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Terminology forex : I

Ian Macfarlane

Macfarlane
Macfarlane
Ian Macfarlane was the Governor of the Reserve Bank of Australia from 1996 to September of 2006.
Governor since 1996, Mr. Macfarlane was one of the longest serving central bankers in the group. Educated at University of Sydney, Mr. Macfarlane worked for the RBA from 1979 up until he was replaced by Glenn Stevens, serving a variety of positions from Head of Research to Deputy Governor.

 

 

 

 

 

Ichimoku Kinko Hyo

Ichimoku Kinko Hyo is an equilibrium chart used in technical analysis. The chart’s name means, roughly, “equilibrium chart at a glance”, which also describes its function: providing information about the equilibrium behavior of an asset with a single look. Ichimoku Kinko Hyo was developed by Goichi Hosoda and released in 1968, although the chart didn’t gain popularity in the West until the 1990s.
Ichimoku Kinko Hyo is composed of five lines. Tenkan-sen averages the highest high and lowest low and is calculated over a fairly short period of time ( seven to nine periods. ) Kijun-sen uses the same equation, but is calculated over twenty-two periods. Chikou Span plots the current closing price a full twenty-two periods behind. Senkou Span A averages Tenkan-sen and Kijun-sen, and is plotted twenty-six periods ahead. Senkou Span B averages the highest high and lowest low over the last forty-four periods, and is plotted twenty-two periods ahead. The space between Senkou Spans A and B is known as the Kumo.Traders use Ichimoku Kinko Hyo to generate a variety of signals for market behavior, based on the interaction of the chart’s lines with the Kumo. Because of the comprehensiveness of the chart, traders consider it to be a very powerful tool for technical analysis. However, foreign exchange traders should be aware of the chart’s drawbacks in forex markets: since forex markets never close, no close prices are generated, and it’s unclear how the Chikou Span should be plotted. Good judgment should therefore be used both in choosing the time periods from which to generate the chart, and in deciding which price should be chosen as a forex market’s close price.

 

 

 

 

 

 

IMF

The International Monetary Fund ( IMF ) is an organization of 186 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world. It oversees the global financial systems of its member countries by monitoring policies that have an impact on exchange rates and the balance of payments. It also offers highly leveraged loans to underdeveloped countries.
The IMF was formed in July 1944 during the UN Monetary and Financial Conference when the delegates agreed on a framework for international economic cooperation. This took place after the infamous Great Depression when countries attempted to save their economies by raising barriers to foreign trade and devaluing their own currencies. As these measures proved to be self-defeating, it became necessary to form an institution that would ensure exchange rate stability and encourage member countries to eliminate trade restrictions. The IMF came into formal existence after its first 29 member countries signed the Articles of Agreement. From then on, the number of IMF member countries have more than quadrupled to 186 countries today.
http://www.imf.org

 

 

 

 

 

 

 

Imports – Australia

Release schedule : 1:30 ( GMT ); monthly, in the fifth week following the reporting month.
Revisions schedule : Monthly
Source of report : Australian Bureau of Statistics
Web Address : http://www.abs.gov.au/
Address of release : http://www.abs.gov.au/ausstats/abs%40.nsf/mf/5368.0

 

 

 

 

 

 

 

Indian Rupees

The currency of India. Currency code ( INR )

 

 

 

 

 

 

Indonesian Rupiahs

The currency of Indonesia. Currency code ( IDR )

 

 

 

 

 

 

