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Bollinger Bands indicator

The Bollinger Bands is a momentum indicator that gives an excellent visual representation of the market’s volatility. When the market is quiet, the bands are much closer together, but when the market is very volatile, the bands are far apart.

There are three parts of this indicator: a 20 period Simple Moving Average (20 SMA) found in the middle, and two outer bands that are 2 standard deviations above and below the middle band.

Bollinger-Bands

Bollinger Bands have 4 basic characteristics:

1. When volatility lessens, the bands tighten and sharp price changes are likely to occur. The quiet market will soon become extremely volatile. This increase in volatility is initiated by a breakout.

Bollinger-Bands-trading

2. After the breakout, the price moves outside the bands, it could mean that price may continue moving towards the direction of the breakout.

3. When the price makes bottoms and tops outside the bands then makes bottoms and tops inside the bands, the price is most likely to reverse.

4. When price moves away from one band, the price tends to go all the way to the other band.

In simpler terms, when the price moves along the upper band and crosses out, the market is considered overbought and will eventually decrease in price. A sell trade is imminent.

In the same way, if the price is very close to the lower band and crosses below it, the market is becoming oversold and will soon increase in price. This means a buy trade is imminent.

Also, it is important to note that the Bollinger Bands in higher timeframes, such as the 4 Hour timeframe, are much stronger than those of lower timeframes.

Download Traders Secret Library – Bollinger Bands

aaaTraders Secret Library lets you in on the secrets the world’s best forex traders know. These traders finished in the top 25 spots in the world’s largest forex competition, and you’ll definitely benefit from their expertise.

By becoming a member of Traders Secret Library, you’ll have access to the best trading systems and the largest collection of trading techniques in the world. You can learn the award-winning systems of these traders, learn about the market and currencies they trade as well as learn about their trading schedule and attitude toward their work. Traders Secret Library will also teach you about how to find little-known propriety indicators, how to start trading and how to achieve great results.

About : Traders Secret Library – Bollinger Bands

This upload contains files for 9 webinars hosted by Mr. Ty Young, the faculty member of the Traders Secret Library.There are five webinars are on Technical Indicators – Bollinger Bands, Reversal Signals and Volitility Breakout.

 

 

 

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Summary: Common Chart Indicators

Best Cash Back Forex Rebates : Learn How to Trade Forex: Foreign Exchange (FX) Currency Trading – Summary: Common Chart Indicators

summary-common-chart-indicators

Everything you learn about trading is like a tool that is being added to your trader’s toolbox. Your tools will give you a better chance of making good trading decisions when you use the right tool at the right time.

Bollinger Bands.

  • Used to measure the market’s volatility.
  • They act like mini support and resistance levels.

Bollinger Bounce

  • A strategy that relies on the notion that price tends to always return to the middle of the Bollinger bands.
  • You buy when the price hits the lower Bollinger band.
  • You sell when the price hits the upper Bollinger band.
  • Best used in ranging markets.

Bollinger Squeeze

  • A strategy that is used to catch breakouts early.
  • When the Bollinger bands “squeeze”, it means that the market is very quiet, and a breakout is eminent. Once a breakout occurs, we enter a trade on whatever side the price makes its breakout.

MACD

  • Used to catch trends early and can also help us spot trend reversals.
  • It consists of 2 moving averages (1 fast, 1 slow) and vertical lines called a histogram, which measures the distance between the 2 moving averages.
  • Contrary to what many people think, the moving average lines are NOT moving averages of the price. They are moving averages of other moving averages.
  • MACD’s downfall is its lag because it uses so many moving averages.
  • One way to use MACD is to wait for the fast line to “cross over” or “cross under” the slow line and enter the trade accordingly because it signals a new trend.

Parabolic SAR

  • This indicator is made to spot trend reversals, hence the name Parabolic Stop And Reversal (SAR).
  • This is the easiest indicator to interpret because it only gives bullish and bearish signals.
  • When the dots are above the candles, it is a sell signal.
  • When the dots are below the candles, it is a buy signal.
  • These are best used in trending markets that consist of long rallies and downturns.

Stochastic

  • Used to indicate overbought and oversold conditions.
  • When the moving average lines are above 80, it means that the market is overbought and we should look to sell.
  • When the moving average lines are below 20, it means that the market is oversold and we should look to buy.

Relative Strength Index (RSI)

  • Similar to the stochastic in that it indicates overbought and oversold conditions.
  • When RSI is above 70, it means that the market is overbought and we should look to sell.
  • When RSI is below 30, it means that the market is oversold and we should look to buy.
  • RSI can also be used to confirm trend formations. If you think a trend is forming, wait for RSI to go above or below 50 (depending on if you’re looking at an uptrend or downtrend) before you enter a trade.

