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Terminology forex : R

Rally

An increase of price after a period of decline.

 

 

 

 

 

  Rate

The price of one currency in terms of another currency.

 

 

 

 

 

 

 

Raw Materials Price Index ( RMPI )

Release Schedule : 8:30AM ( EST ) roughly 30 days after the reporting month
Source of Report : Statistics Canada
Web Address : http://www.statcan.ca/start.html
Address of Release : http://www.statcan.ca/english/Release/index.htm

 

 

 

 

 

  Rectangles

A Rectangle is a method of pattern trading based on a continuation pattern. Continuation patterns also include Ascending Triangles, Descending Triangles, Wedges, Flags, Symmetrical Triangles and Pennants and are essentially technical patterns that are expected to lead to the continuation of an existing trend. Continuation patterns are considered a powerful trading tool as they usually result in extremely low risk trading opportunities and spectacular returns.The rectangle pattern generally reflects a consolidation period, usually of four to six weeks duration. This pattern regularly features well defined support and resistance levels, which are to be distinguished by horizontal lines.Upon breakout the Rectangle is most likely to continue the existing trend, however a failure to do so will deflect the rectangle from a continuation pattern to a reversal pattern leading to a downward trend, this is a relatively easy pattern to spot however as it will show in a minor sideways trend.If the rectangle continues to follow an uptrend, with breakout occurring on the upside then the rectangle is referred to as bullish, is the trend is reversed with the breakout occurring on a downtrend, or continuing in the original trend then the rectangle will be called bearish.

 

 

 

 

 

 

 

 

  Relative Strength Index

Relative Strength Index, sometimes shortened to RSI, is a price oscillator used in technical analysis to show changes in the strength of prices.
he Relative Strength Index is considered a popular tool and is a relatively easy one to interpret. This price following oscillator is depicted as a basic graph and ranges from zero to one hundred.
By far one of the most popular methods of analyzing the Relative Strength Index is to look for an area on the graph that shows a divergence away from the current trend, in particular seeking an area of divergence in which the currency price seems to be aiming to create a new high, but where the Relative Strength Index has as yet failed to reach a level on par with it’s previous price high.
This sort of divergence can often be considered a good indication of an impending price reversal to the current trend and when the RSI does reverse and falls in a down trend that extends below its most recent low, the RSI could then have been considered to have completed what is known as a ‘failure swing’. Such a swing is generally considered to be a confirmation of an impending reversal in the price of the currency in question.

 

 

 

 

 

 

 

 

  Request a New Term

Can’t find what you’re looking for?
That’s not possible, look again. The remote possiblity always exists that we have somehow missed a term or subject that just needs to be covered in Forexpedia. If this is the case, and you have nothing to offer on the subject/term, feel free to make a request below. But wouldn’t it be so cool to start your own article? We definitely want the information to be relevent and concise, but remember, Forexpedia is community driven. There is help if you need it.What that really means is if your stuff is just terrible, you’ll have people to back it up and make it better. Ummm, yea, that’s what that means.Put your request here! It’s easy:Register for a FREE Babypips.com account Log into Babypips.com and then head over to the Forexpedia Main PageUse the Quick Links section to come back to this page, Request for Existence Click the edit tab above, and make your requestThat’s it!And don’t forget to sign your name with the request! Add this to the end of your request: ~~~~. That gets you this: Forexgump 10:07, 8 January 2007 ( CST )Start the list below this line. Please do not edit anything above this line.[example] History of the US Dollar Bill –Forexgump 23:11, 6 November 2006 ( EST )[example] Your article on Gastro-intestinal Gravitational Physics is lacking… –Forexgump[example] What is a Stop Loss? –Forexgump 23:11, 6 November 2006 ( EST )They keep talking about buying or selling on the fix, profit taking after the fix. Euro selling is fix related? Just who is doing these fixes and why are they doing them? What exactly is a fix anyway? [User: Scalplady]Hey Scalpady – You would be better served in the BabyPips Forums with your question. Hop over to the Forums and start a new thread! Watch the feedback roll in! -ForexgumpWho’s next?There are some basic terms used throughout the sit that would be good to explain for completeness: convergence, divergence, consolidation, etc Daraknor 09:14, 14 April 2007 ( CDT )Term Defined -Consolidation definedTerm Defined -Divergence defined Yes, I have only been trading a minute. However, I feel that I want to use the Fibonacci Fan method. But I like to use “entry orders” to do so. What Brokerage companies execute “entry order” efficiently? Many will tell you how to set them but generally don’t execute the order ever or until afer the fact and the market has evolved and you have a different set of variables. -goingforex GoingForex, thanks for the question. You will be better served researching the forums for an answer to your question, and you might even consider starting your own thread. Although creating the term “entry order” is a possibility, I believe you are looking for a more timely response. Thanks! – Forexgump 13:31, 23 April 2007 ( CDT )
What do the terms hawkish and dovish mean? marksfxTerms Defined – hawkish and dovish. Enjoy!–Forexgump 06:08, 1 April 2009 ( UTC )
Shadows – Can anyone tell me what this term means? I have seen it used several times and can not find a definition of it. Thank you.
Term Defined – Shadows defined. PhreakNIK 22:34, 28 July 2009 ( UTC )draw down Term Defined – Drawdown defined. Pipstradamus 18:41, 18 May 2010 ( UTC )Ddinnov- Please can you explain a bit about “Confluence”?Guvernor – “Comdoll”