Industrial Production and Capacity Utilization

Industrial Production and Capacity Utilization ( IPCU ) is a measure of economic activity, released on a monthly basis by the United States Federal Reserve. The IPCU report for each month contains data for previous months ( for example, June’s report releases information on May ) about the total amount of US industrial production for that month, expressed as a percentage of the gross production for a previous baseline year. The report also gives information about percentage changes from month to month and year to year, as well as a detailed breakdown of production by industry grouping, most broadly for manufacturing, mining and utilities. The data in the report is based on employment records that detail the total hours worked by industrial-sector employees.
The report also includes a measure of capacity utilization, meaning the percentage ratio of actual production to potential production. The report presents data about average capacity over a number of years, a record of percentage change in capacity from month to month, and a breakdown of capacity measures by industry and by stage of completeness ( from crude to finished materials. )
Traders consider the IPCU report important as a gauge for the future performance of assets in the marketplace. Because of this, the report can also function as a “trigger” to increase buying or selling pressure in certain industries. A capacity utilization percentage of 85% or more can also be considered a signal for imminent inflation, but the inherent difficulty of measuring industrial capacity implies that this measure shouldn’t be exclusively relied on to predict market behavior.
Definition: An index designed to measure changes in the level of output in the industrial sector of the economy. The index is grouped by both products ( consumer goods, business equipment, intermediate goods, and materials ) and industry ( manufacturing, mining, and utilities ).
Source: Board of Governors of the Federal Reserve System
Frequency: Monthly
Availability: Preliminary estimate released around the middle of the month for the immediately preceding month. Reason: While the industrial sector of the economy represents only about 20 percent of GDP, because changes in GDP are heavily concentrated in the industrial sector changes in this index provide useful information on the current growth of GDP. The level of capacity utilization in the industrial sector provides information on the overall level of resource utilization in the economy which may in turn provide information on the likely future course of inflation.
The index of Industrial Production is a fixed-weight measure of the physical output of the nation’s factories, mines, and utilities. Manufacturing production, the largest component of the total, can be accurately predicted using total manufacturing hours worked from the employment report. One of the bigger wildcards in this report is utility production, which can be quite volatile due to swings in the weather. Severe hot or cold spells can boost production as increased heating/cooling needs drive utility production up.
In addition to production, this monthly report also provides a measure of capacity utilization. Though the rate of capacity utilization is seen as a critical gauge of the slack available in the economy, the market does not completely trust this measure. Capacity is very difficult to measure, and the Fed essentially assumes that growth in capacity in any given year follows a straight line. One can therefore predict the capacity utilization rate quite accurately based on the assumption for production growth. The 85% mark is seen as a key barrier over which inflationary pressures are generated, but given revisions to these data and the difficulties with capacity measurement, the 85% mark should be viewed cautiously. It would be appropriate to look for corroborating inflation indications from commodity prices and vendor deliveries.

 

 

 

 

 

 

 

Initial Jobless Claims

The Initial Jobless Claims Report is a method of noticing changes in the employment market. This report is therefore an economic indicator, to some extent. It is provided by the Employment and Training Administration of the Department of Labor, and the report comes out for viewing on a weekly basis, each Thursday. The report provides information on the data from the previous week, ending on the Saturday before.The Initial Jobless Claims report provides information on how many individuals have filed for state unemployment benefits during the previous week. This number can be a predictor of what the economy is doing. If there is a significant increase in these claims, it could potentially be pointing to slowing job growth, as unemployment rises. On the other hand, when this number decreases significantly, it can be a sign that the economy is accelerating in job growth and therefore is economically sound. Yet, most investors will only consider this in a four week average, as these factors can be very volatile. Finally, most investors will tell you that a significant number of changes are a move of at least 30,000 claims up or down. Anything less can be merely normal fluctuations.
Those that are interested in learning this information can get the report each Thursday morning at the Department of Labor’s website.

 

 

 

 

 

 

 

Interbank Rates

The foreign exchange rates that large international banks quote to other large international banks. Fat chance you’d ever get access to this rate.
Interest Rate Differential
In the foreign exchange market, the interest rate differential ( IRD ) refers to the difference in interest rates between two similar interest-bearing currencies. In the spot foreign exchange market, this pertains to the difference in interest rates in a pair.
For examle, if the Australian dollar has an interest rate of 4.50% and the Japanese yen has an interest rate of 0.10%, then the interest rate differential between the two is 4.40%.
The IRD is one of the most important factors to consider when engaging in carry trade.

