forex #7

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Technical Analysis: Or, How to Predict the
Future by Studying the Past (even if the
"past" was 15 minutes ago).
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As you've probably guessed by now, the reason we touched
upon TECHNICAL analysis in yesterday's lesson, but saved its
DETAILED discussion for today (last, behind the discussion
of FUNDAMENTAL analysis), is twofold:


#1) to ensure you know they're mutually-inclusive. The best
traders don't discount one or the other but understand that
having a grasp on how the fundamentals influence market
sentiment gives him/her an edge over those traders who
don't.


#2) to ensure you know that TECHNICAL analysis is the
easiest and most precise way of trading the FOREX market.


Before we tell you more about technical analysis,
understanding the philosophical assumptions on which
technical analysis is based, and why it's ideally-suited for
the FOREX market, would be a good start:


#1) "The number's don't lie" - all available information and
its impact on traders, and the market, is already reflected
in a currency's price.


#2) Prices move in trends - the foreign exchange market is
mostly composed of trends and is, therefore, a place where
technical analysis can be very effective.


#3) History repeats itself - over time, certain chart
patterns become consistent, predictable and very reliable.
The catch is SEEING them. There's always more than meets the
eye at first glance.


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The Magic Bullet, the Holy Grail,
the Secret Sauce:
==================================


While we're not claiming that you'll become wealthy by
diving deep and hard into FOREX technical analysis,
techniques, methods, etc., we WILL go on the record and say
that all wealthy FOREX traders DO perform technical
analysis.


Why ?


Because, like us, they have unyielding B-E-L-I-E-F in one
simple TRUTH:


*** PRICES MOVE IN TRENDS ***


The traders who don't believe this obviously have no need to
implement a trading methodology on technical analysis. But,
over 100 years of research has shown that those who trade
"with the trend", more often than not, greatly improve their
changes of winning (i.e., making a profitable trade).


Many times finding the prevailing trend will help you become
aware of the overall market direction and offer you better
visibility--especially when shorter-term movements tend to
clutter the picture. And many times following the trend will
bail you out of an initially less than great entry point.


So, how does technical analysis help you to determine what
the trend is and HOW to trade *with it* versus against it?


Okay good question akin and, yes, we'll
answer that, but before we do, let us first make sure you
understand one very IMPORTANT POINT:


Even though, through our courses, we teach you how to use
and read various technical indicators to identify a
long-term trend, spot predictable chart patters and use
certain rules to enter and exit a high-probability trade --
and even though all this involves sound logic, parameters,
proven methods, processes, formulas, data, and research,
these technical indicators, by themselves, are not the Holy
Grail of FOREX trading. But, they're not some passing fad or
hyped-up secret black box either. Beyond the mere rules, the
human element is core to the strategy. It takes discipline
and emotional control to stick with trading following
through the inevitable market ups and downs. Keep in mind
that good technical traders expect ups and downs. They are
planned for in advance.


Okay, so now that you know that we're not claiming technical
analysis is the Magic Bullet of trading (we often get asked,
"Of the indicators you teach us how to use, which ones are
better?" and we reply: NONE - technical indicators should
simply be components of your overall customized /
personalized trading system and not systems in and of
themselves. They are like tools in a tool kit, not the kit
itself!) let's talk about what technical analysis helps you
look for:


The objectives - As a FOREX Technical Trader, your goals
are:


#1) To figure out the price action of the currency pair.
Price is the main concern. If the EUR/USD is at 1.3224 and
goes to 1.3220, then 1.3114, then 1.3010 - the market is in
a down trend. Despite what every technical indicator might
predict, if the trend is down, stay with the trend.
Indicators showing where price will go next or what it
should be doing are useless. A trader need only be concerned
with what the market is doing, not what the market might do.
The price tells you what the market is doing.


#2) To always remember that technical indicators are only
giving you confirmations based on what the market is telling
you. So listen to the market and let it dictate which method
you will use and which tool you will pull out of your bag of
strategies and techniques. For only by listening to the
markets will you ever be able to conquer it successfully!


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Indicators: Their Uses
===========================


Here are just a few of the most popular indicators and their
purposes as they relate to the Currency Markets.


<<< Moving Averages >>>


If you believe in the "trend-is-your-friend" tenet of
technical analysis, moving averages are very helpful. Moving
averages tell the average price at a given point of time
over a defined period of time intervals. They are called
moving because they reflect the latest average, while
adhering to the same time measure.


A weakness of moving averages is that they lag the market,
so they do not necessarily signal a change in trends. To
address this issue, using a shorter period, such as 5 or 10
day moving average, would be more reflective of the recent
price action than the 40 or 200-day moving averages.


