Learning Forex Trading -Part 5 - More Technical Tools

TECHNICAL INDICATORS - MACD

There are many other tools used in technical analysis. As you learn forex trading my advice is to focus on a just and master them really well. You will do just find with your trading. However, it is wise to have an idea of what all the other tools are about. In my case, I learnt them just for the sake of knowledge.

In learning currency trading, I have thought myself how to fish dollars whenever I want to. So as you learn forex trading, give it your all, do everything you can to master just moving averages and Parabolic SAR and come up with your own rules and you will do just fine.

What other technical indicators do others use out of there? If you search google you will find many. I am going to touch on a few more indicators, those I feel can help you and then you are done with technical indicators.

1. MACD - Moving Average Convegence Divergence

MACD is an acronym for Moving Average Convergence Divergence. MACD is a sort of oscillator that can measure momentum and as well as follow or indicate a trend.

When Gerald Appel developed MACD, he did so to trade a 26 and 12-week cycles in the stock market. However, I have discovered a setup that works best for me. So on your charts the default setup parameter is usually 12,26,9. You really don't need details of what these numbers are. All you have to do is set it up on you chart as you can see from this one below. And you are ready to go. My setup is usually 21,55,8. For some reason these parameters work well for me. Check the chart below:



How do I use MACD in my trading?

Some people trade entirely using MACD to generate both sell and buy signals. I use MACD to confirm my trades. On the chart you see a plot of Simple Moving Average 14 and Weighted Moving Average 14 and Parabolic Sar. Below the chart you will find MACD.

In my chart my MACD is represented by the white histogram. When the white histogram moves above the signal red line I wait for the Parabolic Sar to cross over for a buy trade setup. Once that happens, then I am pretty confident in my trade.

I am still learning forex trading. As you learn forex trading, you will realized that the mastery of a few trading tools is all that's necessary to become a highly successful forex trader. If you can focus on Simple Moving Average 14 and Weighted Linear Moving Average 14 (SMA 14 and WLMA 14) and the Parabolic SAR with the MACD to confirm your trading you will do just fine.

That is my way of trading using only 3 technical indicators. I don't need any thing else to make money.

If you are one of those who want to use just MACD to trade, here is what happens.

There are three main ways to use MACD

1. Buy and Sell Signal



This chart above is an hourly chart. See how I labeled the buy and sell signals on the chart. Do you see when the buy and sell signals occur from the MACD? Looking at the charts, you can see that your buy signal occur, when MACD crosses over the signal red line and a sell signal occur when MACD crosses below the signal line. So if you are only going to use MACD that is how you trade.

Look at the chart itself. The Buy and Sell Signals labeled on the charts are those following my Parabolic SAR trading system. Do you see that my signals occur about 5 hours before the MACD signals. So in my case, when I trade using my Parabolic SAR signals, at the time the signals are confirmed by MACD, I add to my trade. So you can see that trading the Parabolic SAR system gives you an edge in the market.

Hope you will take some time to learn forex trading using this simple system.


2. MACD can also be used to indicate trend direction.

MACD will indicate when a trend is up and when the trend is down. When MACD crosses the zero line and becomes positive then there is uptrend and if MACD crosses below the zero line, then the currency pair is in a downtrend. See Chart.




3. Third use of MACD is too indicate when a trend is about to reverse.

When a divergence occur between MACD and Price (see chart), that means the current trend is weakening. There are two kinds of divergences - the bearish and the bullish divergence

- Bearish Divergence - A bearish divergence will occur when prices are making higher highs, but MACD is making lower highs. This is sign that an up trend is weakening. So you can be sure to watch for a sell signal. Once a sell signal occur after a bearish divergence, then you have got a real winning trade.




-Bullish Divergence - A bullish divergence occurs when prices are making lower lows but MACD is making higher lows. This is an indication that the down trend is weakening. You can watch your chart for a buy signal. Once a buy signal occurs after a bullish divergence, you can be sure of a winning trade.





