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Terminology forex : F

Factory Orders

Definition:
The factory orders report, produced by the U.S. Census Bureau, consists of both of the durable goods report ( announced earlier ) along with a report detailing the events of non-durable goods orders. The
report itself tends to be rather predictable with non durable goods appearing as the only new component to the previous report.
Source: US Department of Commerce; U.S. Census Bureau

Frequency : Monthly

Availablity : There are two releases each month, with data covering the previous two months
The Census Bureau releases the Advance Report on Durable Goods Manufacturers’ Shipments at 8:30 AM EST about every 18 working days after each month
the Census Bureau releases the Manufacturers’ Shipments, Inventories, and Orders report at 10:00 AM EST about every 23 working days after each month
More : Commodities classed as non durable goods consist of items such as food and tobacco products which tend to grow at a fairly consistent monthly rate, leading market forecasts for these items to be on
the whole fare more accurate than those featured in the durable goods orders report.
In addition to non durable goods appearing on the report for the first time, markets also watch out for any revisions to the previously published durable orders data, which can at times be significant although at
present durable goods orders tend to sum to around 54% of total orders.
The information in the report specifically concerning factory inventories is the real first glimpse into the inventory picture each month with separate inventories due to be issued for the disparate industries.
Wholesales inventories, for example, typically are released at the following week, with retail inventories released a few days after that.
While the inventory figures themselves do not tend to affect markets, economists do use this number to help forecast inventories calculations in the quarterly GDP report

 

 

 

Falkland Islands Pounds

The currency of the Falkland Islands. Currency code ( FKP )

 

 

 

Falling Wedge

While a Wedge pattern is most often known as a [http://www.babypips.com/school/reversal_patterns.html Reversal Pattern] ( a chart pattern where the trend of a stock is reversed once the pattern is confirmed ) a falling wedge may be either a reversal pattern or a continuation pattern, depending on the prevailing trend factor.
Wedge patterns act in a similar manner to triangle patterns in that they manifest themselves in the form of converging trend lines and narrowing price ranges although wedge patterns are known to have a
quite noticeable upward or downward tilt.
Although a falling wedge pattern may be found in both uptrends and downtrends, and thus may signify either a continuation or a reversal. If a falling wedge occurs on an uptrend the then the falling wedge will
act in a similar way to a bull pennant and form part of a continuation pattern, however if the falling wedge should occur in a downtrend then it will always follow reversal pattern.
In order to determine the breakout expectations of a falling wedge, attention should first be paid to whether it occurs in the case of a continuation falling wedge, in which case the widest portion of the wedge is
measured and added to the breakout level to determine the upside move to follow. Alternatively, if the falling wedge occurs within a reversal pattern, then the widest portion of the wedge should be added to the
breakout level to determine the upside move which follows.

Falling-wedge

 

 

Falling-wedge

Federal Deposit Insurance Corporation
The United States agency in charge of bank depository insurance in the US. Also known as the FDIC.

 

 

 

 

Federal Open Market Committee

Definition
The Federal Open Market Committee ( FOMC ) is the team behind the US Federal Reserve that controls the nation’s cash supply through open market operations.

Birth The FOMC was formed in 1913 when the Federal Reserve Act of 1913 gave the Fed duty over the US’s monetary policies in response to the massive financial panic and bank runs especially during
1907.
Mission:The committee evaluates the nation’s economic and financial conditions and determines the fitting monetary policy, as mentioned, through open market operations. One of the Fed’s main goals is to
control the country’s inflation by setting inflation targets. The committee aims to meet this target by establishing a target for the Federal funds rate ( the cost that banks charge each other on overnight
borrowings ) as well. The selling of government securities to banks lessens the amount of funds that they would be able to lend, effectively increasing the interest rate. On the flip side, buying government
securities from the banks increases their available funds, thus, decreasing the interest rate.
Members:The FOMC is made up of 12 members – the 7 members of the Board of Governors of the Federal Reserve System; Federal Reserve Bank of New York president; and 4 of the 11 Reserve Bank
presidents, who are appointed on a one-year rotating term.
The current members ( as of Jan. 2010 )are as follows:
Ben S. Bernanke, Board of Governors, Chairman
William C. Dudley, New York, Vice Chairman
Elizabeth A. Duke, Board of Governors
Daniel K. Tarullo, Board of Governors
Kevin M. Warsh, Board of Governors
Donald L. Kohn, Board of Governors
Charles L. Evans, Chicago
Jeffrey M. Lacker, Richmond
Dennis Lockhart, Atlanta
Janet L. Yellen, San Francisco

 

 

 

 

