Forex Technical Analysis by Peter Vincent

8/17/2019 Forex Technical Analysis by Peter Vincent

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Technical nalysis

By eter Vincent

I will try to explain the concepts of each indicator in Plain English and include exampleswhere possible.

No indicator is 100% accurate but by the use of several at the same time we may be ableto eliminate many False signals.

We will start with the basics and work our way up to the more complex

indicators.

1. by MPFX

The basis for drawing trend lines onto charts is probably one of the most basic to do andmaster, yet it is one of the more powerful and reliable indicators used to determine a change intrend.

Trend lines can be applied to many different indicators but for the reference of this article we will

use closing price data. This is the most common data used.

We will discuss the other uses at a latter stage.

Use the list below to navigate or simply scroll down.

1. What are trend lines and how to draw them !2. Support lines.3. Resistance lines

4. What to look for / Breakout's


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Trend lines

When viewing mostcharts a pattern ofthe price formationis usually visible to the naked eye. Thispattern is called atrend and thesetrends have three

distinct patterns.

UP TREND :Prices increasing

DOWNTREND: Prices decreasing

HOLDING OR

FLAT LINE :Prices stagnant orsmall trading range.

A trend line isbasically a linedrawn joiningconsecutive lowsor highs in a trendpattern.

Draw a lineconnecting thelowest points on achart in an up

trend.

Draw a lineconnecting thehighest points on a

chart in a downtrend.

Draw BOTH highsand lows for a

holding pattern

Note Rising

volumes on lead

up to Breakout

An Up trend with trend line drawn in

A down trend with trend line drawn in

Holding pattern with BOTH lines drawn in

TOP


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Support Line

When we draw a line joining all the lows of aprice pattern togetherthe line is called aSupport Line.

These lines are a lowpoint on the chart on

which the pricebouncesoff consistently whenreached.

Many traders elect toBUY when the pricereaches this point.

It is our belief that the

market likes to testSupport lines morethan once and we look

for BUY signals after asecond or thirdtesting of this line.

If a support line isbroken then the currenttrend is said to bebroken or in a DownTrend and the marketwill look for a lowerprice to set up a new support level.

TOP

Support line

You will hear comments about support levels consistently on the chatrooms and in editorials.

These levels ARE very powerful and SHOULD bemonitored diligently when reached.


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Resistance

lines

When we draw a line joining all the tops of aprice pattern togetherthe line is called aResistance Line.

It is basically the exactopposite of the support,it is a series of highs ona chart where themarket continuallyrejects the price thus

not allowing it to go anyhigher.

Many traders elect toSELL when the pricereaches this point.

It is our belief that themarket likes to testResistance linesmore than once andwe look for SELLsignals after a secondor third testing of thisline.

The same applies forresistance in that it is apowerful level andone SHOULD thinkseriously about taking

profit at this level.

Some traders like tosell small parcels toaverage out their price

paid and leave the restin hope of greatergains.

Resistance line is drawn in RED.

Support in Green

TOP


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What to look

for! Breakouts

We have nowestablished what aretrend lines and how todraw them. When oneof theses lines isbreached is called aBreakout.

If a breakout occurson a Resistance linemany Trader's willclass this as BUYsignal and actaccordingly.

If a breakout occurson a Support line

many Traders willclass it as a SELL signal an actaccordingly.

Please note how theOLD Support lineNOW becomes theNEW Resistance line

Resistance Broken


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Note Rising

Volumes on

Breakout

TOP Resistance Broken

Support Broken

From time to time there will be FALSE signals given.

This is why it is important to WAIT FOR CONFIRMATION of a trend reversal or breakout.

It is at this point we need to add other indicators to help with our Analysis.


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2. by MPFX You should now have a basic understanding of Trend Lines and their workings from our first

chapter. In this chapter we will discuss some of the patterns that form on the charts that help give

a further indication of an impending Trend Reversal. Once again some of the patterns about to bediscussed are very powerful and SHOULD be respected!

