Fabulous 200 day moving average

200 day moving average (both simple and exponential) is probably the best known and most reliable technical that there has been for a long time. I know that I have said that about RSI and MACD in my previous posts. However, if we talk about determining direction of a trend and key support and resistance levels no other technical indicator could replace 200 moving average. The indicator can be used on all time frames for trend, swing and day trading. This indicator on long term charts helps you to identify long term tendency, on medium term charts (4-8 hour charts) medium tendency and on short term charts (5,15, 30 minutes and 1 hour) short term direction. 

If we talk about direction it is important to check whether 200 moving average is below or above price of a given security. If the indicator is below the price we have a downward tendency. If it is above price the tendency is upwards. If you see that the price has gone below the moving average (on daily charts) you should start trading a given security from the short side only (selling). If (on daily charts) the indicator is above security price you should trade only from long side (buying). 

Most traders like trading 200 simple moving average together with 50 day simple moving average. You would not see a crossover of the two on daily charts, but it quite often happens on hourly charts. This is pretty strong indication of a trend change.

The indicator also works as support and resistance determinant in both bull and bear markets. You would be amazed to see how often it serves as important support and resistance level on various time frames. Combined with price action signals it can be a very powerful tool to trade in range bound market.

One should also remember that all technical indicators are of lagging origin and you should not put too much confidence in them. The same can be said about 200 simple moving average. It does not show you possible future price action in securities. So, you should not forget to use as many technical and fundamental tools as possible. When you find that most of them start pointing the same thing you should react accordingly.

You should also have in mind that practice makes perfect. Therefore, make some demo trades before you do anything on a real account. Hope you will find the indicator useful.

See also:

Moving average

Technical analysis

Disclaimer

Trading financial markets carries a high level of risk, and may not be suitable for all investors. All information on the blog http://trend0.blogspot.com/ is of educational nature and cannot be considered as advice, recommendation or signals to trade in any financial markets.

Trading Relative Strength Index

Last time I wrote a little about using macd in trading and today I want to talk about relative strength index tradin. I have written one post on the subject and in the article I want to share more ideas on the topic. The two above mentioned indicators, together with 200 simple moving average are my favorite technical indicators. Although I consider myself a trader who mostly follows price action, I still like to place a few indicators on my charts. They usually confirm what I see on the charts and sometimes even start giving me signals about coming reversals prior to all other technical, fundamental and price action techniques.  

The thing I would like to start is a very simple idea that might help you to be a successful trader. The idea is that even if you have a medium good trading system and you are able to discipline yourself by following signals of the system you will most often end up having some profit. Of course, you need to back test your system. However, you should remember in this business it is your personality and not your trading system that matters most. And discipline is one of the keys that will open you the gates to success. 

There are hundreds approaches how one can use rsi indicator and to tell the truth you can also create hundreds of your ways to use the indicator. You should however find the best filtering ways to select only the best ones and avoid those that have a high potential for false signals. You will surely notice that the indicator (values 14 or 21) can pick up tops and bottoms pretty well (bottoms when it is below 30 and tops when the indicator above 70). So, if you are a swing or trend trader have this in mind.  

Statistics also shows that your chances for a profitable trade using rsi increases if you don’t simply use overbought or oversold values, but try to wait for divergences on the indicator. Even if you have an indicator showing you that the market is overbought it is only stating the fact about condition of the market. You, however, do not know for sure how much will the market continue rising. So, you do not want to immediately jump into the market and start selling right after it goes above 70 level or buying when it goes below 30 level. 

You want to see more signs of the market slowing down and more signs of reversal. A divergence could be one of the best confirmations of that after you have seen overbought or oversold level reached. Then wait for some important levels to be broken and trade a market reversal. 

Hope this short post was useful. I will update the topic in my future article.

More on the topic:

RSI

MACD

Trading moving average convergence divergence indicator

Moving average 

Technical analysis

Disclaimer

Trading financial markets carries a high level of risk, and may not be suitable for all investors. All information on the blog http://trend0.blogspot.com/ is of educational nature and cannot be considered as advice, recommendation or signals to trade in any financial markets.

Trading moving average convergence divergence indicator

Moving average convergence divergence indicator or simply macd is one of the best technical indicators that are available to all traders. However, the traditional approach and way of using it has become somewhat obsolete and you will have too many bad trades trading the traditional way. Most often it means trading crossovers from below up (above zero line) or from above down (below zero line). Another popular usage of the indicator is to trade divergences. This may be still be a good way to trade, but one has to identify the best trading conditions for trading divergences in financial markets. 

It has become rather risky to trade macd divergences in a trend environment. When securities go in one direction (trending) almost all indicators start giving false signals and you should not follow those. If the market is in a state of a range there are fewer false signals and you can trust more macd divergences and trade accordingly (traditionally). 

So, if you see that there is a prevailing tendency in the market ignore all the technical indicators, no matter how good they are and simply follow the price action or trade against the signals by doing the opposite of what they tell you. How is that? If in a moving upward market (trending) you see that macd indicator is showing divergence (giving signal about a coming reversal) you should ignore it, or wait for the security to go down, form a reversal pattern (such as 123 or inverted head and shoulders, or some candle pattern) and go long again in the direction of the prevailing trend. In this case you would be trading against divergences.

However, let us imagine that a security is in a range (and in most cases it will be as securities stay in ranges 80 to 90 percent of time of a year)! This means we are going to see a lot of sideways action as well as moving from one end of range to another. Then overbought and oversold levels identified by macd divergences work very well and seeing those on your charts help you to trade them accordingly and make profit. 