In my opinion Moving Averages, Parabolic Sar and MACD are the only indicators you need to focus on as you learn forex trading. There are many other indicators. If you still want to explore these as you learn forex trading, then check out the next lesson. I will list a number of these indicators. I don't need them and I believe you don't need them either.

Learn Forex Trading - Part 4 - Technical Indicators cont.

More Technical Indicators - Parabolic Sar

In my last post Learn Forex Trading Part 3, I mentioned that I only use 2 techinical indicators on my charts. The Moving Averages (Simple and Weighted), The Parabolic Sar And sometimes MACD (Moving Average Convegence Divergence). See diagram below


In my opinion, using the hourly chart, Parabolic SAR (Stop and Reverse) is very good for pin-pointing a new trend pretty early. So it does offer an excellent buy and sell signal. If your mind is strong enough to just do what the chart is telling you with this indicator you will do just fine. Like I said, in part 3. My stop loss is usually placed just about 5 pips above the Parabolic SAR value at the close of the candle.

Parabolic SAR is an outstanding indicator. It works beautifully well in a trending marketing and can keep you long enough in a market to ride out the trend. However, the Parabolic SAR is very unreliable during a sideways trending market, just as the Moving Average. So most of the time, I stay out of a sideways market. If you can stay away from the market, what I suggest you do is drop down your time frame. In my case, since I am mostly trading from an hourly chart, I would drop the time frame to 5 minutes or 1 minute and the parabolic SAR would work just fine in a sideways market.

As you can see from the chart, the points are pretty clear. If you have taken a short position, the SAR pointts will be above the prices, and the signal to go long will be when prices cross the current SAR point from below. (See chart). Once you have entered a position long or short and your stop loss 5pips below or above SAR value, you will notice that the SAR points will be far enough away from price to even permit some counter trend movement without closing you out. Once the currency pair begins to really trend and move in your favor, SAR points will move with prices. When you notice a that price begins to tighten with the SAR points, then get ready to close your position. Sometimes the trend will continue, sometimes it will reverse and hit your stop loss.



What are the main uses of Parabolic SAR

SAR means Stop and Reverse

As you can see from the chart below:



The sell and buy signal were a perfect example of stop and reverse application. In this case. In both cases, you would have earned a nice profit just by obeying the rules. Close your sell position, when the parabolic SAR went below price and enter a buy trade. As I write, that particular buy trade on the chart moved from 1.4262 to 1.4816, before a reverse SAR signal was indicated. That is a whooping 554 pips in less than 4 days. Your only job would have been to check your charts and adjust your stop loss, until the parabolic SAR changed position in relation to price.


Using Parabolic SAR in conjunction with MACD also helps me to ignore false reversal signals in a trending market. Sometimes, a move will stall in such a way as to cause the SAR point to change position. For example if MACD is indicating a strong downtrend move, you would take only short trades and ignore all long signals. But if MACD is showing a strong uptrend, then, you can take only long trades. So in this case you are able to filter all false reversal signals.

Another use for me as mentioned before is to chose my stop loss. After my trade has been taken, I use the Parabolic SAR value to trail my position. Every hour, I adjust my stop loss, 5 pips below or above the parabolic value.

As you learn forex trading using technical indicators, please make sure you keep it simple. Don't crowd your charts with many indicators. As you can see, my chart is clean and clear. I have just 2 moving averages, the Parabolic SAR and MACD.

I hope this lesson on Parabolic SAR will help you achieve your dreams of becoming a master currency trader.

Learn Forex Trading Part 1-Basic Forex
Learn Forex Trading Part 2 - Technical
Analysis
Learn Forex Trading Part 3 - Technical Indicators

Learn Forex Trading Part 3 -Technical Indicators

Learning Forex trading online will greatly improve your odds for success. So I congratulate you for continuing your forex education.

Technical Indicators:

In my last post :Learn Forex Trading part 2 I gave you a simple system that I use to trade everyday, mentioning just two technical indicators that I use on my charts. Moving Average and Parabolic Sar. Sometimes I add MACD. You will soon see what these means.

