Technical Analysis

In my last two posts I have touched on Fundamental Analysis so it is now time to talk on Technical Analysis, the other major branch of analysis that most traders carry out.

Technical Analysis (TA) can be defined as the study of historical price movements to predict future price movements or looking at the market past behaviour to see what is most likely to happen in the future. There is this standard disclaimer that "past performance is no guarantee of future results" and also the equally common "history repeats itself" so which one do the Forex market follow? Well, it is a bit of each and a combination of both and that makes the market both predictable and unpredictable the same time. So nothing is 100% certain in the market and we can only talk of high probability and TA provides the tools to help traders make decisions with a high probability of success, hopefully.

Two factors make TA a viable tool for traders - the market is made up of human and thus follow human crowd behaviour and TA is used by the majority of traders and thus it has a self-fulfilling prophesy aspect. This is more so in the Forex market than the other trading markets and it makes TA an important tool for Forex traders.

There are hundreds (if not thousands) of books written on Technical Analysis and you can get loads of information on the Internet so I'll just give a brief summary here and mention only the common items. Broadly, TA can be broken into the following main areas but these are not clear divisions and there are overlaps.

1. Chart Analysis
2. Pattern Analysis
3. Trend Analysis
4. Momentum Analysis
5. Predictive Analysis.

Chart Analysis
Briefly, this is looking at the charts and price to see the movement in the market and this forms the basis of all the other analysis. The two main types of charts are the Bar Chart and Candlesticks and the latter is gaining popularity since it gives a record of the price movement that is slightly easier to interpret visually that the traditional Bar Charts.


Pattern Analysis
Over a period of time, the Bars or the Candlesticks will form certain patterns and from pass experience, certain patterns will behave in a certain way. Past gurus have given names to these patterns such as Double Tops, Head and Shoulder, Flags, etc. In the case of Candlesticks, a particular candle or a certain combination of candles will occur before subsequent behaviour in a certain way and they also have names such as Doji, Morning Star, Harami, etc.

Trend Analysis
The price will sometimes make higher highs or lower lows and by joining some of these points, you will will be able to form a trend line. Sometimes the price will stop repeatedly at certain points and by joining these stops, you will have the support and resistance lines, akin to the ceilings and the floors of a room. To smooth out the choppy price movements, Moving Averages are normally used and they can also come under trend analysis since after being smoothed out, the MA will show some kind of trend, especially over longer periods. There are two main types of MA, the Simple (SMA) and the Exponential (EMA).

Momentum Analysis
Apart from moving sideways, prices will move up or down and the momentum will show how fast or slow it is moving and there are technical indicators that show this momentum and they tend to oscillate between 0 and 100%. Such oscillators include Relative Strength Index (RSI) and Stochastic. You will meet Overbought and Oversold areas in these oscillators and also the somewhat predictive Divergence.


Predictive Analysis
Under this would be the Fibonacci Retracement, Fibonacci Extension, and Elliot Waves since traders use them to predict what the future price will likely to be or where it will likely to change directions.

There are some common indicators that do not fall clearly into any of the above analysis. One is MACD (or Mac-D) that is a combination of moving averages and oscillators that do not oscillate between 0 and 100% but around the zero point. Another one is the Bollinger Band, a combination of moving average and the standard deviation. When the bands contract, a breakout is imminent.

A successful trader will use a combination of all or some of the above analysis before making a trade. Some are used to trigger a trade, some used for confirmation and some used to set stops or profit targets. If you enter with too little analysis, it will be like gambling; if you make too much analysis, you may never enter at all or miss the opportunity. As they say this is "Paralysis by Analysis"

So it has to be a practical compromise between the two extremes and this will come with experience and it depends on the individual as a certain combination of indicators are best suited for a certain trading style. In summary, all these tools are used in combination to time when to enter the market and when to exit for high probability trades with the best results.

Ronald Kwok
http://cbpirate.com/s/cbp/ronaldkwok

NFP - review

So how was your experience with the NFP last Friday? This time around it was not too exciting since the unemployment figures were bad just as expected, so no surprises. Looking at EURUSD, it went up just 58 pips within two minutes of the NFP report. It was definitely more exciting early last year before this financial crisis. The range of movement was in excess of 100 pips and it would move up and down within minutes, unlike the tame affair we are having nowadays.

What are the other market moving economic reports? Here are the top 8 for the US Dollar (and consequently the EURUSD) as given by Kathy Lien of FXCM.

1. NFP (Unemployment report)

2. Interest rates (Federal Open Market Committee or FOMC decision)

3. Trade Balance

4. Inflation (consumer price index, CPI)

5. Retail sales

6. Gross domestic product (GDP)

7. Current account

8. Durable goods.

Most of the US reports are released at 8.30am EST or 10.00am EST

What about the Euro? Similar reports to the above for the main EU countries are also significant and in addition, the European Central Bank (ECB) statements and German economic reports are also important. These are normally released at 0900 GMT.

As for the British Pound, the Bank of England (BOE) statements are critical in addition to those reports above. Most British reports are released at 0930 GMT.