Fibonacci Channel

Human behavior is not only reflected in chart patterns as large swings, small swings or trend formations. Human behavior is also expressed in peak-valley formation. Fibonacci channels make use of peak

and valley formations in the market and lead to conclusions on how to safely forecast major changes in trend directions.
The secret of Fibonacci channels is to identify the correct valleys and peaks to work with. Support and resistance lines can be drawn weeks and months into the future, once the appropriate tops and bottoms
in the market have been detected. Only major tops and bottoms should be considered for a base line of a Channel with one or more prominent side swings. The widest swing within a time frame of the base
line is used for a trigger line.
Fibonacci channels are a method of predicting levels of support and resistance for a given market. Although Fibonacci channels fall under the general category of Fibonacci studies for technical analysis, the
channels aren’t among the most popular tools used by traders today.
Fibonacci channels are variants of the more-popular Fibonacci retracement strategy, with retracement lines running diagonally rather than horizontally. To generate Fibonacci channels for a chart, a trader first
creates a base channel by drawing parallel lines through a price top and price bottom. The slope of the Fibonacci channel is determined by connecting either two bottoms or two tops, depending on the
overall trend: in a downward trend two bottoms are connected, while in an upward trend the slope is generated from two tops. Once the base channel is drawn, additional parallel lines are drawn above or
below it, with the distance between lines determined by Fibonacci numbers: 0.618 times the width of the original channel, then the width of the original channel, then 1.618 times to the width and so on,
multiplying each number by the golden ratio 1.618 to determine each successive width. These Fibonacci channels determine the support and resistance levels for the market within the overall trend.
When used, Fibonacci channels are often drawn along with Fibonacci retracement charts. The points where the diagonal lines and horizontal lines cross are considered to be exceptionally strong levels of
support or resistance for the market.

 

 

 

 

Fibonacci Extension

Fibonacci extensions are, as the name indicates, not a separate Fibonacci study in their own right, but rather a way to increase the utility of Fibonacci retracements over time. Fibonacci extensions are created
by first generating a Fibonacci retracement chart for a market. This is done by drawing a vertical line from a top to a bottom and then crossing the vertical with horizontal lines, each drawn through points
determined by taking Fibonacci-significant percentages of the initial vertical’s length ( 38.2%, 50% and 61.8% of the vertical’s length being the most common values used. ) Once a basic Fibonacci retracement
is created, a Fibonacci extension can be created by extending the vertical and drawing additional horizontal lines through it at higher or lower price levels, corresponding to greater Fibonacci-significant
percentages: 161.8%, 261.8%, or any percentage derived by multiplying a previous percentage by the golden ratio of 1.618. Once a Fibonacci level is met and broken through, that level becomes support,
with the following Fibonacci level becoming resistance.
Fibonacci extensions are used to outline future support and resistance levels for a market once price levels exceed the initial retracement resistance or support level of 100% of the original vertical’s height.
Fibonacci extensions are thus not just a method of assessing how much the market will recover from a major price adjustment, but rather a long-term method of determining the support and resistance levels
of the market once price levels have broken the original support or resistance and begun moving along a new overall trend.

 

 

  Fibonacci Studies

Fibonacci studies are geometrical representation of nature’s law and human behavior that can be applied, almost without limit, to market data series, whether cash currencies/Forex, futures, index products,
stocks or mutual funds. Each shape possesses unique characteristics in determining when the battle between bulls and bears is approaching a critical phase and which side is likely to win it.
Most Fibonacci studies are based on 3-wave patterns ( A-B-C corrective patterns ). The first impulse wave A is followed by the second corrective wave B that doesn’t penetrate a point from which wave A
started. The third continuation wave C goes in the direction of wave A and signals formation of the 3-wave pattern.
waves:Fibonacci studies are technical analysis tools based on the Fibonacci sequence. The Fibonacci sequence generates numbers based on the sum of the two preceding numbers in the sequence: for
example, the first six numbers in the sequence are 1, 1, 2, 3, 5, 8. Fibonacci sequences are mathematically important for several reasons, chief among these the fact that any Fibonacci number multiplied by
1.618 tends to equal the next number in the Fibonacci sequence. This 1.618 proportion, also known as the “golden ratio”, describes many patterns in seemingly disorderly natural processes, often including
foreign exchange market trends.
Fibonacci studies use this regularity to generate a number of different graphs meant to analyze a market in terms of levels of support and resistance. There are four popular studies: Fibonacci arcs, fans,
retracements, and time projections. However, a number of other studies exist, including Fibonacci ellipses, spirals, and channels. Additionally, certain of the Fibonacci studies ( arcs and fans, most frequently )
can be combined in a single projection, with the strongest levels of support and resistance theoretically occurring where the projection lines cross.
The most common percentages used to generate Fibonacci studies are 38.2%, 50% and 61.8%, but other Fibonacci numbers can also be used in certain of the projections.