I have a chart here to show you how my setup works. Try in on a demo account, stick the rules and you will do just fine.



Do you see where the sell and buy signals appear? The chart is a 1 hour chart of EUR/USD. This is simple if you keep it simple. You can see my moving averages and my parabolic sar on the chart. I entered the trade when price candle moved below the moving averages and the parabolic sar. My stop loss is always placed about 5 pips above the parabolic sar value. Set this up on your chart and back test it. After entering the trade, profit target was hit about 15 hours later. So with this I don't have to be glued to my computers for hours watching the trade unfold. You can do the same.

So what is a Moving Average in relation to technical analysis

Moving Averages (MA) are the most superior trend-following tools available to a market technician. There is no need to go into details on how the moving averages are calculated. Most if not all chart packages comes with this indicators. All you have to do is open your chart and insert this indicators. There are different versions of moving averages. On my chart I make use of two versions, because I have tested them and I feel comfortable with Simple Moving Average 14 and Linear Weighted Moving Average 14. Test different combinations for yourself and find a comfortable pair for yourself. I use this setting on all my charts. It works for me well. Majority of futures traders use exponential moving averages. I tried and tested it, but I was not comfortable with my settings.

There are 5 predominant Simple Moving Averages (SMA)

1. 10 SMA. is mostly used in up and down trends. Sometimes I use it especially in shorter time frames.

2. 20 SMA. is usually the dominant chart, you can use on all time frames. It is also good. But when I tested the 14MA, I loved what I saw. It is between 10 and 20 so it made sense to me and it is working really well. So for me, in place of 20 being the dominant MA on my chart, MA14 is the dominant moving average on my charts.

3. 50 SMA. Institutional traders pay close attention to this Moving Averages. So should refer to it once in a while. However, in my own test, it does no good for me.

4. 100 SMA. I look at this once in a while on a 4 hour chart, when I am planning a swing trade, that is long term trade. But still I did not find it to be of any important use to my trading style.

5. 200 SMA. I can say more than 90% of traders rely on this long term MA. It is very reliable. You can use it on daily charts and your intraday charts to note profit targets, because price almost always bounces off the 200 SMA.

The Currency Markets trend up or down and then sometimes move sideways. As you can see on my chart. When there is a trend the moving average is the most reliable tool you can have on your chart. It keeps you in the trade and helps you maximize your profit in a good trending market like what you see on my chart.

However, when it comes to sideways movement in the market, Moving Averages are useless. As you learn forex trading, here is what you should note about moving averages. When a currency pair in a strong down trend rallies back to retest a declining MA, you can go ahead and sell, provided the price does not cause the parabolic sar to move below price. Again if the pair is in a strong up trend, pull backs to retest the rising MA, without causing the parabolic sar to move above price, then you can confidently buy at that point.

Learning forex trading will take a while, but if you start practicing so far with a demo account, with what i have shared with you does far, you should be making progress already.

Linear Weighted Moving Averages

This is one of the other MA that I have on my chart. Like I said, when I tested various combinations, I found the combination of this MA and the Simple Moving Averages to be just perfect for my system. While the Simple Moving Average gives equal weight to all the values in a particular period, the Linear Weighted Moving Average assigns greater weight to the most recent data.

Continue learning forex trading and you will see your results improve as you practice and practice. You may have a good system, but if you don't learn to stick to the rules, you will become a failure statistics. If you learn your forex trading and come up with your own trading system and you are able to stick to the rules, you will do just fine.