Average Directional Index (ADX)

  • The ADX calculates the potential strength of a trend.
  • It fluctuates from 0 to 100, with readings below 20 indicating a weak trend and readings above 50 signaling a strong trend.
  • ADX can be used as confirmation whether the pair could possibly continue in its current trend or not.
  • ADX can also be used to determine when one should close a trade early. For instance, when ADX starts to slide below 50, it indicates that the current trend is possibly losing steam.

Ichimoku Kinko Hyo

  • Ichimoku Kinko Hyo (IKH) is an indicator that gauges future price momentum and determines future areas of support and resistance.
  • Ichimoku translates to “a glance”, kinko means “equilibrium”, while hyo is Japanese for “chart”. Putting that all together, the phrase ichimoku kinko hyo stands for “a glance at a chart in equilibrium.”
  • If the price is above the Senkou span, the top line serves as the first support level while the bottom line serves as the second support level. If the price is below the Senkou span, the bottom line forms the first resistance level while the top line is the second resistance level.
  • The Kijun Sen acts as an indicator of future price movement. If the price is higher than the blue line, it could continue to climb higher. If the price is below the blue line, it could keep dropping.
  • The Tenkan Sen is an indicator of the market trend. If the red line is moving up or down, it indicates that the market is trending. If it moves horizontally, it signals that the market is ranging.
  • The Chikou Span is the lagging line. If the Chikou line crosses the price in the bottom-up direction, that’s a buy signal. If the green line crosses the price from the top-down, that’s a sell signal.

Each indicator has its imperfections. This is why traders combine many different indicators to “screen” each other. As you progress through your trading career, you will learn which indicators you like the best and can combine them in a way that fits your trading style.

source: www.babypips.com
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What is the Most Profitable Indicator?

Best Cash Back Forex Rebates : Learn How to Trade Forex: Foreign Exchange (FX) Currency Trading – What is the Most Profitable Indicator?

Now on to the good stuff: Just how profitable is each indicator on its own?

After all, traders don’t include these indicators just to make their charts look nicer. Traders are in the business of making money! If these indicators generate signals that don’t translate to a profitable bottom line over time, then they’re simply not the way to go for your needs!

In order to give y’all a comparison of the effectiveness of each indicator, we’ve decided to backtest each of the indicators on their own for the past 5 years. Backtesting, the expertise of our resident robot Robopip, involves retroactively testing the parameters of the indicators against historical price action. You’ll learn more about this in your future studies.

For now, just take a look at the parameters we used for our backtest.

Indicator Parameters Rules
Bollinger Bands (30,2,2) Cover and go long when daily closing price crosses below lower bandCover and go short when daily closing price crosses above upper band
MACD (12,26,9) Cover and go long when MACD1 (fast) crosses above MACD2 (slow)Cover and go short when MACD1 crosses below MACD2
Parabolic SAR (.02,.02,.2) Cover and go long when daily closing price crosses above ParSARCover and go short when daily closing price crosses below ParSAR
Stochastic (14,3,3) Cover and go long when Stoch %K crosses above 20Cover and go short when Stoch %K crosses below 80
RSI (9) Cover and go long when RSI crosses above 30Cover and go short when RSI crosses below 70
Ichimoku Kinko Hyo (9,26,52,1) Cover and go long when conversion line crosses above base lineCover and go short when conversion line crosses below base line

Using these parameters, we tested each of the indicators on its own on the daily time frame of EUR/USD over the past 5 years. We are trading 1 lot (that’s 100,000 units) at a time with no set stop losses or take profit points. We simply cover and switch position once a new signal appears. This means if we initially had a long position then the indicator told us to sell, we would cover, and establish a new short position. Also, we were assuming we were well capitalized (as suggested in our Leverage lesson) and started with an example balance of $100,000.

Aside from the actual profit and loss of each strategy, we included total pips gained/lost and the max drawdown.

Again, let us just remind you that we DO NOT SUGGEST trading without any stop losses. This is just for illustrative purposes only!

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Moving on, here are the results of our backtest:

Strategy Number of Trades P/L in Pips P/L in % Max Drawdown
BuyAndHold 1 -3,416.66 -3.42 25.44
Bollinger Bands 20 -19,535.97 -19.54 37.99
MACD 110 3,937.67 3.94 27.55
Parabolic SAR 128 -9,746.29 -9.75 21.96
Stochastic 74 -20,716.40 -20.72 30.64
RSI 8 -18,716.69 -18.72 34.57
Ichimoku Kinko Hyo 53 30,341.22 30.34 19.51

The data showed that over the past 5-years, the indicator that performed the best on its own was the Ichimoku Kinko Hyo indicator. It generated a total profit of $30,341, or 30.35%. Over 5 years, that gives us an average of just over 6% per year!