 

waves

 

 Filipino Pesos

The currency of The Philippines. Currency code ( PHP )

 

 

 

 

Fill price

the price at which an order was executed.

 

 

 

 

First In First Out

Rule in which positions are closed in the order they were originally opened. Also known as FIFO.

 

 

 

 

Fisher effect

The Fisher effect describes the relationship between interest rates and inflation. According to Irving Fisher, the brains behind this amazing theory, the real interest rate is equal to the nominal interest rate minus
the expected inflation.
With the real interest rate held constant, an rise in expected inflation should be accompanied by an increase in the nominal interest rate. In other words, if a central bank expects a considerable rise in price
levels, they could hike rates accordingly.

 

 

 

Fixed exchange rate

An official rate set by monetary officials.

 

 

 

 

Flat

Slang used to describe a position that creates a neutral position. A position that has been sold or bought at the same price as the buying or selling price respectively. Also known as square.

 

  Fading

Definition:
Fading is a trading technique in which a trader assumes that a rapid upward movement is overdone and takes a short position on a possible reversal.
This technique can be very risky in trending markets because going against a strong trend reduces the probability of profitability.
This technique can be potentially rewarding in range bound markets because a strong resistance level has been established, increasing the probability of future resistance and reversals at that level.

 

 

 

 

Falling Three Methods

Falling-three-methodsA bearish continuation pattern. A long black body is followed by three small body candles, each fully contained within the range of the high and low of the first candle. The fifth candle
closes at a new low.Falling-three-methods

 

 

 

 

 

Fed

The Federal Reserve of the United States, commonly known as the Fed, is the organization responsible for monitoring and maintaining the United States currency supply. Established by Congress in 1913,
the Fed is composed of a Washington D.C.-based Board of Governors, twelve large regional banks, and a number of smaller affiliated institutions.
The Federal Reserve of the United States has a number of methods for influencing the American money supply. Chief among these is the power of the Fed to increase or decrease the amount of currency in
circulation. The Fed can purchase or sell government securities to its primary traders, which brings additional Federal Reserve Notes into circulation or removes excess paper money from the supply. The
Fed also works with the U.S. Mint to print additional paper money, or to destroy unneeded currency.
Another of the Fed’s financial powers is its ability to influence the short-term interest rate. The Fed does this by changing the default rate at which it loans money to fellow banks. Since the Fed’s default rate is
one of the major factors in determining the nationwide prime interest rate, the Fed’s actions can indirectly increase or decrease the yield from interest-accruing assets. This in turn plays a role in determining
investor behavior, and the trends of the market as a whole.
In more detail, the rate that the Fed lends money to depository institutions is called the Discount Rate. That is set above the nominal rate which is the rate that the depository institutions lend money to each
other to meet reserve requirements at the Fed. The nominal rate is what is commonly known as the Federal Funds Rate. It is set by open market operations.
Since the money supply is a factor in determining the overall trade balance between currency markets, foreign exchange traders who work with US currency tend to keep a close eye on the actions of the
Federal Reserve.
Ben Bernanke is the current Chairman of the Federal Reserve System.

 

 

 

Federal Funds Rate

The interest rate at which US financial institutions ( e.g., credit unions, savings and commercial banks, etc. ) are charged for holding active balances at the Federal Reserve. This interest rate is used as a
benchmark by US banks when lending excess balances to each other.

 

 

Fibonacci Arcs

Fibonacci arcs are created by first drawing an invisible trendline between two points ( usually the high and low in a given period ), and then by drawing three curves that intersect this trendline at the key
Fibonacci levels of 38.2%, 50% and 61.8%. Transaction decisions are made when the price of the asset crosses through these key levels.
Fibonacci arcs are one of the four most commonly used Fibonacci studies for analyzing markets in terms of support and resistance levels. They are used to draw circular arcs that are probable values of
support and resistance based on a market range. Fibonacci arcs are generated by first finding the low and high prices for a given market. A line drawn between these two points becomes the radius in a
large circle. Taking one point at 0% and the other as 100%, three arcs are then drawn across this radius at the Fibonacci percentages of 38.2%, 50%, and 61.8% of the total length of the line. The price levels
at which the arcs intersect with a time index are, in theory, strong areas of support or resistance for the market.
Another popular strategy is to combine Fibonacci arcs with Fibonacci fans, drawing both studies on the same chart. Fans of this method consider the points where both studies cross to be extremely strong
areas of support and resistance.
One caveat when using Fibonacci arcs: since the arcs are literally drawn as circles across a chart, the points of intersection can vary depending on the chart’s horizontal or vertical scale. A savvy trader will
experiment with Fibonacci arcs applied to previous market data in order to determine a chart scale that seems the most effective, and then use that in future predictions of resistance and support.

