Table of Contents
- 1 Gaps
- 2 Common gaps
- 3 Breakaway gaps
- 4 Runaway gaps
- 5 Exhaustion gaps
- 6 Mathematical instruments of the technical analysis
- 7 Moving averages
- 8 Trade signals of the moving averages
- 9 Oscillators
- 10 Stochastics
- 11 MACD
- 12 Momentum
- 13 RSI
- 14 Rate of change (ROC)
- 15 %R of Larry Williams
- 16 Commerce channel index (CCI)
- 17 Bollinger bands
- 18 Parabolic system
- 19 Direct moving index (DMI)
Locating currency by price different from the price of the previous day or other time interval makes gaps in the graphic of the price. Gaps shown on the graphics are normal effect on the market of currency features. Although the currency features can be traded 24 hours a day, the market is physically open during 1/3 from the trade day. For example the biggest market of currency features in the world is Chicago market opened for operation from 7.20 in the morning until 14h Central time of USA.
4 kinds of gaps are known:
- Common gaps
- Breakaway gaps
- Runaway gaps
- Exhaustion gaps
The common gaps have the least meaning for the technical analysis of all kinds of gaps. They are not indications of the beginning of new trend, continue, unfolding or just direction of the movement of the prices unless during very short period of time. The common gaps can start in periods of relative calmness of the market or low-liquid markets. If common gaps show on low-liquid markets for example little before the running out of the timeline of the features contracts they can be ignored. Opening of positions for features ling time before the timeline of their action is decipher for sale on prices of closing and doesn’t show trade activity. It mustn’t be traded on low-liquid markets because the leaving of the market is too expensive and hard. When gaps are formed in usual trade situation they are threat from the position that the gaps must be filled.
The common gaps are not lasting. When the currency feature has price above “high”, they are fast sold, watching the level of the previous “high”-price.
These gaps are fast filled and in few days the prices come back to their new passage. Show up usually on calmness markets with missing trend. There is no continue to them the capacity in the beginning rises up but in few days comes down to its average values.
The breakaway gaps show in the beginning of the new trend after a long period of consolidation. They can also reveal themselves after finishing the forming of some graphic figures characterized ling-termed consolidation. Breakaway gaps mean liveliness of the market emotions and start if the capacity is rising extremely. The traders are tired from the consolidation which rarely brings profits. That’s why the breakaway of the polo sat of slow movement is met with optimism from the wanting profit traders and they don’t care about the price. The outsiders as usual go after the first breakaway. Sooner or later the pessimist has no other way but to join the new movement raising the trade activity.
The breakaway gaps maybe close themselves during the breakaway and during the upsurge. They can hide themselves because of the movement in opposite side.
In situation shown on graphic 6.34 the currency feature is traded some time on the non-trend market in interval of 0.6550 to 0.6690. The gaps in prices between 0.6690 and 0.6730 are sign for leaving the trade channel.
Information sprung up when there is breakaway gap:
- The breakaway gap shows the direction of further movement of the price
- The purpose of the price is unknown
- Growing demand of currency secures resistant movement of big capacity in close future.
From the position of the technical analysis runaway gaps or measurement gaps are separate kind gaps sprung up in the frames of the resistant trend. They are known as measuring gaps because of the power of its willing to show on the half of trend’s existence. Knowing the changing of the price for the time of existence of the current trend and exploitation it during the period after forming the gap can be guessed the level of the purpose of the price. If we consider the speed of movement of the price until and after the finish of the trend for equal, can be also prognosticate the time of finishing of the existence of one trend.
Information sprung up when there are runaway gaps:
- Runaway gaps or measurement gaps show the direction of moving of the market. Like the figures of continue they are confirmation for the activity of the market and the speed of development of the trend.
- Presence of runaway gaps certificate for presence of big trade capacity which is not connected to the approval of the traders from the sprung up trend but connected with the confirmation of the trend-gap that raises the optimism and the income of capitals on the market.
- This is the only kind of gaps which shows the purpose of the price and the time existing of the trend – features which are useful especially for making a strategy for insuring the risk.
Exhaustion gaps can show in the end of the ascending or the falling trend when the trend changes its direction extremely fast. After the breakaway of the trend channel doesn’t come consolidation, the development of the trend as a result of “bull” the movement is very jerky and looks like the showing of measurement gap. Leading out of this the traders locate positions and leave them for the night. On the next day the market starts on price lower than the previous day and there is new gap. If the second gap close itself or doesn’t show at all the trade signals stay the same. The traders mustn’t complain from the insidiousness of the exhaustion gaps. The sudden development of the market wouldn’t spring up if there is information vacuum. It is possible reason to be an event which is still unknown – falling of the government or massive and well-planed intervention of the Central Bank. For getting such information traders should take care by themselves.