 

 

 

 

 

 

 

Interest Rate Risk

The potential for losses arising from changes in interest rates.

 

 

 

 

 

 

 

International Monetary Fund Special Drawing Rights

The currency of the International Monetary Fund.( IMF ) Currency code ( XDR )

 

 

 

 

 

 

 

Interest Rate Risk

The potential for losses arising from changes in interest rates.

 

 

 

 

 

 

 

 

International Monetary Fund Special Drawing Rights

The currency of the International Monetary Fund.( IMF ) Currency code ( XDR )

 

 

 

 

 

 

 

Inventories – Australia

Release schedule: 1:30 ( GMT ); quarterly, three months after the reported quarter
Source of report: Australian Bureau of Statistics
Web Address: http://www.abs.gov.au/
Address of release: http://www.abs.gov.au/ausstats/abs%40.nsf/mf/5676.0

 

 

 

 

 

 

Inverted Head and Shoulders

An Inverted Head and Shoulders is a reversal pattern consisting of three lows with the Head represented as central low being the lowest peak of the pattern and the flanking peaks as the shoulders.
The inverted head and shoulders represents a decline to a new low and a rally to immediate resistance followed by a second decline to a lower level then a third, more modest decline and rally through resistance.A ‘neckline’ may be drawn through the pattern reaching from the top of one ‘shoulder’ to the other, with the inverted head and shoulders a breakout through this line represents a good buy opportunity whereas with a normal head and shoulders a breakout through this line’s counterpart ( the neckline representing the uptrend ) would indicate a good sell opportunity.
Head and shoulders patterns are considered to be among the most important of all reversal patterns as they are both common and reliable.
Inverted-head-and-shoulders

Inverted-head-and-shoulders

 

 

 

 

 

 

 

 

 

Iranian Rials

The currency of Iran. Currency code ( IRR )

 

 

 

 

 

 

Ireland

Ireland is an island nation located in northwest region of Europe, right beside the United Kingdom. Interestingly, the island itself is split into two, the Republic of Ireland, and Northern Ireland, which is part of the United Kingdom.Ireland uses the euro as its currency, making it part of both the euro zone and the EU.
Economy
The Irish economy is heavily services dependent, focusing primarily on high-tech and knowledge services. Other industries that play an integral part to the Irish economy are pharmaceuticals, food products, computer software, and medical equipment.

Naturally, one if its largest export partners is the United Kingdom, who take up 15% of all exports. First is the United States, who are responsible for 23% of total exports.
Ireland is also part of the PIIGS and was the second nation to receive a bailout from the EU-ECB-IMF Troika to help shore up its banking sector.

 

 

 

 

 

 

ISM Manufacturing Survey

The ISM Manufacturing Survey is used as an economic indicator of the market. It is felt that this survey is very important in determining what the market is likely to do, and it is published by the Institute for Supply Management, on a monthly basis. The report will indicate information from the previous month’s historical data, and is released on the first business day after the close of the month.
The ISM Manufacturing Survey provides details in the manufacturing aspect of the economy, and therefore is considered a strong indictor of the economy’s movement. It is also the very first report that is provided as an economic indicator for the month, therefore it perhaps has more significant attention and benefit than might otherwise be the case. The survey deals specifically with the manufacturing industry in the country. ISM provides a wide range of other reports as well that help to define risk in the market at any given time.

 

 

 

 

 

 

 

Ivey Purchasing Managers Index

A measure of the change in purchases made by corporate executives. Generally used to determine economic growth and measure business optimism. If the optimal economic conditions are predicted, businesses will spend more in order to accommodate future demand for goods and services.