 

 

 

Fibonacci Ellipse

Fibonacci ellipses identify underlying structure of price moves. Fibonacci ellipses circumvent price patterns. When a price pattern changes, the shape of the ellipse circumventing the respective market price
pattern changes too. We can find long and short ellipses, fat and thin ellipses and ellipses that are flat or have a steep angle. There are very few market price moves that do not follow the pattern of a Fibonacci
ellipse. In general, the shape of an ellipse is defined by the ratio of major axis to minor axis. Ellipse is turned into Fibonacci Ellipse where this ratio is a member of Fibonacci series.
The strength of Fibonacci ellipses is that no matter how many waves or sub waves we find in a price pattern, we receive a solid overall picture of the total price pattern as long as it can be circumvented by a
Fibonacci ellipse. It starts in the beginning of a wave A in 3-wave patterns and its width is chosen so that the beginning and the end of a wave B is tied between extreme points of minor axis of the ellipse. As
long as the price stay inside the ellipse it is very likely to reach level indicated by the end of major axis at approximate time it projects onto a time scale of a graph.
Fibonacci ellipses, also known as phi-ellipses, are a lesser-known member of the general category of Fibonacci studies in technical analysis. An important difference between Fibonacci ellipses and
standard Fibonacci tools is that Fibonacci ellipses are are used to determine overall market trends, rather than merely levels of support and resistance.
A Fibonacci ellipse can be drawn when three points on a chart are known: an arbitrary starting point, the first peak before a reversal in price levels, and a second point representing a second reversal back
toward the direction of the overall trend. Once these three points are known, an ellipse can be drawn inscribing all three. The line bisecting this ellipse along the median can be taken as an indicator of the
median price level for the overall trend, and traders consider the point where the median line crosses the far boundary of the ellipse to be an indicator of an impending market reversal.
There are a number of additional complexities when working with Fibonacci ellipses. Once three Fibonacci ellipses in a row are drawn, on occasion a larger Fibonacci ellipse can be drawn circumscribing all
three. If this happens, it should be considered an extremely strong indicator of an upcoming trend reversal. Additionally, the slope of a Fibonacci ellipse is usually taken to indicate the severity of the upcoming
price reversal, allowing traders to take the appropriate positions.
Fibonacci ellipses can only be drawn by computer, limiting their utility if the trader doesn’t own appropriate technical analysis software.

 

 

 

 

Fibonacci Fan

Fibonacci fans name derives from the fanlike appearance of the three trend lines shown. The Fibonacci fans are drawn using typical tops or bottoms. The three Fibonacci fans project into the future with

slopes at 38.2, 50 and 61.8% ( additional levels are also available ). As the daily prices pass these three fans, we make predictions about future price movements based upon whether there appears to be
price resistance or support at these intersection points. If the prices hold at the fan line, there is support there, if they quickly move through the fan line, then you will not see support until the next fan line is met.
Fibonacci fans are among the four most popular Fibonacci studies, used to predict levels of support and resistance in a market. Fibonacci fans are generated by first finding the high and low of the market. An
invisible vertical line running from the high price level to the low price level is drawn at the rightmost point, whether high or low. Three lines are then drawn from the leftmost point through the invisible vertical
line, crossing the line at 38.2%, 50% and 61.8% of the total distance. ( These are the classic Fibonacci study percentages, but other Fibonacci percentages are sometimes used. ) These three Fibonacci fan
lines predict strong levels of support and resistance for the market in the near future.
The Fibonacci fan also predicts the range of a market for a short period of time, as prices tend to “bounce” between the lowest and highest of the three Fibonacci fan lines, occasionally hovering or
rebounding from the 50% line at the middle of the projection. Several traders also use Fibonacci fans in conjunction with Fibonacci arcs. Both Fibonacci studies are drawn on the same chart, and the points at
which the projections cross are considered to be extremely strong levels of support or resistance.

 

 

 

Fibonacci Spiral

Fibonacci spirals provide the optimal link between price and time analysis and are the answer to a long search for a solution to forecasting both time and price. Each point on a spiral manifests an optimal
combination of price and time. Corrections and trend changes occur at all those prominent points where the Fibonacci spiral is touched on its growth path through price and time.
You will be astonished to see that if the correct center is chosen, Fibonacci spirals pinpoint turning points in the market with an accuracy seldom before seen. Investing based on spirals is neither a black-box
approach nor an overfitted computerized trading system. It is a simple universal geometrical law applied to different sorts of products such as futures, stock index futures, stocks or cash currencies.
The Fibonacci spiral is one of the many Fibonacci studies for analyzing markets in terms of support and resistance levels for the price of a given asset.
Unlike several of the other Fibonacci studies, the exact methods for calculating Fibonacci spirals are kept as something of a secret. The basic idea behind the Fibonacci spiral is that a certain extreme point
on a market chart is taken to be the center of the spiral, and then a Fibonacci spiral based on the golden ratio is drawn emanating out from that center. Certain points along the spiral are then considered to be
strong indicators of market events, such as reversals, price spikes or high levels of resistance or support. The Advocates often tout the Fibonacci spiral as an extremely accurate method of predicting the
behavior of a market based on both critical times and critical price levels, rather than simply on price levels. Several pieces of software exist for calculating Fibonacci spirals on a computerized chart. The
secret nature of the calculations, however, makes it difficult for a prospective Fibonacci trader to assess the actual efficacy of the device.
In general, Fibonacci spirals are generated by picking a starting point and then increasing the width of points along the spiral from the center by multiplying the width by a Fibonacci ratio for every quarter turn.
In markets, this Fibonacci ratio would likely be determined by certain price levels within the market.