 

 

 

 

 

 

 

 

 

 

 

Reserve Bank of Australia

The Reserve Bank of Australia’s ( RBA ) main responsibility is monetary policy. Policy decisions are made by the Reserve Bank Board, with the objective of achieving low and stable inflation over the medium term.The Reserve Bank of Australia is the institution responsible for managing Australian currency policies. The Reserve Bank was founded in 1911, but achieved its present form in 1960 when the bank’s function shifted toward regulation and away from commercial banking.The Reserve Bank of Australia, like many central banks, has the power to increase or decrease the money supply in Australia. Unlike the US Federal Reserve, the Reserve Bank of Australia prints and destroys money directly, rather than working with other government institutions. The Reserve Bank also buys and sells treasury bonds to primary traders, which raises money for government operations as well as pumping money into the economy ( or removing an excess of money ) at critical junctures. The Reserve Bank also has the power to regulate nationwide interest rates, as well as to adjust the asset holdings of individual commercial banks, meaning that this Reserve Bank plays a heavy role in Australian financial affairs.
The Reserve Bank of Australia also publishes a number of reports on both a monthly and an annual basis. Traders in the Australian currency market consider these reports extremely accurate and useful in developing an idea of the state of the Australian economy at any point in time.Since trade balances depend on a nation’s money supply, the Reserve Bank of Australia’s actions play a large role in determining the behavior of the Australian currency market, a fact which many foreign exchange traders take advantage of by closely watching the Reserve Bank’s actions and taking appropriate actions.

 

 

 

 

 

 

 

 

 

 

 

  Reserve Requirement Ratio ( RRR )

The reserve requirement ratio ( RRR ) or cash reserve ratio ( CRR ) is the percentage of customer deposits and other liquid assets that commercial banks must store, within it’s own institution or with the central bank.The RRR is set by the central bank to ensure that commercial banks have enough assets to pay its depositors in case of unusually high withdrawals.
Some central banks use RRRs for monetary policy. Decreasing the RRR tends to stimulate economic activity as banks have more assets to loan out to borrowers.
Alternatively, increasing the RRR decreases the money available to potential borrowers, which could lead to a decline in economic activity and higher purchasing power of the money circulating in markets.

 

 

 

 

 

 

 

 

  Retail Sales

Definition:
An estimate of the total sales of goods by all retail establishments in the U.S. ( Sales of services are not included ) for month prior to the release of the report. Data are presented in nominal, or current, dollars, meaning they are not adjusted for inflation. However, the data are adjusted for seasonal, holiday, and trading-day differences between the months of the year.
Background
The report is generated from the receipts provided by participating randomly-sampled retailers. The report is expressed both in millions of dollars and as a percentage change from previous months, and data is broken down into a wide variety of retailer categories. Sales are categorized by type of establishment, not by type of good. Additionally, the report is usually made available with automotive sales excluded from estimates of total spending, since automotive sales vary widely from month to month and tend to skew data.
The use of the Retail Sales report in trading is clear, since the report provides extremely specific data about which industries and commodities consumers are spending most of their money on. However, one major drawback of the report is that it only reflects sale prices without taking into account inflation within the prices of certain volatile industries ( gas and other energies in particular. ) The report also doesn’t provide any data on service industry sales, making the Personal Income and Spending report more useful in this area. Still, traders consider the Retail Sales report one of the most generally useful of the economic indicators, with a wide range of applications for various asset markets.
Importance
Personal consumption expenditures ( PCE ) represent roughly two-thirds of GDP. By monitoring retail sales, policy makers are able to make an assessment of the likely growth of PCE for the current and future quarters.
Source
U.S. Department of Commerce, Bureau of the Census
Frequency
Monthly
Availbility
Advance estimate released during the second week of the month for the immediately preceding month.