Mathematical instruments of the technical analysis
Mathematical instruments of the technical analysis called technical indicators secure more objective idea for the activity of the prices. Apart from that these methods are used for receiving of trade signals as long as the information shows on the graphic of the movement of the market. Main groups technical indicators are:
Moving average quantity of the prices – this is the average value of the chosen interval of the prices for setting the quantity of the days divided on the count of the days. As bigger the count of the days is as more smooth the graphic is. Moving average of the price lighten up the visual look for the activity of the currency at the expense of expelling of daily statistic noises. Moving averages are well known instrument of the technical analysis and are used either by themselves either creating of oscillator.
As it’s known of the example on graphic 6.35 the graphic of the moving averages is smoother than the graphic of the price of the currency. The graphics of the moving averages stays usually in the base of the prices of closing down. The moving averages can be calculated on the average for the day price or for the average values – high“, “low” and price of closedown. We need to notice that the moving averages are more secondary than leading. Their signals start after the relevant trade situation is shown on the graphic of the prices but not earlier.
3 kinds of moving averages are known:
- Simple moving average (SMA)
- Weighted moving average (WMA)
- Exponensional moving average (EMA)
The SMA is sun of chosen value of the price for some count of days divided to the count of these addends. Traders have opportunity to choose the EMA shown on graphic 6.36.
With such concentrating bigger reflection get the sooner prices of closedown. The last one is made by multiplying of the price of the first day of the chosen period with 1, the second day with 2 and etc. so the multiplier of the price of every following day is number of the day in the chosen row of days after the sum of these products is divided to the sum of the numbers of days.
Most sharpened of the known kinds of the moving average is the EMA – graphic 6.37. In addition to the usage of EMA are reported previous prices for the time of the observation of the dynamic of the prices, not the prices in chosen work interval.
Trade signals of the moving averages
SMA is used as a filter of the prices and the time. As a filter of the prices, short-termed moving average smoothes the price of the closedown, or the averages for the day, or the equal to a percent of the interval of the daily prices chosen by the trader.
The convert is moving average of the prices of closedown for short interval of time to which is added or taken a percent (for currency usually it is 2%). The both curves parallel to the graphic of the moving average create a corridor in the limits of which are located most of the fluctuations of the prices. Crossing the histogram in the low end of the corridor in direction up is a signal for purchase and the crossing in the upper end downwards is a signal for sale. As long as the signals generated from the convert take carry the short-timed phenomenon and start repeatedly while the market is working the speed of execution of the needed operations for missing the looses must be very high. The corridor “high-low” works the same way except for that the moving averages are calculated separated for the “high” and “low” prices. It is necessary to notice that during the making of time filter the count of the days can be small so the wrong signals can be missed.
Usually for analysis the traders need several moving averages for different periods of time – as a rule three but they can be more. The usage of long-termed, middle-termed and short periods can be useful for making more complex conscription of signals. Some of the most popular are 4, 9 and 18 days; 5, 20 and 60 days; 7, 21 and 90 days. If the analysis is made using conscription of moving averages the same count of days in every conscription is not obligatory, the important is these numbers to stay as far as it can be separated for missing of wrong signals.
The signal for purchase of combination of two moving averages starts when the graphic of the short-termed moving average crosses the graphic of the long-termed from down upwards. The signal for sale spring up when the long-termed moving average crosses the short-termed from up downwards.
The oscillators are meant to receive signals for springing up of a situation “overbought” – the market is overrated and “oversold” – the market is underrated. The signals of the oscillators are useful in the lowest and the highest parts of their measured scales and are generated because of the missing between the graphics of the price of the analyzed currency and the graphic of the oscillator. Crossing of the zero line if there is one usually creates signals for changing of the direction of moving of the currency. The most popular examples of the main kinds oscillators are: Moving averages closing-distancing (MACD), Momentum and relative strength index (RSI).
The stochastics generate trade signals until showing of trade signals on the graphic of prices. Basic for them is the lookout, according to which during upsurge of the market the prices of closedown strive to the highest price for the day and during the falling of the market to the lowest.
Oscillators contain 2 lines called %K and %D – %K is a tool and %D is a moving average.
Stochastics are counted in percents according to the following formulas:
- %K = [(CCL – L9)/ (H9 – L9)].100
- CCL – current closedown price
- L9 – lowest for the last 9 days
- H9 – highest for the last 9 days
- %D = (H3/ L3).100
- H3 – three-day sum (CCL – L9)
- L3 – three-day sum (K9 – L9)
The graphics are built using the scale from 1 to 100 where as signals for the conditions of the market “overbought” and “oversold” are the indexes correspondently 70% and 30%. The signal for purchase spring up when the stochastic is lower than 10% and for sale – higher than 90% after the development of the graphic of the price. Extra important signals are the signals for closing/distancing of the directions of moving of the graphics of prices and the graphics of oscillators.
