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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Understanding the difference between M/M and Y/Y data

Learn how to familiarize yourself with the time periods in data reports

Learn how to familiarize yourself with the time periods in data reports

Economic reports are given in a number of different formats. Many economic data releases are reported in a month on month format (m/m) and also in a year on year format as well (y/y). A y/y reading might be represented by the characters, YoY.

Similarly, a m/m reading may also be represented by the format MoM. Regardless of the format of the report, they both mean the same thing. In many instances, both m/m and y/y readings are reported as percentages which allows for easy reporting and comparisons.

At first, these conventions can be confusing, so this article is designed to help explain them and point out the key differences between the readings and, most importantly, how they help investors get a handle on the key data.

m/m or MoM data

The m/m readings are changes in data with respect to the previous month. So, for example, on Friday March, 9 German January factory orders showed a m/m reading of -2.6% vs. a prior reading of +0.9% m/m. This meant that the factory orders for January were down -2.6% on December’s figures. As such, this indicated a m/m contraction. For simplicity, the chart below illustrates this trend:

German factory orders

m/m data and a few things to be aware of

One of the most important things to mention is that m/m readings are vulnerable to a number of variables. Is there a major holiday in a month? Take Christmas, Thanksgiving, and lunar New Years for example.

When these events occur, they can impact m/m readings. Similarly, one-off events can impact m/m readings. In the last football World Cup, UK retail sales were positively impacted as England made it through to the Semi-finals of the World Cup.

Many new televisions were bought, more food and drink and, as a result, retail sales enjoyed a spike in the report. In a similar way, m/m readings can also be impacted by natural disasters and other one-of disasters.

Other less dramatic variables can be things such as days in the month and months when people typically take holidays. All of these types of factors mean that m/m readings can vary considerably from month to month. This is why m/m figures are often reported with the more stable y/y figures.

y/y or YoY data

The y/y readings are changes in data over the course of one year in comparison with the previous year. So, as an example, in June 2018 Japanese preliminary machine tool orders reported +11.4% y/y reading vs +14.9% prior y/y reading.

This means that the data, at this point in time, shows only a +11.4% y/y increase as opposed to the previous year’s increase of 14.9%. See the chart below.

Japanese machine tool orders

Calculating y/y data with a working example

To calculate year on year growth you perform the following calculation. Let’s simplify this with a fictional example by comparing the sales of a watch company. Say a company sells 200 watches in one year and 220 watches in the following year. How do we calculate the growth rate? You can calculate this as follows:

1. Take away last year’s sales from the most recent number e.g.

220 – 200 = +20

The company sold 20 more watches in the present year

2. Then divide that number of 20 by the previous sales and multiple by 100 to get a percentage.

20/200 x 100 = 10%

So, in the listed example we can see that there is a year on year growth rate of +10%.

y/y data and a few things to be aware of

If a company experiences a period of negative growth over one year then the next period that reports strong growth may be more an emphasis on the period of weakness than a particular period of strength.

The worse the prior year, the better the present year will seem. Therefore, it is always prudent to be aware that if a y/y reading is reported that appears very strong, just check what has happened in the previous year.

However, y/y analysis does generally help to smooth out the inherent volatility that you get through reporting m/m data. This is probably the biggest advantage of y/y data; all the ups and downs of m/m reporting (one-of events, seasonality, holidays etc.) are balanced out allowing for simpler comparisons.

A final word on Q/Q data

While covering m/m and y/y data it is also worth covering q/q data. This stands for quarter-over-quarter and these figures compare the previous financial quarter. Each year is broken down into four quarters and the first quarter of the year is referred to as Q1.

There are a number of reports that are broken down into m/m and y/y readings. However, some very important indicators, like Gross Domestic Product (GDP) are broken down into quarters. In terms of volatility q/q data will be more volatile than y/y figures, yet less volatile than m/m readings.

So, there you have it, a quick rundown on understanding the difference between m/m readings and y/y readings.

This article was submitted by the ADSS Research Team.

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