 

 

 

 

 

 

 

Iceland Kronur

The currency of Iceland. Currency code ( ISK )

 

 

 

 

 

 

IFO Busines Climate Index

Definition
The IFO Business Climate Index is a monthly survey that measures the current business conditions of German firms ( manufacturing, construction, wholesale and retail industries ) and their business expectations six months ahead.
The index is based on a on a 7,000 survey replies. Regarding the current business situation, a company is asked to mark their condition as “good,” “satisfactory,” or “poor.” Also, the firms are asked to grade their business expectations as “more favorable,” “unchanged,” or “more unfavorable.” The headline business climate index is derived from the current and expected business conditions results.
A reading above 100 represents a positive business condition and outlook. On the other hand, a reading below 100 indicates a negative sentiment.
Importance
The index is used as a leading indicator of Germany’s economy. Germany comprises about 25% of the Euro zone’s GDP. Given this, the index can also be employed as a principal barometer of the Euro zone’s economic state.
Link: http://www.cesifo-group.de/portal/page/portal/ifoHome/a-winfo/d1index/10indexgsk

 

 

 

 

 

 

 

 

 

Imports

Definition
Imports refer to goods and services purchased from another country. For instance, industrialized countries usually import oil from OPEC countries. The term ‘imports’ also refers to the economic value of all goods and services bought abroad.
Components
Imports are generally composed of agricultural products ( rice, corn, wheat ), fuel ( oil, petroleum ), metals ( gold, silver, copper ), equipment and machinery, and intermediate services ( transportation, banking, shipping ).
Imports contribute to domestic consumption by increasing consumers’ purchases of goods and services. It also adds to domestic investment by enhancing production capabilities with new tools and equipment. Lastly, it contributes to domestic production through an increased supply of raw materials and spare parts.

 

 

 

 

 

 

Importance

A country’s trade balance is affected by its imports. A trade surplus occurs when a country’s imports are less than its exports while a trade deficit occurs when its imports are larger than its exports. If a trade deficit persists, it usually implies that local production is weak since the demand for foreign goods and services is higher than the demand for domestic goods and services. This could translate to weaker employment and eventually lower consumption.

 

 

 

 

 

 

 

 

 

Indirect Quote

An exchange rate quoted as the foreign currency per unit of domestic currency. The domestic currency is always denoted as 1 while the foreign currency is variable.

 

 

 

 

 

 

 

 

Industrial Production – Japan

Release schedule : 23:50 ( GMT ); monthly; one month after the reporting period
Revisions schedule : Final, revised figures come out two weeks after the preliminary report.
Source of report : Ministry of Economy, Trade and Industry ( METI )
WebAddress : http://www.meti.go.jp/english/index.html
Address of release : http://www.meti.go.jp/english/statistics/index.html

 

 

 

 

 

 

 

 

Inflation

Inflation is defined as the rise of the overall prices of goods and services over a certain period in time. This means that, as general level of prices climb, the purchasing power for each unit of currency declines. For example, there is inflation if one dollar can buy two candy bars in 2000 and only one candy bar in 2009. Most economists agree that inflation is caused primarily by the imbalanced growth of money supply with respect to the rate of economic expansion. Other reasons include excessive demand for goods and services and decreased availability of supply during scarcities.
Inflation has good and bad effects depending on the people concerned. For instance, high inflation is helpful to borrowers as it decreases the real value of money they pay to their lenders. Consumers, on the other hand, are obviously hurt by high inflation as it erodes their purchasing power.
In the foreign exchange market, the issue of inflation is very important because it is one of the primary factors central banks consider when determining interest rates. The Federal Reserve, the US’s prime body in determining interest rates, use a report called the Personal Consumption Expenditure as their preferred method to measure inflation while other central banks, such as the European Central Bank, use a report called the Consumer Price Index.
The Consumer Price Index measures inflation by getting the average price of a basket of goods typically bought by a consumer and comparing it with the value of basket of goods in a different time. The resulting percent change is determined as the rate of inflation. The index is usually computed yearly, quarterly or even monthly in some countries.
As you can see, it is the job of central banks to maintain a certain balance in setting interest rates to make sure it doesn’t get too high or low and hurt the economy.
Other related issues with inflation are: disinflation – the fall in the rate of inflation; stagflation – high rate of inflation during a period of stagnant economic growth; hyperinflation – severe increase in the rate of inflation.

