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INDICATORS. Bollinger Bands.

12 Nov

Bollinger Bands developed by John Bollinger are volatility bands placed above and below a moving average. The bands are based on standard deviation (SD), which is a function of a currencies volatility. Bollinger Bands widen when volatility increases and narrow when volatility decreases. Settings for the Bollinger Bands can be adjusted to suit the particular characteristics of the currency being analyzed. Bollinger recommends making small incremental upward adjustments to the standard deviation multiplier when the number of periods is increased, since longer time periods will result in a smaller SD (with all other factors held constant). With a 20-day SMA and 20-day SD, the SD multiplier is set at 2.0. Bollinger suggests increasing the SD multiplier to 2.1 for a 50-day SMA and decreasing the SD multiplier to 1.9 for a 10-day SMA.

How to trade signals.

W- Bottoms – Bollinger uses various W patterns with Bollinger Bands to identify W-Bottoms (based on the work of A. Merrill). A “W-Bottom” forms in a downtrend and involves two reaction lows. Bollinger looks for these bottoms where the second low is lower than the first, but holds above the lower band. Four steps are required to confirm a W-Bottom with Bollinger Bands:

• A reaction low forms. This low is normally, but not always below the lower band;

• The price experiences an upward move towards the middle band;

• A new price low is reached holding above the lower band;

• The pattern is confirmed with a move off the second low breaking resistance.

M-Tops – Bollinger uses the various M patterns identified in Merrill’s work to signal market tops. Bollinger asserted that market tops are often more complicated and drawn out than bottoms, and can be signalled by double tops, head-and-shoulder patterns and diamonds. A basic M top is similar to a double top, although reaction highs are often not equal and the first high can be higher or lower than the second high. A classic M top should play out as follows:

• A reaction high breaches the upper band;

• A pullback occurs towards the middle band;

• The price moves to above the prior high, but fails to reach the upper band;

• Final confirmation of a topside failure will come with a support break or other bearish indicator signal.

Follow the bands.

Moves above or below the Bands should not be construed as signals, rather Bollinger called such moves that touch or exceed the Bands as “tags”. During strong up-trends/down-trends prices will touch the band numerous times, Bollinger called this “walking the band” and can be taken as a sign as significant strength or weakness, conditions which can persist during trends. It is common for prices to not reach the other side of the band during these strong trends until a reversal is under way, an upper band touch that occurs after a Bollinger Band confirmed W-Bottom would signal the start of an uptrend.

INDICATORS. Alligator.

11 Nov

Like the Gator oscillator, the Alligator indicator was also developed by Larry Williams. The indicator utilizes the convergence and divergence of three Smoothed Moving Averages to generate trade decisions. The indicator is designed to detect the beginning and exhaustion of trends from which it generates trade decisions; accordingly the indicator will typically perform poorly in ranging markets.

How  to trade signals.

Like the Gator oscillator the Alligator indicator is traded off the basis of the trend life cycle.

  • When the Alligator’s Lips line crosses the other lines from above traders should look to take short positions. When the Lips line crosses the other lines from below traders will look to initiate a long position (Alligator awakening). These trades should be placed after a sleeping phase.
  • When the lines are moving together in unison the position will be held (Alligator eating with mouth wide open).
  • When the lines converge together to a smaller area and begin to cross the trend has run its course, and traders will look to cover their position (Alligator Sated).
  • When the lines stay inter-twined moving closely around each other the Alligator is sleeping and traders should remain on the sidelines until another awakening phase ensues. The Alligator indicator being a system based on moving averages will suffer from similar weaknesses as the Gator oscillator. The lag in moving average signals can render them ineffectual in whippy trendless markets; therefore it is advisable to deploy the Alligator and Gator with other trend confirming indicators such as the MACD indicator.

INDICATORS. Weighted Moving Average (WMA)

10 Nov

Like the EMA the WMA also assigns more weight to recent prices at the expense of allocating less weight to older prices; therefore the WMA is also more sensitive to current prices than an SMA. Weighting has a more significant bearing on the moving averages with longer time intervals. Moving averages smooth past price data to form trend following indicators and are a component in many other technical indicators including the MACD, the DeMarker and the Directional Movement System amongst many others.

How to use.