 

  Fibonacci Time Projection

Fibonacci time projection days are days on which a price event is supposed to occur. Time projection analysis is not lagging but is of forecasting value. Trades can be entered or exited at the price change
rather then after the fact. The concept is dynamic. The distance between two turning points is seldom the same, and time projection days vary, depending on larger or smaller swing sizes of the market price
pattern. This base for drawing this shape is 2 critical points: two highs, two lows or a low and a high. Fibonacci levels are projected into the future based on those points and at this time it is impossible to say
whether those levels mark peaks or valleys. If price is declining or rising approaching a given Time Projection level, it is likely this level will mark an end or a pause of a particular trend. It is always
recommended to combine Time Projection with other Fibonacci tools for more dependable signals.
Fibonacci time projection is one of the four most popular Fibonacci studies for technical analysis, involving the use of Fibonacci time zones. Fibonacci time zones are generated by dividing a chart into a
number of time areas, based on the Fibonacci sequence. As an example, if the base increment is taken to be an interval of one day, Fibonacci time zones would occur around 1.618 days after that day, then
2.618 days after that, then 4.236 and so on. Each interval is multiplied by the golden ratio, 1.618, in order to generate the next interval. These Fibonacci time zones are used to predict large price events,
whether reversals of a current price trend or sharp changes in price along with the trend.
Fibonacci time projection is accurate to a point, but in a few cases large price events occur significantly before or after the time predicted by the Fibonacci time projection. Although this only describes about
30% of cases, Fibonacci time projection should only be used in conjunction with other technical analysis tools, and as a guideline for trading rather than a sure-fire method of divining the future.

 

 

 

Fiji Dollars

The currency of Fiji. Currency code ( FJD )

 

 

 

Fill

The action of completing a order to make a transaction.

 

 

 

Financial risk

The negative chance a firm cannot meet its financial obligations.

 

 

 

Fiscal Policy

Fiscal policy, or financial policy, is the method by which governments adjusts its levels of spending and taxation to directly influence the economy. Fiscal policy goes hand in hand with monetary policy ( the
means by which central banks influence money supply ) to achieve various economic goals.
Fiscal policy gained popularity during the 1930s after it had been advocated by British economist John Maynard Keynes. He suggested that whenever a nation is in recession, putting more money in the
hands of consumers could lead to economic growth. This could be done by reducing taxes or increasing government spending.
Various Fiscal Policies: The following are the three basic financial policies: neutral, expansionary, and contractionary.
Neutral – Government spending is roughly equal to its revenue.
Expansionary – Government spending is higher than its revenue.
Contractionary – Government spending is lower than its revenue.
Effects of Fiscal Policies on Exchange Rates:The effect of financial policy on the currency is highly dependent on the economic situation. Since each country is unique and the economic environment is
constantly changing, it is very hard to tell exactly how financial policy will affect exchange rates.
Let’s say a government has a budget deficit due to an expansionary financial policy. To finance the deficit, the government can work with the central bank to print fresh currency ( also known as quantitative
easing ).The newly printed money can be used by the government in their economic development projects. The increase in money supply can end up being inflationary and lead to the weakening in value of
the domestic currency in relation to foreign currencies.

 

 

 

 

Fitch

Fitch Ratings is currently one of the Big Three players in the credit ratings industry.
Fitch Ratings was founded by John Knowles Fitch in 1913 when he published financial statistics in his “The Fitch Stock and Bond Manual.” In 1924, the Fitch Publishing Company first introduced the “AAA” to
“D” ratings scale, which is currently used by the industry.
Today, Fitch Ratings provides services from its headquarters in both New York and London and its 51 offices worldwide.

