Single moving averages

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Single moving averages are frequently used as price and time filters. As a price filter, a short-term moving average has to be cleared by the currency closing price, the entire daily range, or a certain percentage (chosen at the discretion of the trader).

The envelope model (See Figure MA4) serves as a price filter. It consists of a short-term (perhaps 5-day) closing price based moving average to which a small percentage (2 percent is suggested for foreign currencies.) are added and substracted. The two winding parallel lines above and below the moving average will create a band bordering most price fluctuations. When the upper band is penetrated, a selling signal occurs. When the lower band is penetrated, a buying signal occurs. Because the signals generated by the envelope model are very short-term and they occur many times against the ongoing direction of the market, speed of execution is paramount. The high-low band is set up the same way, except that the moving average is based on the high and low prices. As a time filter, a short number of days may be used to avoid any false signals.



Figure MA4. An envelope model define the edges of the band. A close above the upper band sends a buying signal and one below the lower band gives a selling signal

Usually traders choose a number of averages to use with a currency. A suggested number is three, as more signals may be available. It may be helpful to use intervals that better encompass short-term, medium-term, and long-term periods, to arrive at a more complex set of signals. Some of the more popular periods are 4, 9, and 18 days; 5, 20, and 60 days; and 7, 21, and 90 days. Unless you focus on a specific combination of moving averages (for instance, 4, 9, and 18 days), the exact number of days for each of the averages is less important, as long as they are spaced far enough apart from each other to avoid insignificant signals.

A buying signal on a two-moving average combination occurs when the shorter term of two consecutive averages intersects the longer one upward. A selling signal occurs when the reverse happens, and the longer of two consecutive averages intersects the shorter one downward.



Oscillators
Oscillators are designed to provide signals regarding overbought and oversold conditions. Their signals are mostly useful at the extremes of their scales and are triggered when a divergence occurs between the price of the underlying currency and the oscillator. Crossing the zero line, when applicable, usually generates direction signals. Examples of the major types of oscillators are moving averages convergence-divergence (MACD), momentum and relative strength index (RSI).



The moving average convergence-divergence (MACD) oscillator, developed by Gerald Appel, is built on exponentially smoothed moving aver ages. The MACD consists of two exponential moving averages that are plotted against the zero line. The zero line represents the times the values of the two moving averages are identical.

In addition to the signals generated by the averages' intersection with the zero line and by divergence, additional signals occur as the shorter average line intersects the longer average line. The buying signal is displayed by an upward crossover, and the selling signal by a downward crossover. (See Figure MACD1.)



Figure MACD1. An example of MACD


Stochastics generate trading signals before they appear in the price itself. Its concept is based on observations that, as the market gets high, the closing prices tend to approach the daily highs; whereas in a bottoming market, the closing prices tend to draw near the daily lows.

The oscillator consists of two lines called %K and %D. Visualize %K as the plotted instrument, and %D as its moving average.

The formulas for calculating the stochastics are:
%K = [(CCL -L9)I(H9 - L9)] * 100, where
CCL = current closing price
L9 - the lowest low of the past 9 days
H9 - the highest high of the past 9 days

and

%D=(H3/L3~) * 100,
where H3 = the three-day sum of (CCL - L9)
L3 = the three-day sum of (H9 - L9)

The resulting lines are plotted on a 1 to 100 scale, with overbought and oversold warning signals at 70 percent and 30 percent, respectively. The buying (bullish reversal) signals occur under 10 percent, and conversely the selling (bearish reversal) signals come into play above 90 percent after the currency turns. (See Figure 5.40.) In addition to these signals, the oscillator-currency price divergence generates significant signals.



Figure S1. An example of the stochastic

The intersection of the %D and %K lines generates further trading signals. There are two types of intersections between the %D and %K lines:
1. The left crossing, when the %K line crosses prior to the peak of the %D line.
2. The right crossing, when the %K line occurs after the peak of the %D line.


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Tags: Forex broker, MetaTrader, Moneybookers
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EUR/USD Gains for 4th Day on Continuing Optimism
September 17th, 2009

The euro is currently showing a small daily gain against the U.S. dollar — its fourth bullish daily candle this week. The series of the better-than-expected or just good macroeconomic reports from the developed economies increases the attractiveness of the euro and other riskier assets as the investment medias. Today EUR/USD set its new highest level since September 25th, 2008. Currently it’s trading near 1.4718.

Building permits annual number rose from 564k to 579k in August. Housing starts increased from 589k to 598k during the same period. The housing starts were expected to gain to 595k.

Initial jobless claims went down from 557k to 545k last week. They declined even faster than the forecast — 561k.

Phildaphia Fed index increased from 4.2 to 14.1 in September. This index indicates the manufacturing activity in the region.

Yesterday, some other important fundamental reports were released in the United States:

August’s CPI was reported with a monthly change at 0.4%, which followed an unchanged value of the consumer price index in July and was slightly better than 0.3% increase in the forecasts.

The preliminary report for the current account balance showed a deficit of $98.8 billion in the second quarter of 2009 — down from $104.5 billion. It’s lowest value of the deficit since Q4 2001. Forecasts by the economic strategists predicted a fall to $92.0 billion.

Net foreign purchases of the U.S. long-term securities were at $15.3 billion in July after $90.2 billion in June. Expected purchases value was near $60 billion.

Industrial production and capacity utilization both improved in August considerably. Industrial production went up by 0.8% after 1.0% gain a month before and 0.6% forecasts. Capacity utilization went up from 69.0% to 69.6%.

Commercial crude oil inventories decreased by 4.7 million barrels compared to the previous week in U.S. Total motor gasoline inventories increased by 0.5 million barrels during the same short period.

Tags: CPI, crude oil inventories, current account balance, housing starts and building permits, industrial production and capacity utilization, initial jobless claims, net foreign purchases, Philadelphia Fed
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Bearish Inside Bar on EUR/USD
September 15th, 2009

EUR/USD is down today even with the optimistic reports from both Eurozone and United States coming out. The currency pair is currently forming an inside bar chart pattern from the technical point of view. I believe we are back to a more “normal” logic where USD is benefiting from good U.S. fundamentals and the growing stock market. EUR/USD is now trading at 1.4586.

Advance retail sales report for August showed 2.7% gain today, which is much better than 0.2% decline in July and considerably better than 1.9% growth predicted by the forecasts.

Producer Price Index (PPI) increased by 1.7% in August, following negative 0.9% reading in July. The average forecasts by the analysts showed 0.8% increase.

Empire State Manufacturing index rose from 12.1 to 18.9 in September — it’s highest reading since late 2007. A growth to 15.0 was expected by the market participants.

Business inventories in U.S. declined by 1% in July after falling by 1.1% a month earlier. They were expected to decline only by 0.8%.

Tags: business inventories, NY Empire State Index, PPI, retail sales
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The Most Used Forex Indicator?
September 14th, 2009

Indicators are great tools that allow forming trading strategies and systems in Forex. They present an easy-to-understand visual form of what’s going on in the market (on the chart, actually) without requiring a trader to perform various rather difficult and time-consuming calculations. Modern trading platforms, like MetaTrader 4, allow traders to create their own indicators but there are several popular standard indicators that re used by the on-line traders on all platforms and with all brokers. I prefer using the chart without the indicators but occasionally I add some of them to confirm my assumptions about the market. I prefer using the simple ones and I try to avoid those of them that I don’t fully understand (like Ichimoku Kinko Hyo). And how about you?