Use the list below to navigate or simply scroll down.

Head & Shoulder Patterns

Inverse Head & Shoulder Pattern

Double Tops

Double Bottoms

Rounded Top / Saucers

Rounded Bottoms / Saucers and Cups

Triangles

Flags / Pennants / Wedges


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Head &Shoulder

Pattern

The Head &Shoulder Patternhas claim tobeing one of themostreliable of all

chart patterns. Itis usually formedat the end of anupward trend ormarket rally and

acts as a SELLsignal.

There are fourmain

components thatmake up a H&Spattern and they

are :

The LeftShoulder

The Head

The RightShoulder

The Neckline.

The LeftShoulder - Themarket looks totest higher pricelevels. IncreasingVolumes.Followed byretracement toneckline.

The Head -Market againlooks to test

higher groundand succeeds with settinga higher pricethat was set bythe LeftShoulder. LargeVolumesFollowed byretracement toneckline.


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The Right

Shoulder - Onceagain the marketlooks to testhigherground but thistime fails toachieve the highprice set byHead. Reducing

Volumes. Againfollowed byretracement to

neckline only thistime there is agood chance ofthe Necklinebeingviolated and themarket MAY lookto test Lowerground.

The Neckline -Is a line that isdrawnconnectingconsecutivelows. It is a linewhere the price

bounces off andrefuses to gobelow. It isbasically thesame as asupport line

Most traders whoare familiar withthis patternwould try to

liquidate at thetop of the Heador as it started toretrace towardsthe Neckline.

If you are stillholding a stock

during the RightShoulder stage itmay be your lastchance toliquidate beforethe price testslower ground.

I advise that youlook to liquidateat the top of theRight Shoulder.


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InverseHead &

Shoulder

Pattern

This pattern isidentical to theH&S discussed

above except itoccurs atthe end of adownward trend ormarket sell off. It ismade up of thesamefour componentsonly this time theyare acting inreverse and thus give a Buy signal.

The Left Shoulder -The market looksto test lower pricelevels. Decreasing

Volumes. Followedby test of Neckline.

The Head - Marketagain looks to test

lower ground andsucceeds withsetting a higherprice that was set

by the LeftShoulder. Steadyto slightlyincreasingVolumes. Followedby test of Neckline.

The RightShoulder - Onceagain the marketlooks to test lowerground but thistime fails to

achieve the lowprice set byHead. IncreasingVolumes. Againfollowed by test ofthe neckline onlythis time there is agood chance of theNeckline beingviolated andthe market MAYlook to test Higherground.

Please note volumes rising.


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The Neckline - Is a

line that is drawnconnectingconsecutive Highs.It is a line wherethe price bouncesoff and refuses anyHigher. It isbasically the sameas a Resistance

Line

Again most traderswho are familiarwith this patternwould try to Buy atthe bottom of thehead but it is asafer way to tradeif you wait tillconfirmation thatthe Right Shoulderhas formed and is

looking to test theNeckline onceagain.

Where you decideto take your

position is a matterof personalpreference and riskadversity.

TOP


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Double Tops

This is another powerful patternthat MAY indicate that the marketis looking to test Lower levels.

It occurs at the end of a upwardtrend or market rally.

Double tops basically tell us that

the market has tested a price levelon two occasions and on bothtimes refused to go higher.

They can also come in the form oftriple and quadruple tops.

Volumes on the second top shouldbe lower than the first top.

If you hold a stock that exhibits adouble top be ready to liquidate asthere is a good chance the marketwill go lower.

TIP

Bar and Candle Charts will give

you a better example of double

tops than line charts.

Examples of Double and Triple Tops:


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TOP


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Double

Bottoms

Double bottoms are

identical to double topsexcept they work in theopposite way and thuscreate a Buy signal.

Double bottomsbasically tell us that themarket has tested aprice level on twooccasions and on bothtimes refused to goLower.

They can also come inthe form of triple andquadruple bottoms.

Volumes on the secondbottom should beGreater than the firstbottom.