Hope you fine this lessons helps to shorten your forex trading learning curve.
If you got to this page without first reading the first part -learn forex trading basics then go there now. Learn Forex Trading Part 1 Basics

Learn Forex Trading - Part 2 - Technical Analysis

Forex trading education - Technical Analysis

As you learn forex trading, you will soon realize that there are two kinds of traders out there, may be three. There are those traders who learn forex trading focusing mainly on technical analysis, I am one of those. I will explain why shortly. And there are those who learn forex trading focusing mainly on fundamental analysis. And there are those who learn forex trading combining both technical analysis and fundamental analysis. If you came to this lesson directly, then you may want to check Learn Forex Trading Part 1

My market activity is based on technical analysis. In my opinion, technical analysis provides the short-term trader, a solid basis for making intelligent buy and sell decisions. While learning forex trading, I quickly realized that the effect of fundamentals are all reflected on my chart. In my opinion, fundamentals while useful at times, posseses therir greatest value when one is considering investment into forex over a long term basis. Even so, I would rather look at a weekly or monthly chart if I had to trade on a long term basis. But I am fully technical.

Technical analysis reveals proven price patterns, support and resistance, break-outs and break-downs, etc. These are proven tools for a short term trader like myself. Inspite of these, technical setups and charts are just there to give you a general view of the market and to help you assess the odds of a particular trade. Nothing is certain. Charting don't work all the time. At times they fail, even when this happen, it still reveals valuable information to the trader who learn forex trading by listening to what the chart is saying. What I have noticed while learning forex trading is that the charts don't lie.

Before I delve into some of the technical tools you will learn in your forex education, I will like to give you a practical assignment. There are many brokers out there. Open a demo account, so that you can follow me and do what I explain and you will see it all come to play and why you can become a discipline and successful trader in one of the most difficult profession in the world. Don't be scared though.

So go get a demo account. By the way, my broker is FXCM. I like FXCM. Get a demo from them. It takes just about 1 minute to signup for a demo account.

OK, did you get your demo account setup? Great. You are learning forex trading practically now. The technical tools, I will be explaining shortly are those I use on my charts. I am a short term trader, which means I trade intraday. 5 and 15 minute charts. Sometimes, I glance through the hourly chart to see the bigger picture for the day.

On my chart, I have just 3 technical tools:

1: Linear Weighted Moving Average 14

2: Simple Moving Average 14

3: Parabolic Sar

I will be explaining all these and other technical indicators later.

For now login into your demo account. That is your fxcm trading platform.

Step 1: Click on the menu charts - open charts - chose the time frame 5 minutes.

Step 2: Click on the insert and then Add Indicators. A list of indicators will show up.

The first indicator on the list is Simple moving average. Click on parameters and just change the number 10 to 14 and click OK.

Step 3: Repeat Step 2, but this time using Linear Weighted Moving Average.

Step 4: Add the indicator "SAR" Just scroll down the list you will find it. Click on it and click OK.

You are ready to place your first trade. Just watch what is happening with those three indicators on the chart. When price is below all three, you only have to sell. If price is above all three its time to buy.

Practice, watch the demo tutorial. There is alot to learn, but basically, I just gave you my daily trade setup. You will learn forex trading by practicing over and over again on a demo account for at least 3 months, before you venture to trade with your hard earn cash. This setup will not always work, but it does 90% of the time.

So technically what are those indicators and there others? Yes, there are many indicators, but you don't need to know them all, but it pays to at least have some knowledge of these indicators of these technical indicators.

If you completed your practical assignment, it is now clear that technical analysis based on 3 basic principles

1: Price accounts for everything. Price falls and price rises. The reasons for these back and forth movement is not important.

2: Price move in trend

3: History will repeat itself ( Recognizable chart patterns repeat itself)

So as you continue to learn forex trading, note that price movement is the most important element of your technical analysis.

In part 3 of Learn Forex Trading, you will learn more about the technical indicators.

Learn forex trading - Part 1 -Basic forex

To learn forex trading and become a profitable forex trader, you need to master just a few trading tools. I believe that learning forex trading by mastering a few trading tools is all that's necessary to become a highly successful trader. The best forex traders are simple. They learn forex trading by finding tow or three techniques that work consistently. Once they have this forex trading tactics under their belt, they simply implement them over and over again. Repetition in forex trading has value keep this is mind.

What is forex? Why do you want to learn forex trading?

