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Bollinger Bands

Utility: Measuring Volatility / Evaluating Trend Strength

Standard Settings: 20 Periods

 

The Bollinger Bands

Bollinger Bands are two (2) volatility bands that are placed above and below a moving average. The Bollinger Bands can be used to measure volatility but also to evaluate the strength of the trend.

When the distance between the two bands widens then the volatility increases.

When the distance between the two bands is getting narrow then volatility decreases.

The Bollinger Bands

 

Bollinger Bands Squeeze

When the Bollinger Bands converge on the moving average, that is an indication of limited price volatility. This called the "Squeeze" and it is a reliable trading signal that works with forex trading.

 

Bollinger Bands Calculation:

Upper Band = 20-day SMA + (20-day Standard Deviation of Price x 2)

Middle Band = 20-day SMA (simple moving average)

Lower Band = 20-day SMA - (20-day Standard Deviation of Price x 2)

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Parabolic SAR (Stop and Reverse system)

Utility: Evaluating Trends

Standard Settings: 2% acceleration factor and 20% maximum step

The Parabolic SAR is a technical analysis indicator best used with trending markets, that means with markets or assets that are moving in strong-trends. Parabolic SAR will prove more effective if is combined with another indicator. For example, you may use effectively the Parabolic SAR with ADX.

 

The Parabolic SAR can be used:

(i) Identifying and evaluating the trend

(ii) Defining entry and exit levels

(iii) Calculating Trailing Stops

Parabolic SAR (Stop and Reverse system)

 

Parabolic SAR Calculation:

Rising Parabolic SAR = Previous SAR + Previous AF(Previous EP + Previous SAR)

Falling Parabolic SAR = Previous SAR- Previous AF(Previous SAR- Previous EP)

Where,

AF or Acceleration Factor is the determinant of the sensitivity of the SAR

Previous SAR= The SAR of the previous period

EP or Extreme Point represents the Highest High (in case of an uptrend) or the Lowest Low (in case of the downtrend)

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Trading with the Ichimoku Kinko Hyo (一目均衡表)

 

Utility: Evaluating the Trend / Identifying Overbough / Oversold Market Levels

Standard Settings: Tenkan-Sen (9), Kijun-Sen (26), Senkou Span (52)

Forex professionals consider the Ichimoku Kinko Hyo as one of the best technical analysis tools to trade Forex. The Ichimoku Kinko Hyo was developed by the Japanese Goichi Hosoda back in late 1960. The indicator can be used in any financial market (Forex, stocks, etc).

What distinguishes the Ichimoku Kinko Hyo from other indicators is its ability to provide a complete and quick picture of the current market conditions via the Quick Equilibrium Chart. Ichimoku Kinko Hyo can also indentify strong trends and reversals in just a glance.

 

Ichimoku Kinko Hyo Calculation:

The Ichimoku Kinko Hyo system contains 6 main elements, here is how they are calculated:

Tenkan-Sen (転換線) Red Signal Line (9 periods)

Calculation: (Highest High + Lowest Low) / 2

Use: It represents the minor support/resistance level.

Trading Signals: If the red line moves up or down then the market is trending while if the red line moves horizontally then the market is ranging.

Kijun-Sen (基準線) Blue Signal Line (26 periods)

Calculation: (Highest High + Lowest Low) / 2

Use: Kijun Sen is the support / resistance line used as a stop level.

Trading Signals: The Kijun-Sen blue line can signal upcoming price movement. If the current price is higher than the blue line then it signals upward continuation. If the current price is lower than the blue line then it signals downward continuation.

Chikou (遅行) Span / Green Span (26 periods backwards)

Calculation: Compares current price to the price of 26 previous periods

Use: It projects the current price back 26 periods on the chart in a way that you may visualize the master trend. This is actually an additional tool.

Trading Signals: If the Chikou Span crosses the current price in the bottom-up trend that is a signal for upward movemnet. If the Chikou Span crosses the current price from the top-down trend that is a signal for downward movement.

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Standard Deviation (SD)

Utility: Measuring Volatility

Standard Settings: 20 / 21 Periods

 

Introduction To Standard Deviation

Standard deviation is a very popular statistical tool that can be used for measuring volatility or else the shrink of values around an average. The Standard Deviation symbol is the Greek letter sigma (σ).

The standard deviation should not be used individually for the generation of trading signals, instead, it should be used for confirmation of other technical analysis tools and results.

 

Standard Deviation Meaning:

□ Larger the standard deviation larger the variability of values

□ Smaller the standard deviation smaller the variability of values

Standard Deviation

 

Standard Deviation Formula:

■ Standard Deviation can be calculated as follows:

(1) Firstly, we calculate the average (mean) value of the number of periods

(2) The mean is subtracted from all numbers, and the result is squared

(3) The squared deviations are summed

(4) The total sum is divided by the number of periods

(5) The standard deviation (σ) equals to the square root of the total sum

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Trading using Moving Averages

Utility: Evaluating the Trend / Forecasting Trend Reversals

Combination: Moving Averages can be combined with RSI, ADX and other Indicators

 

Introduction to Moving Averages

Moving averages constitute the most common tool of technical analysis. Moving averages are mainly used to identify current trends and to forecast reversals. All traders can easily use a moving average no matter the level of their experience or their trading style. The great advantage of a moving average is its ability to eliminate the impact of ‘Market Noise’. Market Noise usually leads traders to false assumptions about the upcoming market conditions. If you compare the current price of a financial asset with the value of a moving average (for example 50 days MA) you get in just a glance a clear picture regarding if that asset is trading in overbought or oversold levels.

The use of moving averages is not limited to a few markets, instead moving averages can be used to analyze any market (Stocks, Forex, Indices, Commodities) and / or any financial-traded asset.

 

Basic Features of the Moving Averages

(1) Easy-to-use technical analysis tool, easy to assess results

(2) Signal trades in any financial market or asset (check crossovers below)

(3) Can be used in any timeframe (intraday, daily, weekly, monthly)

(4) Can confirm (or not) the results of other technical analysis tools (ADX, RSI etc)

(5) A moving average can be the sub-components of another technical analysis tool (for example RSI or MACD)

(6) Can draw beautiful charts or channels (check Moving Average Envelopes below)

(7) Eliminates the impact of Market Noise

(8) Can be used as components of automated trading systems (for example Forex Robots)