Double bottoms cangive an excellent Buysignal and mostTechnical Traders would

act on such a sign.

TOP

Examples of Double Bottoms :

Note Dramatic rise in volumes on second bottom


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Rounded Top /

Saucers

The formation of arounded top on a chart isa good indication that themarket will look to testLower ground soon andthus giving us a Sellsignal.

It can also be called asaucer or distributioncurve and is seen at theend of an upward trend. Itshows the market isrunning out of steam andcannot achieve newhighs.

Volumes will start toreduce as the pricereaches it's peak andincrease as the pricestarts to fall.

Most experiencedTraders would note thisand exit their position.

TOP

Some example of Rounded Tops:


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Rounded

Bottoms

This formation has thesame characteristics asa rounded top only thistime it works in theopposite way andcreates a BUY signal.Rounded bottoms aresometimes calledSaucers or the

Accumulation Period.

All of these patternsindicate that thedownward trend isrunning out ofsteam and the marketis looking to test higherground once again.

Most experiencedtraders would belooking to positionthemselves in thisaccumulation period, itis called theaccumulation stage asthat is exactly what ishappening, traders areaccumulating shares.

A further extension ofthe rounded bottom is aformation called a Cup.It is basically acompleted roundedbottom with a smallerrounded bottomformed on the righthand side thus givingthe appearance of a

handle for the cup.

Volume should be onthe increase as thebottom starts to climb

upward.

There should be evenlarger volumes againduring the Handlestage.

Below are examples of rounded bottoms and cups:


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The Handle is maybeour last chance to takea position before themarket tests higherground.

TOP


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Triangles

Triangles and wedgesare probably the mostfrequently occurringpattern to form onthe charts and can givea possible earlyindication of a trendreversal.

As they occur sofrequently they are notas reliable as somepatterns previouslydiscussed but are still avery useful indicator forthe Technical Trader.

Drawing Triangles ontocharts is basically justdrawing BOTH supportand resistance lines at

the same time.

They can be foundnearly anywhere on achart. Sometimes anentire up trend ordowntrend may bemade up of lots of littletriangles.

The two main types oftriangles that can befound are:

SymmetricalTriangles and RightAngled Triangles:

SymmetricalTriangles - Theseoccur when the price islocked into a reducingtrading range. Bothsupport and resistancelines meet in a point.

The lines are said to bein Convergence.Volumes slowly reduceas the price nears thepoint of the triangle andthen on breakout surgeconsiderably.

Below are examples of triangles :


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As Traders we are

looking for thisbreakout and wouldeither buy orsell according to thedirection of thebreakout.

Please remember thatfalse are common with

this type of pattern.

Right Angled Triangles- Are similar tosymmetrical trianglebut instead one of thelines drawn will eitherhave a flat top or flat

bottom and is drawnnear perfectlyhorizontal.

These triangles areprobably more accuratethan all others and mayalso indicate whichway the price couldbreak.

Again extreme cautionis needed when usingtriangles as they DOgenerate false signals.


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FlagsPennants

Wedges

Flags, pennants andwedges occur on bothup and down trendsand indicate themarket is reassessing

the share price ormore simply taking abreather.

They are more often

than not formed at thehalfway stage of atrend.

They are drawn ontocharts by drawing bothsupport andresistance lines

simultaneously.

Once drawn theyshould take on theappearance as theirnames imply. I.e. AFlag looks like a Flag

A basic rule to follow

is ' If a Flag, Pennantor Wedge forms inan up or down trend,the trend USUALLYcontinues on thesame path'. I.e.An up trendcontinues Up

.

Below are some examples :


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If holding a stock andone of these patternsforms on the chart it isa signal for cautionand a breach of eitherthe support orresistance should

be acted upon


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As you can seeWedges andPennants are verysimilar in appearancebut in essence asTraders we are onlyinterested in whichway they will break as

opposed to what tocall them.

FOOTNOTE:

Be Warned.. ALL of the above mentioned in this chapter

CAN and WILL give False buy and sell signals.

