastic is a leading indicator that determine where a trend might end, stochastic also determines when the market is over bought or when it’s over sold, stochastic is scaled from 0 to 100, when the stochastic indicator lines are above 70 it means the market is over bought and when the stochastic lines is below 30 it means the market is over sold.

Parabolic SAR: This indicator is a very easy indicator to use; it appears as dots on the trading chart. When this dots are above the candle sticks it signals a possible Short or SELL signal, and when the dots are below the candles sticks it’s a possible long or BUY signal. This indicator works in a Stop and Reversal (SAR) pattern, and it works well in a trending market (up or down trend) it may not give accurate data if there is no trend or if the market is moving side ways.

Relative Strength Index (RSI): this indicator is very similar to stochastic, Relative Strength Index helps to show when the market is over bought or over sold. It could also be used to determine and confirm trend formations. This indicator is scaled 1 to 100, when trading if the RSI lines are above 50 it means there might be a possible up trend forming, and if the RSI lines are below 50 it means there might be a possible down trend forming.

More on lagging and leading indicators later. Thank you for reading article.