 

 

 

 

 

 

 

 

 

 

 

Initial margin

The original deposit of collateral needed to enter in a trade.

 

 

 

 

 

 

 

Interest rates

Definition
A rate which a borrower pays for holding a lender’s money.
Importance
Differences in interest rates affect the relative worth of currencies relative to another.
Market Impact
Interest rates dictate flows of investment. An increase in interest rates in a particular country encourages investment in that country since it offers higher returns. This causes the demand for their currency to rise. As demand for that currency rises, it becomes scarcer and thus more valuable. When central banks change interest rates, the value of their currency relative to other currencies also changes. Countries that undergo interest rate cuts tend to experience a depreciation of their currency.
Nominal versus Real Interest Rates
The nominal interest rate is the rate of return without any adjustments for inflation. The real interest rate is the nominal rate minus the effect of inflation.

 

 

 

 

 

 

 

 

Interest rate parity

The interest rate parity theory helps describe the relationship between foreign exchange rates and interest rates. According to the theory of interest rate parity ( IRP ) the difference in national interest rates for financial securities and derivatives of similar risk and maturities should be equal to the forward rate discount or premium for the foreign currency.
This means that when an investor is choosing between whether to invest in the domestic market or in a foreign market, the returns would be approximately equal, given that the risks and maturities of the securities are similar.
What this means is that differences in national interest rates help set the forward rates at which financial securities are set.

 

 

 

 

 

 

 

 

 

 

 

International Merchandise Trade Canada

Release Schedule : 8:30 AM ( EST ); monthly, on the second week of each month
Revision Schedule: Monthly
Source of Report : Statistics Canada
Web Address : http://www.statcan.ca/start.html
Address of Release : http://www.statcan.ca/english/Release/index.htm

 

 

 

 

 

 

 

 

 

 

 

 

Intraday position

Open positions that are usually closed by the end of the trading da

 

 

 

 

 

 

 

 

Inverted Hammer

A one candle bullish reversal pattern. In a downtrend, the open is lower, then it trades higher, but closes near its open.
Inverted-hammer

Inverted-hammer

 

 

 

 

 

 

 

Investment Funds

Investment management firms manage financial assets and funds of other institutions. They use the currency market to facilitate transactions in foreign securities. Aside from the international equity portfolio of firms, several new forex mutual funds have been created to allow investors to track long-term trends in currencies. Some investors use these funds to help them diversify their portfolios. This can also work as a forex trading strategy as it can be used to hedge currency losses in the spot market, especially in terms of the US dollar. Most investment management firms are able to manage the currency exposures of clients with the aim of generating profits as well as limiting risk. The actual number of these investment funds that exist is small ( relative to banking institutions and commercial traders ). Many investment firms have a large amount of assets under management and thus account for a huge share of daily currency trades.
The foreign exchange market is split into levels of access. The top level is the interbank market, which is made up of the largest investment banking firms. The interbank market accounts for 53% of all the forex transactions. Some smaller investment banks, though, are tiered below this level.

 

 

 

 

 

 

 

 

 

 

Iraq Dinars

The currency of Iraq. Currency code ( IQD )

 

 

 

 

 

 

 

ISM Non-Manufacturing Survey

The ISM Non Manufacturing Survey provides for a detailed look at the economy from a non manufacturing standpoint. ISM, or Institute for Supply Management, provides this survey each month, based on the previous month’s data. The data of the previous month is analyzed and the report is provided on the third business day of the month following its close. The data provided is based on the entire United States data, as a whole.
This survey reports new orders index percentages, as well as employment index percentages. This information is based on a collection of 375 purchasing executives’ surveys from those that are working in the non manufacturing industries throughout the country. The surveys are collected then compared to the previous month’s data to show any change or predictors in the economy. While these surveys are provided based on data supplied by these agents, they are not a definite indicator of the economy. Rather the report should be regarded as one of several tools offered to rate the risks and the market trends happening. ISM provides several other surveys, including ISM Manufacturing Survey for this purpose.vey Purchasing Managers Index ( PMI ) – Canada
Release Schedule : 10:00 AM ( EST ); monthly, on the fourth working day of the following month
Source of Report : Joint Sponsorship between the Purchasing Management Association of Canada and the Richard Ivey School of Business
Web Address : http://iveypmi.uwo.ca/english/welcomeeng.htm
Address of Release : http://iveypmi.uwo.ca/english/historic_data.htm