It is at the Traders discretion whether to act on any of these signals.

It is my recommendation that diligent monitoring should be applied if you

are holding a stock that exhibits ANY of these patterns mentioned.

TOP


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BY MPFX BY MPFX

When looking at a chart we have the option to view the price formations in four main styles, these are: Line, BaCandle and Point and Figure. All of these have their strengths and weaknesses and which style you choose willbe a matter of personal preference.

I personally elect to use three of the four types with point and figure the one I never use. This works for me butthere are many Technical Traders out there who trade with great success using only P&F so as already stated

this really is a personal choice that you will have to make.

The line chartis the one mostof us wouldhave seenmany timesbefore and isusually plottedusing closing

price data.

This chart isgood forvisualizing the

overall trend ofa stock and onsome chartingprograms it willallow you tosee more dataover a longertime span.

It's use islimited as it isbasically what Icall a onedimensionalchart as it usesonly one formof data.

Good forglancing, butnot foranalyzing.

TOP


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Bar charts are probably themost widely used by traders

and not only give us theclosing price but also thehigh, low and openingprices.

As traders we need to knowas much as possible about astock and its movementsand these bars are the

perfect tool for the job.

With a single glance at oneof these bars we can get afeel for how investors tradedthis stock for the day andtheir general sentiment

towards it.


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Small bars ( or bodies as

they are Technically called )are a sign the market maybeconsolidating its position orthinking about its nest move.

Long bodies could indicatethe market is again on the

move and looking to testnew levels.


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Some charting packages willonly show the close on thebar, many traders elect to

use this style with greatsuccess. Some say theopening price does not givea true indication of marketsentiment and choose toignore it.

There is a marked differencewhen drawing trend lines ona line chart compared to abar chart. With a bar chartyou get the entire tradingrange and a trend line canbe drawn using theseranges as opposed to only

using closing price data on aline chart. To make thismore clear please refer todiagrams opposite.

These two charts areidentical except one is a linechart and one is a bar. Thetrend lines drawn in are thesame for both charts basedon the bar chart only.


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Candle stickcharting wasdeveloped by theJapanese severalcenturies agoand hasundergone aresurgence inpopularity inrecent times. This

form of chart is byfar my personalfavorite and Iusually use itexclusively.

Although morecomplex tounderstand, oncemastered, candlecharts can giveyou the bestoverall view of

market sentiment.

In this section Iwill give you abrief summary ofcandles but thepurchase of abook dedicated tocandle chartingshould be a mustfor anyoneserious aboutdeveloping their

charting skills.

Candles aresimilar to barcharts in that they

show all four datacomponents (open , close, highand low ) but thatis where thesimilarities end.

Candle chartsuse rectangularboxes that join

the open andclosing pricestogether, and usevertical thinnerlines to define thetrading range.The boxes are

called the ' RealBody ' and thethin trading rangeline are called the' wicks or shadow


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If the closingprice is higher than the openingprice the body willbe white, if theclosing price islower than the

opening price thebody will beblack.

Opposite is abasic list ofcommon candlestick formations.

A = Open/closethe same. largetrading range.

B = Open/closethe same. smalltrading range.

C = Open/closethe same. notrading range

D = Open closethe same. Markettested higherlevels but failedto close any

higher than open.

E = Open closethe same. Markettested lowerlevels but failedto close lowerthan open.

F = Doji withmarket testinghigher levels butrefusing to close

above open. Alsoknown as a 'Hammer ". Theappearance of ahammer at the

top of a trendcould suggestlower prices mayfollow. Bearishsign.

The correct term for a line that represents a price that opened and closed at identiclevels is ' Doji '


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G = Doji withmarket testinglower levels butrefusing to closebelow open. Alsoknown asHammer. The

appearance of ahammer at thebottom of a trend

could suggesthigher prices mayfollow. Bullishsign.

