How Technical Analysis Beat Black Monday

Milton Berg, CIO of Milton Berg Advisors, tells Grant Williams (NYSE:) how his investment process β€” which focuses on psychology and technical analysis β€” allowed him to brace for the 1987 market crash. This clip is excerpted from a video published on Real Vision on July 10, 2019 entitled β€œThe Turning Point Master.”

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Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.

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A better understanding of technical analysis and related indicators

We’re focusing on technical analysis in this article with a description of some of the important indicators

LegacyFX

We could say, all wealthy traders use technical analysis but not all technical analysis traders are wealthy although technical analysis (TA) is the most precise way of trading the Forex market.

It’s also useful note that fundamentals play their part in indicating whether a price will move up or down. It gives you the edge over other traders.

Technical Analysis is so powerful because of a few reasons:

1) It represents numbers. All information and its impact on the market and traders is represented in a currency’s price.

2) It helps to predict trends and the foreign exchange market is very ‘trendy’.

3) Certain chart patterns are consistent, reliable and repeat themselves. TA helps us to see them.

Here’s one way of putting technical analyses into perspective (wish I had a dollar each time I said ‘technical analysis’). We all know that prices move in trends.

Research has shown that those that trade ‘with the trend’ greatly improve their chances of making a profitable trade.

Trends help you become aware of the overall market direction and often rescue us from less than profitable entry points. I attended a 2-day course costing me over $ 2500 AUD and the biggest thing I learned from it was the need for discipline and emotional control.

The content was so basic that within the next 3 or 4 articles, I would have covered all of it. So, learning the ‘tools of the trade’ the technical indicators and their applications will help you to diagnose what the market is doing but even then, you need to expect ups and down and trade with emotional control.
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Stay with the trend, follow the price

Find the price of the currency pair. If EUR/USD is 1.4224 and moves to 1.4180 then 1.4090 then the market is in a down trend. Concern yourself only with what the market IS doing not what it might do. Listen to the markets and the indicators will back up what they are telling you.

Moving averages

Tell you the price at a given point of time over a defined period of intervals. They are called moving because they give you the latest price while calculating the average based on the selected time measure.

They lag the market so to give you an indication of a change in trend, use a shorter average such as a 5- or 10-day moving average. By combining a shorter term and longer-term MA you can detect a buy signal when the shorter term crosses the longer-term moving average in the upward direction.

Or a sell signal if it crosses in a downward direction. For example, you could use a 5 day versus a 20-day moving average or a 40 day versus a 200 day moving average.

There are simple moving averages, linearly weighted which gives more importance to the recent prices or exponentially weighted. The latter is a favorite because it considers all prices in a time period but emphasizes the importance of the most recent price changes.

MACD

Based on moving averages, a MACD plots the difference between a 26 exponential moving average and a 12-day exponential moving average, with a 9 day used as a trigger line. If a MACD turns positive when the market is still plummeting it could be a strong buy signal. The converse also works.

Bollinger bands (sounds like an elastic band)

Prices tend to stay between the upper and lower bands. They widen and become narrower depending on the volatility of the market at the time.

A sell signal would be when the moving average is above the Bollinger bands and vice versa for a buy signal. Some traders use it in conjunction with RSI, MACD, CCI and Rate of Change.

Fibonacci retracement

Describe cycles found throughout nature and when applied to technical analysis can find shifts in the market trends. After a climb prices often retrace a large portion sometimes all of the original move. Support and resistance levels often occur near the Fibonacci retracement level.

RSI

Relative Strength Index measures the market activity to see whether it’s overbought or oversold. This is a leading indicator so helps to indicate what the market is going to do (awesome!). A higher RSI number indicates overbought (so expect a bearish shift) and a lower number indicates oversold.

Successful traders will generally use 3 or 4 signals to provide a more conclusive signal before entering a trade.

Always remember, “If in doubt, stay out!”. Technical analysis doesn’t factor in political news, a country’s economic profile or fundamental supply and demand.

Technical Analysis helps us figure out how much money to risk on a trade. How and when to enter the market and how to exit the trade for profit or to minimize loss.

This article was written by LegacyFX.

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Analyze this: 5 tips for good market analysis

How to evaluate the market

How to evaluate the market

Trading is a process that can be broken in 2 stages: market analysis and the trade itself. To the latter we attribute things like opening an order, choosing position size and making sure that your actions conform to the rules of risk management.