Moving averages are commonly used to identify trends and reversals as well as identifying support and resistance levels. Moving averages such the WMA and EMA, which are more sensitive to recent prices (experience less lag with price) will turn before an SMA. They are therefore more suitable for dynamic trades, which are reactive to short term price movements. Moving averages such as the SMA move more slowly providing valuable information on the long dominant trend. They can however be prone to giving late signals causing the trader to miss significant parts of the price movement.

How to trade signals.

Moving Average Crossing over: Moving average crossing over is a term applied when more than one moving average is used to generate a trade signal where traders will act when the shorter term moving average crosses the longer term moving average. A bullish crossover occurs when the shorter term moving average crosses above the longer term moving average (golden cross). A bearish crossover occurs where the shorter term moving average crosses below the longer term moving average (dead cross).

Price crossovers: A Price crossover is a term applied when a signal is generated where the price crosses a moving average. Bullish signals are given when the price moves above the moving average, bearish signals are given when the price moves below the moving average. Crossover trades are more likely to enjoy success when the moving average slopes are in the direction of the trade.

Support and Resistance: Moving averages can also act as a support level in an uptrend and resistance levels in a downtrend. If the average is widely followed orders in favour of the trend often cluster around the average. As markets are often driven by emotion and many players trade counter to the trend expect overshoots, to this extent the average should be used to identify support and resistance zones rather than exact levels.

INDICATORS. Smoothed Moving Average (SMMA)

10 Nov

The SMMA gives recent prices an equal weighting to historic prices. The calculation takes all available data series into account rather than referring to a fixed period. This is achieved by subtracting the prior periods SMMA from the current periods price. Adding this result to yesterday’s Smoothed Moving Average gives today’s Moving Average.

How to use.

Moving averages are commonly used to identify trends and reversals as well as identifying support and resistance levels. Moving averages such the WMA and EMA, which are more sensitive to recent prices (experience less lag with price) will turn before an SMA. They are therefore more suitable for dynamic trades, which are reactive to short term price movements. Moving averages such as the SMA move more slowly providing valuable information on the long dominant trend. They can however be prone to giving late signals causing the trader to miss significant parts of the price movement.

How to trade signals.

Moving Average Crossing over: Moving average crossing over is a term applied when more than one moving average is used to generate a trade signal where traders will act when the shorter term moving average crosses the longer term moving average. A bullish crossover occurs when the shorter term moving average crosses above the longer term moving average (golden cross). A bearish crossover occurs where the shorter term moving average crosses below the longer term moving average (dead cross).

Price crossovers: A Price crossover is a term applied when a signal is generated where the price crosses a moving average. Bullish signals are given when the price moves above the moving average, bearish signals are given when the price moves below the moving average. Crossover trades are more likely to enjoy success when the moving average slopes are in the direction of the trade.

Support and Resistance: Moving averages can also act as a support level in an uptrend and resistance levels in a downtrend. If the average is widely followed orders in favour of the trend often cluster around the average. As markets are often driven by emotion and many players trade counter to the trend expect overshoots, to this extent the average should be used to identify support and resistance zones rather than exact levels.

INDICATORS. Moving average. Simple moving average (SMA)

8 Nov

Amongst the most widely used moving averages is the SMA. It is formed by computing the average price of a currency over a specific number of periods. An SMA drops old data as new data is received allowing the average to move along the time scale.

How to use.

Moving averages are commonly used to identify trends and reversals as well as identifying support and resistance levels. Moving averages such as WMA and EMA, which are more sensitive to recent prices (experience less lag with price) will turn before an SMA. They are therefore more suitable for dynamic trades, which are reactive to short term price movements. Moving averages such as the SMA move more slowly providing valuable information on the long dominant trend. They can however be prone to giving late signals causing the trader to miss significant parts of the price movement.

How to trade signals.

Moving Average Crossing over: Moving average crossing over is a term applied when more than one moving average is used to generate a trade signal where traders will act when the shorter term moving average crosses the longer term moving average. A bullish crossover occurs when the shorter term moving average crosses above the longer term moving average . A bearish crossover occurs where the shorter term moving average crosses below the longer term moving average.

Support and Resistance: Moving averages can also act as a support level in an uptrend and resistance levels in a downtrend. If the average is widely followed orders in favour of the trend often cluster around the average. As markets are often driven by emotion and many players trade counter to the trend expect overshoots, to this extent the average should be used to identify support and resistance zones rather than exact levels.

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