H = Hammer withclose higher thanopen. Bullish at

bottom

I = Hammer withclose lower thanopen. Bullish at

bottom.

J = Hammer withclose higher thanopen. Bearish at

top.

K = Hammer withclose lower thanopen. Bearish attop.

Please note thatHammers arealso referred toas ' umbrellalines ".

L & M = Both ofthese are knownas spinning tops.They representsmall tradingranges and areimportant in somecandle chart

patterns. Againwhere they occuris of the up mostimportance.


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Moving Averageshave beenaround for many

centuries andhelps the traderto try andeliminate some ofthe volatility thatis associated withstock prices.There are three

main types ofmovingaverages:Simple,

Exponential andWeighted.

I personally useonly Simple M/As

for my trading.This suits mytrading style andall examples

shown here arebased on this.

I suggest that youexperiment withall 3 on the samestock to see howall three behave

just that little bitdifferently.

Moving averages

are basically the

share pricesmoothed outover a set timeframe. They arecalculated byadding all theclosing pricestogether for a setnumber of daysand then dividingthis total by that

set number ofdays. So for a 20day m/a we usethe last 20 daysof data. As newdata becomesavailable theearliest entry isreplaced with thelatest entry thuskeeping our 20day total intact.

By MPFX By MPFX

The four charts below are all of the same stock with only the time frames changed onthe m/a.

The longer the time frame the less false signals.


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As most chartingpackagesautomaticallyconstruct all threetypes of movingaverages Ibelieve that time

is better spenthere explaininghow to trade

using them asopposed to theirhow they aremathematicalmade up.

The first andmost basic

method for theuse of m/a's is towait till the priceof the stockcrosses over the

m/a.

This works asboth a buy andsell signal and isone of the mostwidely usedmethods.

The key to thismethod is thetime frame. Thebasic rule is the

longer the timeframe the lessfalse signals.This is fine but

with this you alsoget the longer thetime frame thelater the buy orsell signal.

Day traders andshort termspeculative

traders may electfor shorter timespans than a longterm, morecautious trader.Ranges from 9days to 24months can be

used. The mostcommon used bytraders would be9, 20, 25, 30, 50,75, and 100

days.


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I advise that yourun tests on astock you arefamiliar with,changing the m/atime frame to seethe differences in

entry and exitlevels.

As we havealreadydiscussed trendlines we can nowapply themtogether with am/a on the samechart.

We now howhave twoindicators givingus signals.

Sell Signal = 50m/a crossed tothe downside andsupport line has

been broken.

Buy Signal = 50m/a crossed toupside andresistance linehas been broken.

Interesting tonote that the50ma gave a sellsignal before thesupport wasbroken but gavea buy signal afterthe resistance

was broken.

Above and below are the same stock with only five days added to both m/a's in the

one below. It is interesting to note that such a small change can effect the timing of

the signals.


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The secondmethod for theuse of m/a's is to

apply MultipleMoving Averages.

This is thepreferred method

by many tradersand the method Ipersonally electto use.

It involves theuse two or more

moving averagesat the same timewhich are set atdifferent timesspans.

When the movingaverages crosseach other, eithera buy or sellsignal isgenerated.

When the fastermoving average (25ma ) crossesabove a slowermoving average (50ma ) it isclassed as a Buysignal.

When the fastermoving averagecrosses belowthe slower

moving average itis classed as aSell signal.

Once again thetime frames usedhave a greatimpact on wherethe signals aregenerated on the

charts.

Below are all the same stock with a moving average added each time. It is of PBL

daily.


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I advise runningnumerous testsadjusting the timeframes on bothm/a's. Make sureyou use the samestock for thetests. Thismethod is by farthe best way totruly understandmoving averagesand will allow youdevelop your ownset of tradingcriteria.

Some traders liketo use up to 6moving averagesat a timebelieving thatwhen all theaverages

converge to thesame spot on thechart a change oftrend is verynear.