 

 

 

 

Flags

A flag is a chart pattern used in technical analysis. Although it is less popular than triangles, wedges, and other commonplace technical analysis tools, traders consider flags to be extremely reliable
consolidation patterns.
A flag forms when price shoots up extremely sharply in a single trading period, forming a nearly vertical line. This is known as the flagpole. After the flagpole forms, bearish traders, eager to capitalize on instant
profits, begin selling off their holdings in the asset. However, this doesn’t cause a rapid decline in price, as bullish traders begin buying up holdings of the stock, hoping to capitalize on future increases in price.
The resulting declining trend channel resembles a downward-sloping parallelogram, giving the chart the appearance of a flag, and hence its name.
If prices fail to break the upper resistance line of the flag within twenty days, the flag pattern fails. If prices do break this level, however, another flagpole and another extreme peak in prices can be expected in
the near future. This causes the flag, when confirmed, to be an extremely strong buy signal and an opportunity for massive profits with little time investment.

Flag

 

 

 

 

Flip

The point in which a trader switches from having more long positions to more short positions.

 

Floating exchange rate

a rate that is allowed to change freely, as influenced by an open market, rather than being fixed to the value of another asset ( e.g., the Chinese Yuan is not openly traded and fixed to the value of the U.S.
Dollar ).

 

 

 

Foreign Currency Effects

The loss or gain on foreign investments due to a rising or falling domestic currency. A falling domestic currency means foreign investments will result in higher returns when converted back into domestic
currency.

 

 

 

Forex

Definition: Also referred to as the “FOREX” or “Forex” or “Retail forex” or “FX” or “Spot FX” or just “Spot”, the foreign exchange market is the largest financial market in the world, used for trading and
exchanging the world’s different currencies. The trading occurs by simultaneously buying currency of one currency and the selling the currency of another.
With a trading volume of about $4 trillion a day, compared to the $25 billion a day volume that the New York Stock Exchange trades, you can easily see how enormous the Foreign Exchange really is. It
equates to more than 3X the total combined amount of the stocks and futures markets!

 

Forexpedia:Sandbox

Welcome! This is Forexpedia’s Sandbox, the place to test the skills that your Mama gave you. Feel free to experiment with different things, such as text edits, headings, linking and list creation.
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Build and destroy below , and build again! Just like when you were a kid and didn’t have anything better to do!
“This is a test. For the next sixty seconds, this station will conduct a test of the Emergency Broadcast System. This is only a test.”

 

 

 

 

Forward

A forward contract is a non-standardized contract between two parties, who enter into an agreement to complete a transaction sometime in the future. The two parties agree today to buy ( sell ) an asset at a
specific date in the future at a specific price.
The buyer of the asset assumes the “long” position of the contract ; the seller of the asset assumes the “short” position. The price that the buyer and the seller agree upon is called the delivery price.

 

 

 

 

Forward Points

The interest rate differential between two currencies expressed in exchange rate points. The forward points are added to or subtracted from the spot rate to give the forward or outright rate ( depending on
whether the currency is at a forward premium or discount )..

 

 

 

 Francoise Hollande

Francoise Hollande is currently the 24th President of France. He was elected in 2012, ousting then President Nicolas Sarkozy. His past political experience includes serving as mayor of Tulle ( 2001-2008 )
and as President of the General Council of Corrize ( 2008-2012 ). He is a member of the Socialist political party. He built his campaign on the promise of anti-austerity and pro-growth, raising some concerns
that this may cause tension between France and Germany going forward, but he has promised that he will work hand-in-hand with Germany’s Angela Merkel to help promote a better relationship between the
two countries.

 

 

 

French Consumer Confidence

Release Schedule: Monthly
Source of Report: ECB
Web Address: http://www.ecb.int/ecb/orga/decisions/genc/html/index.en.html
Address of Release: N/A

 

 

 

 

 

French Industrial Production

Release schedule : 6:40 ( GMT ); monthly, in the first half of the month, with a two month lag.
Revisions schedule : Revisions can be significant
Source of report : National Institute for Statistics and Economic Studies
Web Address : http://www.insee.fr/en/home/home_page.asp
Address of release : http://www.insee.fr/en/indicateur/indic_conj/liste_indice.asp

 

 

 

Front Office

The normal trading activities carried out by the dealer.

 

 

 

 

Fundamental Analysis

Fundamental analysis is a way of understanding the changes in market valuation by analyzing economic, social, and political forces that affects the supply and demand of an asset.
In Forex, the idea behind this type of analysis is that if a country’s current or future economic outlook is good, their currency should strengthen. The better shape a country’s economy is, the more foreign
businesses and investors will invest in that country. This results in the need to purchase that country’s currency to obtain those assets.
Forex traders who utilize Fundamental analysis often keep one eye focused on the market price action, while keeping the other financial news resources. They will study the news for information on political
climate, international relations, natural disasters and other worldly events in order to determine what might be coming up in the trading arena.
Fundamental factors that many traders use when deciding whether to enter, stay with a trade, or exit, besides those already mentioned, include unemployment rates, inflation, fiscal policy changes, and
stocks/bonds/money markets. If an Earthquake occurs in India, for example, fundamental analysts will keep a close eye on the impending changes in the value of Indian currency to determine when to buy or
sell.
For example, let’s say that the U.S. dollar has been gaining strength because the U.S. economy is improving. As the economy gets better, raising interest rates may be needed to control growth and inflation.
Higher interest rates make dollar-denominated financial assets more attractive. In order to get their hands on these lovely assets, traders and investors have to buy some greenbacks first. As a result, the value
of the dollar will most likely increase.