 

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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Bollinger Bands®

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

Congratulations on making it to the 5th grade! Each time you make it to the next grade you continue to add more and more tools to your trader’s toolbox.

“What’s a trader’s toolbox?” you ask.

Simple!

Let’s compare trading to building a house. You wouldn’t use a hammer on a screw, right? Nor would you use a buzz saw to drive in nails. There’s a proper tool for each situation.

Just like in trading, some trading tools and indicators are best used in particular environments or situations. So, the more tools you have, the better you can adapt to the ever changing market environment.

Or if you want to focus on a few specific trading environments or tools, that’s cool too. It’s good to have a specialist when installing your electricity or plumbing in a house, just like it’s cool to be a Bollinger Band or Moving Average expert.

There are a million different ways to grab some pips!

For this lesson, as you learn about these indicators, think of each as a new tool that you can add to that toolbox of yours.

You might not necessarily use all of these tools, but it’s always nice to have plenty of options, right? You might even find one that you understand and comfortable enough to master on its own. Now, enough about tools already!

Let’s get started!

Bollinger Bands

Bollinger Bands, a chart indicator developed by John Bollinger, are used to measure a market’s volatility.

Basically, this little tool tells us whether the market is quiet or whether the market is LOUD! When the market is quiet, the bands contract and when the market is LOUD, the bands expand.

Notice on the chart below that when price is quiet, the bands are close together. When price moves up, the bands spread apart.

bollinger-band

That’s all there is to it. Yes, we could go on and bore you by going into the history of the Bollinger Band, how it is calculated, the mathematical formulas behind it, and so on and so forth, but we really didn’t feel like typing it all out.

In all honesty, you don’t need to know any of that junk. We think it’s more important that we show you some ways you can apply the Bollinger Bands to your trading.

Note: If you really want to learn about the calculations of a Bollinger Band, then you can go to www.bollingerbands.com.

The Bollinger Bounce

One thing you should know about Bollinger Bands is that price tends to return to the middle of the bands. That is the whole idea behind the Bollinger bounce. By looking at the chart below, can you tell us where the price might go next?

bollinger-resistance-start

If you said down, then you are correct! As you can see, the price settled back down towards the middle area of the bands.

bollinger-resistance-end

What you just saw was a classic Bollinger Bounce. The reason these bounces occur is because Bollinger bands act like dynamic support and resistance levels.

The longer the time frame you are in, the stronger these bands tend to be. Many traders have developed systems that thrive on these bounces and this strategy is best used when the market is ranging and there is no clear trend.

Now let’s look at a way to use Bollinger Bands when the market does trend.

Bollinger Squeeze

The Bollinger Squeeze is pretty self-explanatory. When the bands squeeze together, it usually means that a breakout is getting ready to happen.

If the candles start to break out above the top band, then the move will usually continue to go up. If the candles start to break out below the lower band, then price will usually continue to go down.

bollinger-squeeze-start

Looking at the chart above, you can see the bands squeezing together. The price has just started to break out of the top band. Based on this information, where do you think the price will go?

bollinger-squeeze-end

If you said up, you are correct again!

This is how a typical Bollinger Squeeze works.

This strategy is designed for you to catch a move as early as possible. Setups like these don’t occur every day, but you can probably spot them a few times a week if you are looking at a 15-minute chart.

There are many other things you can do with Bollinger Bands, but these are the 2 most common strategies associated with them. It’s time to put this in your trader’s toolbox before we move on to the next indicator.

source: www.babypips.com
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