I genuinely believe that one can trade without any indicators, relying purely on price action and be a profitable trader. However, beginners sometimes need various tools of technical analysis to help them see what is going on in the market and what to do with the information that they have. macd will definitely help you to see that.

Hope the post was useful.

See also:

MACD

RSI

Head and shoulders

Technical analysis

Bollinger bands

Divergence

Moving average

Disclaimer

Trading financial markets carries a high level of risk, and may not be suitable for all investors. All information on the blog http://trend0.blogspot.com/ is of educational nature and cannot be considered as advice, recommendation or signals to trade in any financial markets.

6 key elements of technical analysis

Today I want to talk about importance of technical analysis and various aspects of it that should help you in making profitable trading decisions. I know that most people want to know the fundamentals of economics, finance and see the big picture of how global economy works. However, we should understand that our perception and understanding of what we see in the world may be very subjective and if we make decisions (in trading) based on those subjective assumptions we might end up losing all of our capital. Therefore, I am more for doing technical analysis than I am for doing fundamental analysis. This does not mean you should not study fundamentals. It means you have to compare what you know with price action and follow the market, not your opinion. 


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Disclaimer: All trading involves risk. Only risk capital you’re prepared to lose. Past performance is not an indication of future results. This content is for educational purposes only and is not investment advice. 

Even if your opinion is right about economy you should never forget that there are a lot of powers working in the market and they have enough capital to push the price where they want, no matter what state this or that economy is in at a given moment. This can have a very negative impact on your trades, especially if you are a short term trader. I saw a lot of times how good economic news is accepted very negatively by participants, or market makers I’d better say and prices start falling. So, if you follow your opinion you may be right and lose money, if you follow the market your fundamental opinion might be wrong, but you make money. So, that is a big plus for studying technical analysis. 

When you finish reading the post read other related articles and watch my videos:

RSI

MACD

Moving average

Resistance

1. Resistance and support levels

I personally believe that resistance and support levels are the greatest tools of TA. These are levels where price comes and usually reverses. These levels are extremely important in range trading for when prices are stuck in ranges support and resistance levels are visited a lot of times and they do hold till finally a breakout occurs. One would wait for reversals around these levels and often be able to catch a new swing and go to the other end of the range making nice money. Patience and risk management is the key element here. 

2. Technical indicator

Technical indicators have been developed by a variety of trading specialists to help one in making trading decisions with the help of those indicators most of which are based on moving averages. The most popular indicators are: MACD, RSI, various moving averages, Stochastics, Bollinger Bands, Pivot points, Price channels and many more. I do not want to mention all of them, nor discuss them in detail as I do not believe you should base your trading decisions on those alone. Try to use them with other technical or fundamental analysis tools. My favorite indicators are MACD and RSI. I wrote posts on the usage of both of them as well as moving average indicator.  

3. Price action

It is a movement of a security in some direction and by using tools of technical analysis a trader is often able to guess the direction of price in advance. The application of those tools might be subjective as looking one and the same pattern two traders will probably form a different opinion. If one includes things such as fundamental news releases into one’s analysis his accuracy in predicting price action will grow. Most traders like looking at candlestick patterns, support and resistance levels and other methods to predict direction of price in the nearest future. No one will do it one hundred percent correctly all the time. Learning from mistakes and perfecting one’s methods of analysis should make one’s speculation better. 

4. Trading strategies

There are plenty of trading strategies that purely rely on application of technical analysis. If you visit sites like Forex factory, Babypips, dailyfx and many more you will find a lot of free trading strategies that are based on TA. Most are based on the application of technical indicators, some on breakout of support and resistance levels, others on news trading and many more. If you are a newbie you can visit one of the above mentioned sites and back test some of the strategies, which you will like most. 

5. Chart patterns

Those that like trading swings or trends that last longer than a week will often wait for developing chart patterns that would indicate a continuation of an existing trend, show a possibility of a break out of a current chart pattern, show places of a possible reversal and many more. The most famous chart patterns are: triangles, head and shoulders, inverted head and shoulders, wedges and rectangles. Some traders rely purely on those patterns while making their trading decisions and make big money in financial markets. One of them is Dan Zanger who made millions in stock market when it experienced dot.com bubble. He also pays much attention to volume, which is not very important if you are a Forex trader for you cannot know exact volumes if you are trading currencies. It is important if you are trading stocks though. 

6. Trends and swings

Predicting long term trends and swings is probably one of the best things that technical analysis can help you to do in trading securities. We know that securities tend to stay in ranges for a long time. Some say that the ratio is ten to one. It means that securities could be in ranges for about ten months in ranges a year and only two months trend. But if one wants to make consistent profits, one should also learn how to identify an emerging trend and trade in the direction of it. One of the best ways to do it is to identify the limits of a range (support and resistance levels) that a security is in at a given period of time and wait for those limits to be broken. That’s how a lot of traders of the past and present made millions of dollars. They also kept building a line of positions after the breakout and would exit all of them when they saw the slightest sign of reversal.

That much information about technical analysis. I hope to expand the post and add more information on the topic in the nearest future. 

Disclaimer

Trading financial markets carries a high level of risk, and may not be suitable for all investors. All information on the blog is of educational nature and cannot be considered as advice, recommendation or signals to trade in any financial markets.