 

 

 

 

 

Futures contract

An agreement to trade a good at a set price a later date.

 

 

 

 

  Food Price Index – New Zealand

Release Schedule : 22:45 ( GMT ); monthly, 1-2 weeks after the reporting period
Source of Report : Statistics New Zealand
Web Address : http://www.stats.govt.nz/default.htm
Address of Release http://www.stats.govt.nz/products-and-services/info-releases/fpi-info-releases.htm

 

 

 

 

Foreign Exchange

Foreign Exchange, or Forex trading is the simultaneous buying of one currency and the selling of another. Currencies are traded through a broker or dealer, and are traded in pairs; for example the Euro and
the US dollar ( EUR/USD ) or the British Pound and the Japanese Yen ( GBP/JPY ).
Because you’re not buying anything physical, this kind of trading can be confusing. Think of buying a currency as buying a share in a particular country. When you buy, say, Japanese Yen, you are in effect
buying a share in the Japanese economy, as the price of the currency is a direct reflection of what the market thinks about the current and future health of the Japanese economy.

 

 

 

 

Forexpedia:link

Wow, how cool! I just jumped to another page! How did I do this? Ah-haa, I clicked on a link!
Back to Basic Navigation

 

 

 

Forex Swap

A forex swap is the simplest type of currency swap. It is an agreement between two parties to exchange a given amount of one currency for an equal amount of another currency based on the current spot
rate. The two parties will then give back the original amounts swapped at a later date, at a specific forward rate.
The forward rate locks in the exchange rate at which the funds will be swapped in the future, while offsetting any possible changes in the interest rates of the respective currencies. Thus, this creates a hedge
for both parties against potential fluctuations in currency exchange rates. This makes forex swaps very useful for multinational and exporting companies.

 

 

 

 

Forward Deal

A deal with a value date greater than the spot value date.

 

 

 

Fractal

A fractal is a structure that you can self-replicate geometrically in a smaller or miniature copy of itself indefinitely. This characteristic is called self-similarity.
Fractals can be found all over nature and in math. Some examples include: seashells, snow flakes, lightnings, broccoli, ferns, and pineapples.

 

 

 

 

French Business Confidence Indicator

Release schedule: 6:45 ( GMT ); monthly, end of every month
Source of report: National Institute for Statistics and Economic Studies ( INSEE )
Web Address: http://www.insee.fr/en/home/home_page.asp
Address of release : http://www.insee.fr/en/indicateur/indic_conj/liste_indice.asp

 

 

 

 

French Gross Domestic Product Quarterly ( GDP )

Release schedule: 6:50 ( GMT ); quarterly, 50 days after the end of the reporting quarter
Revisions schedule: Final report is issued 90 days after the end of the quarter
Source of report: National Institute for Statistics and Economic Studies ( France )
Web Address: http://www.insee.fr/en/home/home_page.asp
Address of release: http://www.insee.fr/en/indicateur/cnat_trim/publications.htm

 

 

 

 

French Unemployment Rate

Release schedule : 6:45 ( GMT ); monthly, at the end of the following month
Source of Report: National Institute for Statistics and Economic Studies ( France )
Web Address : http://www.insee.fr/en/home/home_page.asp
Address of release : http://www.insee.fr/en/indicateur/indic_conj/liste_indice.asp
Unemployment and Jobs

 

 

 

 

Fundamentals

Macroeconomic factors that affect the currency markets.

 

 

Futures Commission Merchant

A futures commission merchant ( FCM ) is just like a securities broker, but instead deals with futures contract orders. FCM’s provide service to their clients by buying or selling contracts in the futures market.
Collateral may also be accepted from clients as margin for their orders. A FCM must be certified by the CFTC.

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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Parabolic SAR

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

Up until now, we’ve looked at indicators that mainly focus on catching the beginning of new trends. Although it is important to be able to identify new trends, it is equally important to be able to identify where a trend ends. After all, what good is a well-timed entry without a well-timed exit?

parabolic-SAR

One indicator that can help us determine where a trend might be ending is the Parabolic SAR (Stop And Reversal). A Parabolic SAR places dots, or points, on a chart that indicate potential reversals in price movement.

From the image above, you can see that the dots shift from being below the candles during the uptrend to above the candles when the trend reverses into a downtrend.