 

 

 

 

 

 

 

 

 

 

  Retail Sales – Euro-zone

Release schedule : 9:00 ( GMT ); monthly, one month following the reporting month
Revisions schedule : Data is revised monthly to adjust for previously unavailable data from some member countries
Source of report : Eurostat
Web Adress : http://ec.europa.eu/eurostat
Address of release : http://ec.europa.eu/comm/eurostat
Long-term indicators > Industry, Trade and Services > European Business – Selected indicators for all activities ( NACE divisions ) > Wholesale and retail trade; repair of motor vehicles, motorcycles and personal and household goods > Retail trade, except of motor vehicles and motorcycles; repair of personal and household goods

 

 

 

 

 

 

 

  Retail Sales – United Kingdom

Revision schedule : Quarterly
Source of report : U.K. Office of National Statistics
Web Address : http://www.statistics.gov.uk/
Address of release : http://www.statistics.gov.uk/instantfigures.asp

 

 

 

 

 

 

 

 

 

 

 

 

Retail Trade ( Retail Sales ) – New Zealand

Release Schedule : 22:45 ( GMT ); monthly/quarterly, 2 weeks after each reporting period, with a more in-depth report released every Quarter
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/rts-info-releases.htm

 

 

 

 

 

 

Reverse Repo

A reverse repurchase agreement involves the purchase of securities with the promise to sell them at a higher price at a future date. For the buyer of the securities, it is a way to lend money and get paid with interest in the future. The securities serve as collateral for the loan. Conversely, for the seller of the securities, the reverse repo is a way to borrow money and pay back with interest later on.
Such agreement is a financial instrument which is often used to raise short-term capital. Government securities are often used as collateral for reverse repo agreements.
Central banks typically make use of reverse repo agreements to drain the reserves in the banking system before adding them back later on. For instance, the Fed uses a reverse repo to sell securities in exchange for US dollars in order to mop up the excess liquidity in the markets. In this case, reverse repos could serve as an alternative to tightening monetary policies such as raising interest rates or the reserve requirement.

 

 

 

 

 

 

 

 

 

 

 

  RICS House Price Balance – United Kingdom

Release schedule : 23:30 ( GMT ); Monthly, in the middle of the following month.
Revision schedule : Few or no revisions
Source of report : Royal Institution of Chartered Surveyors ( RICS )
Web Address : http://www.rics.org/
Address of release: http://www.rics.org/Property/Residentialproperty/Residentialpropertymarket/market_surveys.htm

 

 

 

 

 

 

 

 

 

 

 

 

  Rising Wedge

A rising wedge is a common chart pattern in technical analysis. The rising wedge is formed by drawing two ascending trendlines, one representing high prices and one representing low prices for an asset. The slope of the trendline representing the highs is lower than the slope of the trendline representing the lows, indicating that low prices are increasing more rapidly than high prices are. The resulting shape forms a gradually narrowing wedge, giving this pattern its name.Because the trendlines that describe the rising wedge are ascending, rising wedges are occasionally falsely thought of as continuation patterns for an overall upward trend. The seeming upward trend in asset prices invites bullish traders to begin investing in the asset, while bearish traders continue selling off their holdings and maintaining the strong upper line of resistance. ( This is reflected in the smaller slope of the upper trendline in the pattern. ) Since prices refuse to break the upper level of resistance, buying pressure gradually decreases, the lower level of support is broken, and the asset usually enters a strong downward trend. Thus a rising wedge should be taken as a strong sell signal and an indication that a market reversal is imminent

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Risk appetite

Risk appetite is a gauge of how “risk-hungry” traders are. If risk sentiment is up and times are good, risk appetite picks up and trader are more willing to invest in higher-yielding and/or potentially more volatile assets.In the forex market, this normally means that traders are more willing to invest in currencies that have higher interest rates ( i.e. Australian dollar, British pound ), equities and commodities.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Risk Capital

Amount of money a person is willing to lose.