As you can seefrom charts

opposite, by thetime we use fourm/a's the chartbegins to lookvery busy. Thismethod definitelyits merits as thelines convergingis sometimes thefirst indictor to getthe attention ofthe TechnicalTrader and is a

sign that thisstock should beplaced in the 'watch closelybasket '.


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In summary Iwould like toadvise that thebest way to gaina realunderstanding ofmoving averagesis to run tests.Please keep inmind that onceyou have testedthe ma's on theone stock andyou arecomfortable withthe settings youhave chosen, trytesting thosesettings on at

least 50 othersstocks to see ifthey still show thesame results.The more timespent testing, themore comfortableyou will be whenmaking yourtrading decisions.

In closing I haveincluded a chart

opposite with thesettings I usewhen trading. It isof PBL and is a

current chart. Ihave included allsignals that arerelevant thathave beendiscussed so far.PLEASE do not

just copy mysettings and take

them as gospel.This works for meand may not be

suitable for you,PLUS it will notaid in your owndevelopment as atrader, pleasetake the time torun the tests, youwill be more thanrewarded in theend.


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MACD indicators are yet afurther extension of themoving average theory.They are part of theMomentum indicatorfamily.

MACD simply stands forMoving Average

Convergence Divergence.

The most common formused by traders is theMACD Histogram. It is

constructed by measuringthe convergence and thedivergence of two movingaverages.

The most widely used timeframe is a 12,26,9 macd.

The 12 and 26 ma's aredivided and plotted as theRed line, the 9 ma isplotted as the blue line.

A horizontal line is drawnand is used as the pointwhen these two movingaverages are at the exactsame level. ( The 12,26macd crosses the 9 ma)This is called the

Equilibrium Line .

A dotted line is usuallyadded which representsthe zero line.

Bars are used as a visualaid in determining theposition of the fastermoving average inrelevance to the slowermoving average.

Bars pointing above theEquilibrium Line indicatethat the Macd average isabove the 9 day movingaverage.

Bars pointing below theEquilibrium Line indicatethat the Macd average isbelow the 9 day movingaverage.

by MPFX


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There are 3 mains ways

to trade when usingMacd's.

The first is use thecrossing of the m/a's as

a signal.

A buy signal is givenwhen the bars first point

above the equilibriumline.

A sell signal is givenwhen the bars first pointdown below theequilibrium line.

The chart opposite showstwo buy and two sellsignals. It is interesting tonote where the signalsgiven correspond to the

price action on the mainchart. The first two signalsare pretty much spot on,but after the second sell

signal was given, the pricemoved higher beforemoving down again. Onthe second buy signal theprice drifted lower beforemoving up again. Thesecond sell signal was toolow and the second buysignal was too high. This

is important becausetraders who set tight stoplosses on their trades run

the risk of getting out oftheir trade only to watchthe stock rebound.

This is why it is so

important not to rely ononly one technicalindicator, it is theculmination of manyindicators that are

positive or negative atthe same time.


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On this next chart we havefive signals beinggenerated by the Macd.

The Red circle indicates 4sell signals occurring

within 2 weeks of eachother. This is a what Imean by more than oneindicator turning negativeat same time, it does nothave to happen on thesame day.

The Pink circle indicatesthat although the price diddrop on both sell signals,the support line remainedintact. The price only

crossed the 20ma on thefirst sell signal butremained above on thesecond.

The 20 ma remainedabove the 50ma on bothsell signals.


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The second methodused with Macd's is theConvergence /Divergence method.

Convergence means twoseparate objects headingtowards the same meetingpoint.

Divergence means twoseparate objects movingaway from a meetingpoint.

For the use in trading weare interested in theconvergence ordivergence of the pricechart and the indicator thatwe have selected, in thiscase Macd.

What we are looking for islower lows on the pricechart and higher lows onthe Macd. This creates abuy signal or at leastshould alert the trader to apossible trend reversal.

Using this method is agood visual aid for seeing

that a trend is slowlyrunning out of steam.Nearly all momentumindicators exhibit theseconverge / divergeproperties. Most technicaltraders use what is calleda lead indicator. This is theindicator that is the first toshow signs of animpending trend change.Momentum indicators are

usually high on this list.