Alternatively, moving averages may be used by combining two
averages of distinct time- frames. Whether using 5 and 20-
day MA, or 40 and 200-day MA, buy signals are usually
detected when the shorter-term average crosses above the
longer-term average. Conversely, sell signals are suggested
when the shorter average falls below the longer one.


There are three kinds of mathematically distinct moving
averages (MA): Simple MA; Linearly Weighted MA; and
Exponentially Smoothed. The latter choice is the preferred
one because it assigns greater weight for the most recent
data, and considers data in the entire time period of the
moving average.


<<< MACD >>>


Moving Average Convergence Divergence (MACD): is a more
detailed method of using moving averages to find trading
signals from price charts. Developed by Gerald Appel, the
MACD plots the difference between a 26-day exponential
moving average and a 12-day exponential moving average. A 9-
day moving average is generally used as a trigger line,
meaning when the MACD crosses below this trigger it is a
bearish signal and when it crosses above it, it's a bullish
signal.


As with other studies, traders will look to MACD studies to
provide early signals or divergences between market prices
and a technical indicator. If the MACD turns positive and
makes higher lows while prices are still tanking, this could
be a strong_buy signal. Conversely, if the MACD makes lower
highs while prices are making new highs, this could be a
strong bearish divergence and a sell signal.



<<< Bollinger Bands >>>


The basic interpretation of Bollinger Bands is that prices
tend to stay within the upper and lower bands. The
distinctive characteristic of Bollinger Bands is that the
spacing between the bands varies based on the volatility of
the prices. During periods of extreme currency price changes
(i.e., high volatility), the bands widen to become more
forgiving. During periods of low volatility, the bands
narrow to contain currency prices. The bands are plotted two
standard deviations above and below a simple moving average.
They indicate a "sell" when above the moving average (or
close to the upper band) and a "buy" when below it (or close
to the lower band). The bands are used by some forex traders
in conjunction with other analyses, including RSI, MACD,
CCI, and Rate of Change.


<<< Fibonacci Retracements >>>


Fibonacci retracement levels are a sequence of numbers
discovered by the noted mathematician Leonardo da Pisa
during the twelfth century. These numbers describe cycles
found throughout nature and when applied to technical
analysis can be used to find pullbacks in the currency
market.


Fibonacci retracement involves anticipating changes in
trends as prices near the lines created by the Fibonacci
studies. After a significant price move (either up or down),
prices will often retrace a significant portion (if not all)
of the original move. As prices retrace, support and
resistance levels often occur at or near the Fibonacci
Retracement levels.


In the currency markets, the commonly used sequence of
ratios is 23.6 %, 38.2%, 50% and 61.8%. Fibonacci
retracement levels can easily be displayed by connecting a
trend line from a perceived high point to a perceived low
point. By taking the difference between the high and low,
the user can apply the % ratios to achieve the desired
pullbacks.


<<< RSI >>>


RSI stands for Relative Strength Index. The RSI measures the
markets activity as to whether it is over bought or over
sold. It gives a trader an indication as to which way the
Market is moving. It is important to note, that this is a
leading indicator and thus allows one to see what the market
is ABOUT to do and then act accordingly. The higher the RSI
number, the more over bought it is and conversely the lower
the RSI number, the more over sold it is. It is a great
leading indicator for the micro and macro reversals in the
market. By using an RSI on the 1 minute chart set at a
period of 18 and overlaid on the bottom of your charts tend
to give the best entry signals. This can also be applied to
the 5-minute chart as well. The two significant entry
numbers are 25 and 75.


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Technical Traders use some of these indicators, all of them,
or a combination of them (our course packages tell you HOW
we use various indicators to trade successfully) to confirm
that they really do have a high-probability trade signal. A
consistently winning FOREX trader will use 3 or 4 indicators
to provide a DEFINITIVE signal to get in a trade.


Always remember: missed money is always better than lost
money !


The GOLDEN RULE is this: Technical trading should be
primarily systematic with a touch of "gut check" (see Ed
Seykota's interview excerpt from yesterday's lesson).


Price and time are pivotal at all times. Technical methods
are not based on an analysis of fundamental supply or demand
factors, political news, or a countries economic profile.


Rather, to our pleasure, Technical Trading, gives us a good
handle on how to answer these critical questions:


- How and when to enter the market.
- How many lots to trade at any time.
- How much money to risk on each trade.
- How to exit the trade if it becomes unprofitable.
- How to exit the trade if it becomes profitable.