 

 

 

 

 

 

 

 

 

Rollover

Rollover is the interest paid or earned by a trader for holding a position overnight. Since every currency trade involves borrowing one currency to buy another, interest rollover charges are part of FX trading. Interest is paid on the currency that is borrowed, and earned on the one that is bought.For example, let’s say you have a long AUDJPY position. Assuming the AUD has an interest rate of 4.50% while the JPY has an interest rate of 0.10%, you will earn interest on the currency you bought and pay interest on the currency you borrowed. In the case given above, you will be earning 4.50% interest on the AUD minus the 0.10% interest of the JPY.Take note, however, that rollover only happens on positions that are held beyond 5 pm EST. In addition, many retail brokers adjust their rollover rates on a variety of factors like account leverage and interbank lending rates. It would be best to check with your broker for information regarding rollover.

 

 

 

 

 

 

 

 

Round trip

The buying and selling of a specified amount of currency.

 

 

 

 

 

 

 

 

 

 

 

 

Rwanda Rwanda Francs

The currency of Rwanda. Currency code ( RWF )

 

 

 

 

 

 

 

 

 

 

 

 

 

Range

The difference of the highest and lowest price in a given trading period.

 

 

 

 

 

 

 

 

 

  Rate of Change

Rate of change ( ROC ) is an indicator used in technical analysis. The basic logic behind ROC is the same logic that underlies momentum: the change in price levels over time, or the slope of the trendline. However, ROC differs from momentum in the focus traders place on the time period used to calculate ROC, while the value of momentum depends much more on the trendline chosen by the technical analyst than on the time period used.ROC is calculated by taking the current closing price, dividing it by the closing price some x number of periods ago, and multiplying the difference by 100. The resulting value for ROC is expressed as a percentage. The typical value of x is ten, although different results can be obtained by using greater or lesser values.Of special concern to foreign exchange traders is the lack of closing prices in the twenty-four hour forex market. Because of this, the closing price used in calculating ROC is commonly taken to be the closing price of the New York Stock Exchange, as once the NYSE closes, the volume of trading tends to drop off.ROC can be used to generate buy and sell signals in much the same way as momentum. If ROC is rising, short-term buying pressure is indicated; if ROC is falling, short-term selling pressure is indicated.

 

 

 

 

 

 

 

 

 

 

 

 

Recession

The newspaper definition of a recession is when the GDP rate declines by 2 or more consecutive quarters. The problem with this definition is that it makes it more difficult to say whether the economy is in a recession or not. This definition does not take into account other macroeconomic factors like unemployment.Economists say that other factors like industrial production, consumer confidence and capacity utilization should be taken into account when stating whether a recession is in place. Declines in these macroeconomic factors help give a stronger signal that a recession in place.The key economic variable to look at is the GDP rate, as it is a measure of the economic activity of the entire economy. If there is a continuous decline in GDP, it is a strong signal that a recession is in place. Other macroeconomic variables can be looked to support this claim.

 

 

 

 

 

 

 

 

 

 

  Referendum

The process of asking the general public to vote on a political decision. It is also known as a “plebiscite,” or a vote on a ballot question.

 

 

 

 

 

 

 

 

 

 

 

Relative Vigor Index

Definition:
Relative Vigor Index ( RVI ) is a technical indicator used to establish the level of energy, or vigor within the current market. When the market is up ( bull ), the closing price is generally of a higher level than the opening price of the market, with the opposite being true for a down ( bear ) market. By using the Relative Vigor Index to analyze the movements in price level between the open and close of the market, and by comparing this to results gained during subsequent and preceding days, we are able to ascertain the overall vigor of the market as so to better predict the outcome of certain trends.
RVI = ( Close-Open ) / ( High-Low )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Request Term

Have we missed something, or do you feel a new term or subject just needs its own place?
Not a problem! Just add the term below and our staff will review your request. If there’s merit in your request, sit back and wait for an update.