Surprisingly, the rest of the indicators were a lot less profitable, with the Stochastic indicator showing a return of negative 20.72%. Furthermore, all of the indicators led to substantial drawdowns of between 20% to 30%.

However, this does not mean that the Ichimoku Kinko Hyo indicator is the best or that indicators as a whole are useless.

Rather, this just goes to show that they aren’t that useful on their own.

Think of all those martial arts movies you watched growing up. Aside from The Rock and the People’s Elbow, no one relied on just one move to beat all the bad guys. Each of them used a combination of moves to get the job done.

Trading is similar. It is an art and as traders, we need to learn how to use and combine the tools at hand in order to come up with a system that works for us.

This brings us to our next lesson: putting all these indicators together!

source: www.babypips.com
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Ichimoku Kinko Hyo

Best Cash Back Forex Rebates : Learn How to Trade Forex: Foreign Exchange (FX) Currency Trading – Ichimoku Kinko Hyo

Yes, you’re still in the right place. You’re still in the School of Pipsology and not in some Japanese pop fan girl site (although Huck may disagree with the rest of the FX-Men on that). No, “Ichimoku Kinko Hyo” ain’t Japanese for “May the pips be with you,” but it can help you grab those pips nonetheless.

Ichimoku Kinko Hyo (IKH) is an indicator that gauges future price momentum and determines future areas of support and resistance. Now that’s 3-in-1 for y’all! Also know that this indicator is mainly used on JPY pairs.

To add to your Japanese vocab, the word ichimoku translates to “a glance”, kinko means “equilibrium”, while hyo is Japanese for “chart.” Putting that all together, the phrase ichimoku kinko hyo stands for “a glance at a chart in equilibrium.” Huh, what does all that mean?

A chart might make things easier to explain…

ichimoku-kinko-hyo

Whoops. That didn’t help. A few more lines and this’ll resemble a seismograph.

Before you go off and call this gibberish, let’s try to find out what each of the lines is for.

Kijun Sen (blue line): Also called standard line or base line, this is calculated by averaging the highest high and the lowest low for the past 26 periods.

Tenkan Sen (red line): This is also known as the turning line and is derived by averaging the highest high and the lowest low for the past nine periods.

Chikou Span (green line): This is called the lagging line. It is today’s closing price plotted 26 periods behind.

Senkou Span (orange lines): The first Senkou line is calculated by averaging the Tenkan Sen and the Kijun Sen and plotted 26 periods ahead. The second Senkou line is determined by averaging the highest high and the lowest low for the past 52 periods and plotted 26 periods ahead.

ichimoku-kinko-hyo-indicators
Got it? Well, it’s not really necessary for you to memorize how each of the lines is computed. What’s more important is for you to know how to interpret these fancy lines.

How to Trade Using Ichimoku Kinyo Hyo

Let’s take a look at the Senkou span first.

If the price is above the Senkou span, the top line serves as the first support level while the bottom line serves as the second support level.

If the price is below the Senkou span, the bottom line forms the first resistance level while the top line is the second resistance level. Got it?

Meanwhile, the Kijun Sen acts as an indicator of future price movement. If the price is higher than the blue line, it could continue to climb higher. If the price is below the blue line, it could keep dropping.

The Tenkan Sen is an indicator of the market trend. If the red line is moving up or down, it indicates that the market is trending. If it moves horizontally, it signals that the market is ranging.

Lastly, if the Chikou Span or the green line crosses the price in the bottom-up direction, that’s a buy signal. If the green line crosses the price from the top-down, that’s a sell signal.

Here’s that line-filled chart once more, this time with the trade signals:

ichimoku-kinko-hyo-example

It sure looks complicated at first but this baby’s got support and resistance levels, crossovers, oscillators, and trend indicators all in one go! Amazing, right?

Okey dokey, we’ve already covered a smorgasbord of indicators. Let’s see how we can put all of what you just learned together…

source: www.babypips.com
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Average Directional Index

Best Cash Back Forex Rebates : Learn How to Trade Forex: Foreign Exchange (FX) Currency Trading – Average Directional Index

The Average Directional Index, or ADX for short, is another example of an oscillator. It fluctuates from 0 to 100, with readings below 20 indicating a weak trend and readings above 50 signaling a strong trend.

Unlike the stochastic, ADX doesn’t determine whether the trend is bullish or bearish. Rather, it merely measures the strength of the current trend. Because of that, ADX is typically used to identify whether the market is ranging or starting a new trend.