How to Trade Using Parabolic SAR

The nice thing about the Parabolic SAR is that it is really simple to use. We mean REALLY simple.

Basically, when the dots are below the candles, it is a buy signal; and when the dots are above the candles, it is a sell signal.

how-to-use-parabolic-sar

Simple?

Yes, we thought so.

This is probably the easiest indicator to interpret because it assumes that the price is either going up or down. With that said, this tool is best used in markets that are trending, and that have long rallies and downturns.

You DON’T want to use this tool in a choppy market where the price movement is sideways.

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Using Parabolic SAR to exit trades

You can also use Parabolic SAR to help you determine whether you should close your trade or not.

Check out how the Parabolic SAR worked as an exit signal in EUR/USD’s daily chart above.

parabolic-SAR-example

When EUR/USD started sliding down in late April, it seemed like it would just keep droppin’ like it’s hot. A trader who was able to short this pair has probably wondered how low it can go.

In early June, three dots formed at the bottom of the price, suggesting that the downtrend was over and that it was time to exit those shorts.

If you stubbornly decided to hold on to that trade thinking that EUR/USD would resume its drop, you would’ve probably erased all those winnings since the pair eventually climbed back near 1.3500.

 

 

source: www.babypips.com
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Moving Average Convergence Divergence (MACD)

Best Cash Back Forex Rebates : Learn How to Trade Forex: Foreign Exchange (FX) Currency Trading – Moving Average Convergence Divergence (MACD)

MACD is an acronym for Moving Average Convergence Divergence. This tool is used to identify moving averages that are indicating a new trend, whether it’s bullish or bearish. After all, our top priority in trading is being able to find a trend, because that is where the most money is made.

MACD-histogram
With an MACD chart, you will usually see three numbers that are used for its settings.

  • The first is the number of periods that is used to calculate the faster moving average.
  • The second is the number of periods that is used in the slower moving average.
  • And 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.

For example, if you were to see “12, 26, 9” as the MACD parameters (which is usually the default setting for most charting packages), this is how you would interpret it:

  • The 12 represents the previous 12 bars of the faster moving average.
  • The 26 represents the previous 26 bars of the slower moving average.
  • The 9 represents the previous 9 bars of the difference between the two moving averages. This is plotted by vertical lines called a histogram (the green lines in the chart above).

There is a common misconception when it comes to the lines of the MACD. The two lines that are drawn are NOT moving averages of the price. Instead, they are the moving averages of the DIFFERENCE between two moving averages.
In our example above, the faster moving average is the moving average of the difference between the 12 and 26-period moving averages. The slower moving average plots the average of the previous MACD line. Once again, from our example above, this would be a 9-period moving average.

This means that we are taking the average of the last 9 periods of the faster MACD line and plotting it as our slower moving average. This smoothens out the original line even more, which gives us a more accurate line.

The histogram simply plots the difference between the fast and slow moving average. If you look at our original chart, you can see that, as the two moving averages separate, the histogram gets bigger.

This is called divergence because the faster moving average is “diverging” or moving away from the slower moving average.

As the moving averages get closer to each other, the histogram gets smaller. This is called convergence because the faster moving average is “converging” or getting closer to the slower moving average.

And that, my friend, is how you get the name, Moving Average Convergence Divergence! Whew, we need to crack our knuckles after that one!

Ok, so now you know what MACD does. Now we’ll show you what MACD can do for YOU.

How to Trade Using MACD

Because there are two moving averages with different “speeds”, the faster one will obviously be quicker to react to price movement than the slower one.

When a new trend occurs, the fast line will react first and eventually cross the slower line. When this “crossover” occurs, and the fast line starts to “diverge” or move away from the slower line, it often indicates that a new trend has formed.

MACD-fast-slow

From the chart above, you can see that the fast line crossed under the slow line and correctly identified a new downtrend. Notice that when the lines crossed, the histogram temporarily disappears.

This is because the difference between the lines at the time of the cross is 0. As the downtrend begins and the fast line diverges away from the slow line, the histogram gets bigger, which is good indication of a strong trend.

Let’s take a look at an example.

MACD-example

In EUR/USD’s 1-hour chart above, the fast line crossed above the slow line while the histogram disappeared. This suggested that the brief downtrend would eventually reverse.

From then, EUR/USD began shooting up as it started a new uptrend. Imagine if you went long after the crossover, you would’ve gained almost 200 pips!

There is one drawback to MACD. Naturally, moving averages tend to lag behind price. After all, it’s just an average of historical prices.

Since the MACD represents moving averages of other moving averages and is smoothed out by another moving average, you can imagine that there is quite a bit of lag. However, MACD is still one of the most favored tools by many traders.

 

 

source: www.babypips.com
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