 

 

 

 

 

 

 

 

 

 

 

 

  Reserve Bank of New Zealand

The Reserve Bank of New Zealand is New Zealand’s central bank, and its overall purpose is to maintain the stability and efficiency of the financial system.
The Reserve Bank of New Zealand is the institution responsible for managing New Zealand’s money supply and for preventing inflation or other severe economic problems within New Zealand. The Reserve Bank, established in 1939, differs from other major reserve banks ( including the US Federal Reserve ) in that it is entirely government-owned and centralized, and the Reserve Bank thus takes a much stronger hand than non-centralized reserve banks in regulating monetary activities.The Reserve Bank is directly and solely responsible for printing and destroying New Zealand currency. Since the Reserve Bank is willing to accept even non-legal tender as viable assets ( including severely damaged currency or coins and bills that have been withdrawn from active circulation ), this makes the New Zealand money supply slightly more stable than in some other countries, albeit harder to track precisely.The Reserve Bank also ensures a high measure of control over other New Zealand banks by requiring a quarterly disclosure statement from all banks operating in the country, giving the institution information about the financial health of individual banks as well as detailed data about each bank’s activities. The Reserve Bank also sets the Official Cash Rate ( OCR ), which can be adjusted at eight regular intervals throughout the year, as well as at unscheduled times in the event of an emergency. Due to the Reserve Bank’s policy of lending unlimited amounts of money to individual New Zealand banks at above or below the OCR, no bank can charge an interest rate higher than the OCR without being undercut by Reserve Bank funds, making the OCR an unusually stable interest rate nationwide.

 

 

 

 

 

 

 

 

 

 

 

  Resistance

An estimated price level at which people will sell.

 

 

 

 

 

 

 

 

 

 

 

 

Retail Sales – Canada

Release Schedule : Released mid-month at 8:30AM Eastern Time
Revision Schedule: Monthly ( with the next report )
Source of Report : Statistics Canada
Web Address : http://www.statcan.ca/start.html
Address of Release : http://www.statcan.ca/english/Release/index.htm

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Retail Sales – Japan

Release schedule : 23:50 ( GMT ); monthly, one month after the reporting period
Revisions schedule : Little or no revisions
Source of report : Ministry of Economy, Trade and Industry ( Japan )
Web Address : http://www.meti.go.jp/english/index.html
Address of release : http://www.meti.go.jp/english/statistics/index.html

 

 

 

 

 

 

 

 

 

 

 

 

Revaluation

An increase in price due to central bank activity.

 

 

 

 

 

 

 

 

 

 

 

 

  Reward-to-risk ratio

The reward-to-risk ratio measures a trade’s expected returns against its predetermined risk of loss.
The ratio is computed by dividing the profit that a trade is expected to yield by the loss that the trade may incur.
For instance, let’s say that trader ABC expects to make $100 by buying EUR/USD. If he places his stop loss in such a way that he stands to lose just $25, the trade’s reward to risk ratio is 4:1 ( 100 / 25 ).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Rightmove House Prices Index

Definition: The Rightmove house prices index measures the change in prices of homes for sale based on sellers’ asking prices. Investors use it to gauge the health of the housing industry as rising house prices often indicates a healthy demand for homes.Because it is based on asking prices and not actual selling prices, it tends to have a relatively weaker impact on the markets compared to other housing prices reports.
fequency: Monthly
Availability: It is usually published three weeks into the current month and is the U.K.’s earliest report on housing inflation data.
Source: Rightmove ( http://www.rightmove.co.uk/ )

 

 

 

 

 

 

 

 

 

  Risk

A chance in which an effect will occur. Mainly used as a negative effect.

 

 

 

 

 

 

 

 

 

 

  Risk aversion

Risk aversion refers to when traders unload their positions in higher-yielding assets and move their funds in favor of safe-haven currencies. This normally happens in times of uncertainty and high volatility.In the forex market, currencies who have relatively higher interest rates are regarded as higher-yielding currencies. These are seen as “riskier” assets. Thus, in times of risk aversion, traders tend to unwind their positions in these currencies.In turn, traders end up parking their assets in less risky, “safer” currencies, like the U.S. dollar or the Japanese yen. These currencies are regarded to be safer because of the size of their capital markets and liquidity.

 

 

 

 

 

 

 

 

 

 

 

 

Risk management

The process and ability to limit and eliminate various types of risk.

 

 

 

 

 

 

 

 

 

  Romanian Lei

The currency of Romania. Currency code ( ROL )

 

 

 

 

 

 

 

 

 

 

  Russian Rubles

The currency of Russia. Currency code ( RUR )

 

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
.

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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