Crossing the graphics %D and %K create another group of signals. There are 2 kinds of crossing the graphics:
- Crossing from the left side when the line %K is developing earlier than the line %D
- Crossing from the right side when the line %K is developing later than %D
The oscillator MACD is based on the usage of exponential smooth moving averages. This indicator is combination of the differences of two EPS short and long and third-oscillating on zero level which is a period of time in which MACD is positive or negative.
Extra signals are created using:
- Crossing the MACD with zero line
- Crossing the graphics of the difference of both EPS with the graphic of the third
- Close-separating the directions of moving of prices and the indicator
Signal for purchase is for example crossing the graphic of difference of EPS with the zero line from down upwards and the exceeding of the graphic of the third EPS with the signal line – graphic of the difference.
Oscillator Momentum – this is oscillator used for measuring the change of the level of the price, not its real level. This indicator is calculated as difference between the current price of closedown and the previous price of closedown in chosen period of time.
The formula of Momentum is:
- M = CCP – OCP
- CCP – current closedown price
- OCP – most off-lying closedown price for the chosen period of time
The results that can be positive and negative are brought in the graphic oscillating around the zero line. The extreme positive meanings of the indicator certificate for the conditions “overbought” on the market and the extreme negative – “oversold”.
There can be problems connected to this that to the trade is proposed to choose steppe of overbought and oversold of the market. The simplest that can be tried is to rate the relativity of the current situation comparing it with other historical data and to set the steppe of non-linearity of the extremes as many short-termed fluctuations of the price influence on the size of Momentum. The signals of momentum received when the zero line is reached are always objective. After all from them we must be led only if they match to the current trend.
The indicator RSI is popular oscillator proposed from Wales Wilder. RSI measures the relative changing of the highest and the lowest prices of closedown.
The formula of RSI is:
- RSI = 100 – [100/ (1 + RS)]
- RS – average meaning for X days of the price of closedown which was higher than the previous ones
- X – Count of days
RSI last usually 14 days but soon the reviews for 9 days became popular. The graphic of RSI is built using the scale from 0 to 100%. Levels 30% and 70% are warning signals, and reaching more than 85% and less than 15% is signal for sale or purchase.
Wilder thinks that the strong side of RSI is connected to its difference with the graphic of the price.
Rate of change (ROC)
The indicator ROC is the second version of the oscillator Momentum. The difference between them is that the formula for calculating the ROC contains not deduction but dividing of the most distant price of closedown for chosen period of time of the current price of closedown.
- ROC = (CCP/ OCP).100
- CCP – current closedown price
- OCP – off-lying closedown price
%R of Larry Williams
The indicator %R of Larry Williams is version of the stochastically oscillator. It is changed formula for measuring of the stochastic $K for 10-day period. The graphic “%R of Larry Williams” is build using scale from 0 to 100%. “Bull” signal for sale is reaching level of 80% of the indicator and “Bear” (for purchase) falling to 20%. The interpretation of the indexes is the same as the interpretation of the stochastics.
Commerce channel index (CCI)
The indicator CCI is developed by Donald Lambert is calculated as a difference between the current price of the currency and the average price for the previous period of time. The signal for purchase spring up when the price is above the upper boundary (+100%) and for sale – when it falls bellows the down boundary (-100%)
The indicator “Bollinger bands” is combination of the moving average with the volatility of the currency. The bands are meant to be for signalization of high or low level of volatility. They are built calculating the double standard diversion from the value of the 20-day ППС and placing the points up and down from the graphic of ППС. The surface made by the bands is widening (high volatility) and narrowing (low volatility) envelope. The powerful narrowing is a sign of a low volatility in the present moment and of following extreme stature of the volatility in close future. Extra signal is the making from the graphic of the price a figure called “Double top”. The appearance of the figure above the top band is a signal for sale and under the down one – for purchase.
The indicator parabolic system (SAR) is a stop-loss system based on the data for the price and time. The system was made as a addition to the interpretation of accidental gaps on trend markets. The name of the system is connected to its parabolic character correspondence to the twists of the graphic of the prices. The graphic of the indicator is displayed with dotted lines. When appearing of parable above the graphic of the price must be revealed a position for purchase and bellow the graphic – for sale. The parabolic system can be used together with the oscillators. SAR means stop and reverse. The “stop” position is a direction of new trend. The imported in the system knot of acceleration push the system to follow operatively the change of the prices of currencies. When another breach of the trend happens there is SAR.
Direct moving index (DMI)
The indicator DMI signalize for trend existing on the market. The graphic of the indicator follows the movement of the price in the scale from 0 to 100. Higher the number is more reliable the potential for preservation of the trend is. This indicator is used independently or as filter of the system SAR.
The traders also use commonly in their daily practice and the analysis of the commerce situation combination of technical indicators.