Take a look at these neat charts we’ve pulled up:

ADX-downtrend
In this first example, ADX lingered below 20 from late September until early December. As you can see from the chart, EUR/CHF was stuck inside a range during that time. Beginning in January though, ADX started to climb above 50, signaling that a strong trend could be waiting in the wings.

And would you look at that! EUR/CHF broke below the bottom of the range and went on a strong downtrend. Ooh, that’d be around 400 pips in the bag.

Book it, baby!

Now, let’s look at this next example:

ADX-uptrend
Just like in our first example, ADX hovered below 20 for quite a while. At that time, EUR/CHF was also ranging. Soon enough, ADX rose above 50 and EUR/CHF broke above the top of its range.

Tada!

A strong uptrend took place. That’d be 300 pips, signed, sealed, and delivered!

Looks simple enough, right?

If there’s one problem with using ADX, it’s that it doesn’t exactly tell you whether it’s a buy or a sell. What it does tell you is whether it’d be okay to jump in an ongoing trend or not.

Once ADX starts dropping below 50 again, it could mean that the uptrend or downtrend is starting to weaken and that it might be a good time to lock in profits.

How to Trade Using ADX

One way to trade using ADX is to wait for breakouts first before deciding to go long or short. ADX can be used as confirmation whether the pair could possibly continue in its current trend or not.

Another way is to combine ADX with another indicator, particularly one that identifies whether the pair is headed downwards or upwards.

ADX can also be used to determine when one should close a trade early.

For instance, when ADX starts to slide below 50, it indicates that the current trend is losing steam. From then, the pair could possibly move sideways, so you might want to lock in those pips before that happens.

 

 

source: www.babypips.com
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Relative Strength Index

Best Cash Back Forex Rebates : Learn How to Trade Forex: Foreign Exchange (FX) Currency Trading – Relative Strength Index

Relative Strength Index, or RSI, is similar to the stochastic in that it identifies overbought and oversold conditions in the market. It is also scaled from 0 to 100. Typically, readings below 30 indicate oversold, while readings over 70 indicate overbought.

RSI-overbought-oversold

How to Trade Using RSI

RSI can be used just like the stochastic. We can use it to pick potential tops and bottoms depending on whether the market is overbought or oversold.

Below is a 4-hour chart of EUR/USD.

rsi-oversold

EUR/USD had been dropping the week, falling about 400 pips over the course of two weeks.

On June 7, it was already trading below the 1.2000 handle. However, RSI dropped below 30, signalling that there might be no more sellers left in the market and that the move could be over. Price then reversed and headed back up over the next couple of weeks.

Determining the Trend using RSI

RSI is a very popular tool because it can also be used to confirm trend formations. If you think a trend is forming, take a quick look at the RSI and look at whether it is above or below 50.

If you are looking at a possible uptrend, then make sure the RSI is above 50. If you are looking at a possible downtrend, then make sure the RSI is below 50.

RSI-cross-downtrend

In the beginning of the chart above, we can see that a possible downtrend was forming. To avoid fake outs, we can wait for RSI to cross below 50 to confirm our trend. Sure enough, as RSI passes below 50, it is a good confirmation that a downtrend has actually formed.

 

 

source: www.babypips.com
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Stochastic

Best Cash Back Forex Rebates : Learn How to Trade Forex: Foreign Exchange (FX) Currency Trading – Stochastic

The Stochastic is another indicator that helps us determine where a trend might be ending.

By definition, a Stochastic is an oscillator that measures overbought and oversold conditions in the market. The 2 lines are similar to the MACD lines in the sense that one line is faster than the other.

stochastic stochastic-overbought-start stochastic-overbought-end

How to Trade Using the Stochastic

As we said earlier, the Stochastic tells us when the market is overbought or oversold. The Stochastic is scaled from 0 to 100.

When the Stochastic lines are above 80 (the red dotted line in the chart above), then it means the market is overbought. When the Stochastic lines are below 20 (the blue dotted line), then it means that the market is oversold.

As a rule of thumb, we buy when the market is oversold, and we sell when the market is overbought.

stochastic-overbought-start

Looking at the chart above, you can see that the Stochastic has been showing overbought conditions for quite some time. Based on this information, can you guess where the price might go?

stochastic-overbought-end

If you said the price would drop, then you are absolutely correct! Because the market was overbought for such a long period of time, a reversal was bound to happen.

That is the basics of the Stochastic. Many traders use the Stochastic in different ways, but the main purpose of the indicator is to show us where the market conditions could be overbought or oversold.

Over time, you will learn to use the Stochastic to fit your own personal trading style.

Okay, let’s move on to RSI.

 

 

source: www.babypips.com
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