This part of the process is very important. However, you shouldn’t underestimate the relevance of market analysis as well. In this article, we have gathered recommendations regarding the fundamental and technical analysis of the currency market.

Tip 1. Analysis first, trading second 

It often happens that those who only start their trading career form some random trade ideas in their minds and then start looking for the arguments that would justify their thoughts. This is a very wrong approach.

It’s the market analysis that should provide you with trade ideas and not the other way round. When you reverse this order, you lose the ability to think objectively. You will interpret everything you see on the charts as confirmations of your initial idea. There’s no point in such analysis because it doesn’t really prove that this idea was good.

Make sure that when you approach the market you have as clear and free mind as possible. This will allow you to grasp the real profit opportunities.

Tip 2. Confirmations

Once you have the idea, make sure that it’s valid. Of course, there’s no way to be 100% sure that a trade will bring profit. Yet, it’s possible to increase the probability of success. Most trading systems are based on the simple principle: there’s a certain sufficient amount of clues you need to gather in order to adopt a trade idea.

Each trader has his/her own view on what “sufficient” is. In our opinion, at least 3 clues are necessary and these clues have to be of different nature, for example, a clue from price action, a clue from a technical indicator and a clue from fundamentals.

Tip 3. Fundamental or technical approach?

There are still a lot of people who like debating which type of analysis is better. At the same time, ask yourself a question: should we really set limitations here? After all, these types of analysis are very different.

The fundamental analysis represents the study of the forces that are driving the market. These drivers become very important when you trade trends. On the other hand, fundamental analysis won’t allow you to make precise market entry, while often enough every pip counts. That’s where the technical analysis chimes in.

It also offers visual insights in the psychology of market players. For example, a “Head and Shoulders” pattern clearly shows that bulls lose their ability to push the price higher. Many traders recognize this distinctive shape of the price action and act accordingly thus making the pattern a self-fulfilling prophecy.

So, seeing merits in both fundamental and technical analysis, we propose an evident solution: combine the two! You may say that that’s too general a recommendation and you will be right.

How about the following scheme: for short-term trades, make your decision based on technical analysis but consult fundamentals in the economic calendar as they can make a big impact on your trade; for longer-term trades, use fundamental analysis to identify a trend to follow and then apply technical analysis to find good entry and exit levels.

Tip 4. Multiple timeframes save the day

Some traders go as far as to perceive timeframes as different trading instruments. Don’t make this mistake! Timeframes represent merely a set of lens for different perspectives and allow a trader to get a better look at the market.

Alexander Elder has established a classic approach by introducing a triple screen system that uses 3 timeframes. A trader should start with a bigger timeframe (locate the overall trend), then switch to a smaller one (find the point where a counter-trend move ends) and finally open the smallest timeframe (make a precise entry).

In any case, going from a larger timeframe to a smaller one is the correct approach because otherwise you will risk falling victim of the situation we described in tip #1. So, no matter whether you are a scalper or a position trader, make sure you reap the benefits of analyzing several timeframes.

Tip 5. Remember about correlations     

Forex market doesn’t exist in the void. Remember that currencies represent just one of the ways for investors to store their funds, for speculators to get profit and for hedgers to protect themselves from big changes in the exchange rates.

As a result, currencies compete with other assets, such as stocks and commodities for public attention. The prices of other instruments are denominated in currencies and this forms yet another tie (that’s why gold/oil are so sensitive to the dynamics of the USD).

Finally, currencies are naturally connected to the performance of respective economies. The latter interact as well, so no wonder that problems in China will pressure the AUD: China is Australia’s key trading partner. 

As a result, it’s necessary to have a broad view of the market, follow the general newsflow related to currencies and global economy and be aware of especially strong direct and inverse correlations. Examples of direct correlation: AUD/USD and NZD/USD, XAU/USD and XAG/USD. Example of inverse correlations: EUR/USD and USD/CHF.       

All in all, market analysis should be an area of constant improvement for a trader. It’s a key skill both to make your own trades or to evaluate the ideas of others. Check Forex news and market commentary at FBS website: we surf through tons of info to serve you the brief and sharp summary of the most important things. Good luck in your market analysis and trading!

This article was submitted by FBS.

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