The Tankan Survey (done quarterly) is a important report that greatly affects the movement of the Japanese Yen.

In addition to having an immediate effect on the Forex market, some of these reports will have a long term effect which will affect the general direction of the movement of the currency pairs affected. The study of such effect is known as Fundamental Analysis. Some traders specialise in this and they normally trade in longer terms such as days, weeks or even months. These are for the professionals as they have to withstand fluctuation of pips that move in the hundreds.

Fundamental Analysis is one of the two main branch of analysis carried out by Forex traders; the other one is Technical Analysis. Before we move on, here's a reprint of a poem I wrote earlier on the effect of the NFP sometime last year that has appeared in my other Blog in case you have not read it. Have fun. (There are some slight amendments.)

For Karaoke fans, this can be sung to the tune of Twinkle, Twinkle, Little Star and the title is "Twinkle, Twinkle, Currencies"

Prologue

Twinkle, twinkle N-F-P
What you get’s not what you see.
Where more is low and less is high,
When I see sell, you say it's buy.
Twinkle, twinkle N-F-P,
Please don’t bring me to my knees.

The reactions

Twinkle, twinkle E-U-R,
Like the plunging Niagara.
I’ve been praying for your rise,
I have paid a heavy price
Twinkle, twinkle E-U-R,
You will need some Viagara.

Twinkle, twinkle G-B-P
What a trick you played on me.
When I clicked sell, you took a bend;
Now I have to say amen.
Twinkle, twinkle G-B-P
Thanks to you, I’m all at sea.

Twinkle, twinkle C-H-F,
When you dive, there’s nothing left.
Lower, lower down you go,
I’ve been battered, blow by blow.
Twinkle, twinkle C-H-F,
You have put me in deep cleft.

Twinkle, twinkle J-P-Y,
On the downward path you fly.
All my profits, they are gone;
I’m better off to trade the won.
Twinkle, twinkle J-P-Y,
My poor pocket, you wring dry.

Epilogue

Twinkle, twinkle U-S-D,
How I wonder where you’ll be.
Up the charts you rise so high,
Oh as if you’ll reach the sky.
Twinkle, twinkle U-S-D,
I just wander, woe is me.

Ronald Kwok
http://ronaldkwok.atomicblog.hop.clickbank.net/

Times to watch

In my last post, I covered how the Forex market can be traded round the clock, 24 hours a day. You would have realised that the activities and liquidity of the various currency pairs are not the same throughout the 24 hours. Which are the times that is important? (All times mentioned below are Daylight Saving Time where applicable.)

Well, it all depends on when your normal trading hours are. The hours when you trade is of course the most important to you. There are other times that are important to all traders.

1. Start of a trading day. This will depends on the particular Forex market, if it is the London market it will be 0700 GMT . For purpose of compiling data for daily charts, the start of the day will be 0000 hour GMT (which is 8am MYT, 8pm EST)

2. Start and end of a trading week. Since the Forex market closes on Friday, 4pm EST (that's Friday, 4am MYT, 2100 GMT) and opens again on Sunday 6pm EST (that's Monday 6am MYT, 2300 GMT), there is usually a price gap between the closing price and the opening price. Sometimes this can be more than 100 pips so you may want to close your positions before the market closes for the weekend. These times are based on Interbank FX and other brokers may differ slightly.

3. At release time of scheduled economic reports. You will find that at certain time of the day, the price move rapidly either up or down for no apparent reasons. But if you check with the calendar for the schedule economic reports, you will find that these times of rapid movements are the times when such reports are released.
At such times, it is best not to open any new positions or if you have opened positions, to close them or move you stops to protect your profit since nobody knows for sure which way the market will move once the report is released. Luckily for all of us, most of these economic reports have a fixed date and time for their release and we can prepare in advance before these times come.

The best way to be prepared for this is to have a calendar of forthcoming reports. Most of the Forex websites have a calendar option where the economic reports are listed on a daily, weekly or monthly basis. I print out a weekly list of the reports and highlight those that are of importance that may have a major effect on the price in the market. The website that I use is Forex Factory and here are some details on what I used.

I choose the weekly calendar and there is an option to print out the current view. There is a filter option to select the currencies that you are interested in and also the expected impact of the economic reports. There are 4 categories of impact and I choose just the top two so as not to have too many release times to follow. Finally, I select the time of the report to show the local time so that I do not have to do all the time conversion which can be confusing at times. You can find similar options in other major Forex websites.

Not all the reports have the same effect on the Forex market. One of the most important and one that has the most dramatic effect (on the USD and related currencies) is the NFP or Non-Farm Payroll which is the US unemployment report. This is released monthly at 8.30 am EST on the first Friday of the month and you can witness the effect this coming Friday at 1330 GMT (9.30pm MYT). Lately, the effect of this report is less dramatic mainly because it is more of the same, more unemployment every month so it is nothing new and nothing unexpected. Just watch the EURUSD this Friday to see what the effect will be this time around. Will there be fireworks or just a whimper? Nobody can be sure so don't bet on it.

Ronald Kwok
http://cbpirate.com/s/cbp/ronaldkwok