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The same applies whenwe are searching for sellsignals. Instead of thelines converging, this timewe are looking fordivergence of the priceand the Macd.

We are looking for theprice to be making higherhighs but the Macd to besetting lower highs.

We are looking for theprice to be making higherhighs but the Macd to besetting lower highs.

Again these signals areonly part of the equationwhen look to buy and sell.

If a trader only looks touse one indicator he willget caught out more timesthan not, but on the otherhand, I believe the use oftoo many indicators is justas a fatal mistake as usingonly one. It is a finebalance of the indicatorsthat you feel mostcomfortable with.

The third method used

is to use the macd linecrossing the zero line asa buy signal and themacd line making a clearbreak of the histogrambars as a sell signal.

This method creates theleast amount of buy andsell signals but also the

least amount of falsesignals.

This method is also theslowest to generate a

signal and is good for thelonger term trendchanges.

Of course it still generates

false signals like ALLindicators so advicementioned already aboveabout multiply signalsshould be heeded.


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Time Fames.

Choosing which timeframes to use variesgreatly andexperimentation is by farthe best way to educateyourself. Again use thesame stock and adjust thesettings of the macd tosee the difference inwhere buy and sell signals

are being generated.

Some standard timeframes are :

12, 26, 9

8, 17, 9

12 ,25, 9

Please take the time

to do your OWN experimentation.

As you can see above a faster Macd gives an earlier buy signal but

many more false signals.


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STOCHASTIC

Stochasticindicators are

part of the

momentumindicator family

and are extremely

useful for

determiningwhether a stock

has moved into an

overbought or

oversold area.

There are usually

2 lines plotted onthe standard

stochastic, these

are the %K and

the %D lines.

%K is a moving

average of astocks past

trading range

relative to its

current price.

%D is a movingaverage of the

%K line.

These lines are

plotted on a chartwith a range of 0 -

100.

As most charting

packages do all

these calculations

for us I believe

that time is betterspent learning to

read them asopposed to their

mathematical

make up.

by MPFX


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a several ways totrade using the

stochastic

indicator.

The first is by the

use of bands atthe 20 and 80

mark.

A stock is

consideredoverbought ( Sell

Signal ) when the

stochastic is at orabove the 80

level.

A stock isconsidered

oversold ( BuySignal ) when thestochastic is at or

below the 20

level.

Of course this

does not mean

sell when it hits80 and buy when

it reaches 20, as

false signals arecommon place as

the chart opposite

illustrates.

It does howeverindicate that the

trend, in either

direction, isrunning out of

steam.

This is a current chart of BDL


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method is to buyand sell at the

crossing of the

%K and %Dlines. This is the

same method

applied to 2multiple m/a's on

a price chart.

Once again thereare many false

signals given

using this method.On the chart

opposite you can

see 5 signals being given. Only

2 of these are

valid and would

have resulted in profit or saved

losses.

The third methodthat can be used is

by the addition of

trend lines to thestochastic chart in

the exact same

manner as youwould on a price

chart.

As the chart

oppositeillustrates the

down trend ( Blue

Line ) has clearly been broken by

both lines.

This works for

both up trends

and down trends.


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After much back

testing I have

found that the best way to use

stochastic

indicators is tocombine the

entire above

mentioned rules.

On the chartopposite you can

see these

confirmations

occurring.

The top sell signal

shows 2 out ofour 3 rules

confirmed, whilethe bottom buysignals shows all

3.


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time to put all thathas been

mentioned so far

onto the one

chart.

The chartopposite shows a

combined total of

10 positivesignals from 4different

indicators.

Throughout thiseditorial I have

stressed the point

that T/A is a

combination ofmany signals

given at the onetime and this is anexcellent example

of this.

The chart

opposite is of

BDL dated 30-10-

2001.

Documents

Forex Technical Analysis by Peter Vincent