Forex stands for foreign exchange; also known as "fx". Foreign Exchange market is the largest financial market in the world, with a daily volume of over $4 trillion. This is far bigger than the New York Stock Exchange, Nasdaq and futures combined. In a forex trading, you buy one currency while simultaneously selling another.

When you start trading, you will noticed that currencies trade in pairs, like the Euro-US Dollar (EUR/USD) or Pound / US Dollar (GBP/USD). In forex trading there is no centralized exchange . The Forex market is considered an Over-the-Counter (OTC) or 'Interbank' market. All transactions happen via phone or electronic network of banks 24 hours a day starting Sunday A 5 PM ET to Friday 5 PM ET, forex trading begins in Sydney, and moves around the globe as the business day begins, first to Tokyo, London, and New York.

To start trading in forex, all you need is a computer and a high-speed Internet connection and the tools we discuss and share with you on this blog. The cost to trade is now minimal. My broker, offers a micro account you can open starting with $25. This is good because you can use it to test all your skills as you learn forex trading from this site. You can go for a mini account with a minimal start up amount of $300 or a standard account with a minimum of $2000 startup. There are many different brokers out there on the. While you can open these accounts with the minimum required, we advice you to start a micro-account with at least $1000 or a mini account with at least $10,000. That will give you room for testing your tactics as you learn forex trading.

In this first part of learn forex trading, you have learnt a general idea of what forex is. So now that you have chosen to learn forex trading, why do you want to do it? You want to learn forex trading for one reason and one reason only, you want to make money trading. So the question now is how do you make money trading forex?

Here is how you make money trading forex

Trading forex with margin has enabled the little guys like you and me to participate in this huge financial market. Margin trading is a term used for trading with borrowed capital. I will use the example from my broker. Let's say I open a mini account for $300 my require require a margin of $50 to trade with borrowed capital of $10,000. So with $50 I am able to trade as if I got $10,000. So with small amount of capital you can conduct a relatively large transaction quickly and cheaply.

So if I place a trade using just $50 of my initial deposit, this will be known in margin trading as 1lot. If I trade with $100,it will be 2 lots. If I trade with $150 it will be 3 lots. You get the picture.For now, just think of the term "lot" as the minimum amount of currency you have to buy.

Here is an example of what you can make trading forex

Your chart setup is indicating that the British Pound will go up against the US Dollar. You open 1 lot ($10,000) for buying the Pound with a 1% margin at the price of 1.5000 and wait for the exchange rate to climb. This means you now control $10,000 worth of British Pound with $50. Your predictions come true and you decide to sell.
You close the position at 1.5070. You earn 70 pips or about $70. (A pip is the smallest price movement available in a currency). So for an initial capital investment of $50, you have made 120% return. Return equals your $70 profit divided by your $50 you risked to trade.


Learn forex trading, and you could be one of the 10% who trade for a living. If you don't invest time enough to learn forex trading, you will loose your hard earned cash. So take the time to learn forex trading and you will become a master trader.

Open a demo account and trade this account for at least 3 months, before opening a live account.

Learn how to trade forex online

Forex trading online, is a very lucrative way to make money. Tough as the financial markets may be, forex trading can make an ordinary person become financial free. While there is this possibility to make money with forex trading, there is also a substantial risk of loss.

What can you do, to limit your losses while maximizing your profit with forex trading? Learn how to trade forex yourself. There are signal companies out there and there are software for automated trading. In my experience in the last 5 years, only when you learn how to trade forex for yourself then, can you become extremely successful.

As you learn how to trade forex, you are going to determine whether to trade based on technical analysis or fundamental analysis. If you want to become extremely successful in my opinion, focus your learning on technical analysis. Whatever happens fundamentally, will always reflect on the charts.

As you learn how to trade forex online, note simple strategies that you can test and tweak to make your own. Until you make a forex trading strategy your own, it will be difficult to become successful. You can go ahead and open a demo account and start testing various forex trading strategies as you continue your forex trading education.

Read the next post to learn the basics of forex trading.