Posted on November 2nd, 2010 by Rapid Forex9 Comments »
This week I’m going to start a little series on technical analysis for forex trading online. Today I’m going to discuss how to use Exponential Moving Averages (EMA) to know when to get out of a trade early.
Watch This EMA Video First
In the video below I walk you through a quick explanation of a basic EMA setup. After watching the video, I’ve included the main points as notes below.
What EMA’s Were Used in the Video?
Two exponential moving averages were used in the video above. There was a 7 period EMA, which was referred to as the “fast”EMA. This is because it is based on only recent candlesticks, so it reacts more quickly “fast.”
There was also a 21 period EMA, which in this case is referred to as a “slow” EMA. It’s “slow” because it incorporates a longer history of candlesticks so it takes longer to react to price changes “slow.”
EMA Divergence Gap
Two “gaps” were mentioned in the video above. The first one explained was the EMA Divergence Gap. This is the distance between the 7 period EMA and the 21 period EMA. This gap can become wider (i.e. diverge), or become narrower (i.e. converge). Plotted a different way this is the MACD, but that will be covered in another video.
When looking for a potential exit, it’s best to look for a widening (divergence) of the EMA Divergence Gap.
Candlestick-EMA Divergence Gap
The second gap mentioned in the video above was the gap between the candlestick itself and the fast EMA.
A good exit sign for when prices near their peak (in a long trade) or valley (in a short trade) is when there is a significant gap between the candle itself and the fast EMA. If one of the previous few candles can fit in this gap, this is a potentially good exit signal as long as the EMA Divergence gap is also at it’s maximum wideness.
Final Thoughts on EMA Profit Divergence
EMA Profit Divergence is a great way to look for when your trades are losing steam. After entering a trade using Forex Sailing, this signal may cause you to exit a trade for a profit earlier than your limit being hit. but this can also help you “keep” profits before your trade reverses against you
MACD, which is an acronym for moving average convergence divergence, is a momentum oscillator, meaning that it reflects the strength at which the market is oscillating (remember that the market moves in price swings, or oscillations). The MACD is one of the most popular technical indicators for online forex trading.
Components of the MACD
First, the MACD includes a line that represents the difference between the 26-period exponential moving average (the slow EMA) and the 12-period exponential moving average (the fast EMA); this line is often referred to simply as the MACD.
Second, the MACD includes a line that represents a 9-period exponential moving average; this line is known as the “signal” or “trigger” line and is used in conjunction with the first line.
The first indicator that the MACD reveals is based off of those first two lines. When the MACD (the difference between the fast and the slow exponential moving averages) crosses over the trigger line it offers a buy (bullish) signal.
When the MACD crosses under the trigger line it offers a sell (bearish) signal in online forex trading.
The smaller circles highlight points where the MACD crosses 1) over the trigger line (the buy signal) and 2) under the trigger line (the sell signal). As it is in this chart, the MACD is usually represented by a red line while the trigger is usually a blue line.
Another aspect of the MACD indicator is the histogram (which you can see in green in the following screen capture image). The histogram is a good momentum indicator, offering information about the strength of price movement. While the histogram does not reveal any direct buy or sell signals, it is a useful tool to use in conjunction with other indicators when analyzing possible reversals (if the market is slowing down it may be headed toward a reversal; this slow down would be reflected by lower bars in the histogram).
The MACD used in Online Forex Trading
A third aspect of the MACD is that it is plotted against a zero line. In essence, the difference between the fast and slow exponential moving averages is converted mathematically into an oscillator that fluctuates above and below a zero line.
MAC Signals For Online Forex Trading
The MACD gives the following signals that can be used in forex trading online:
When the MACD line crosses over the zero line it offers a buy signal.
When the MACD line crosses below the zero line it offers a sell signal.
Take a look at the MACD forex chart shot to see these signals. The two larger circles represent the market 1) crossing under the zero line (sell signal) and 2) crossing over the zero line (a buy signal).
The fourth aspect of MACD is that its trends (swings) can be compared to the price swings (trends) in the online forex trading market.
MACD divergence is when the MACD line is trending (swinging) in one direction while the market is trending in another.
This divergence can offer information about the future movement of the market. If the divergence is positive (MACD is trending upward while the market is trending downward) the market may be headed toward a rally (that, then, is a buy signal).
If the divergence is negative (MACD is trending downward while the market is trending upward) the market may be headed for a price drop (that, then, is a sell signal).
Looking at the movement of the histogram can also reveal divergences between prices and the MACD (the histogram may reveal those divergences before the MACD does).
In addition to the MACD, stochastics are also commonly used in online forex trading. I’ll be posting about stochastics in the next rapid forex blog post.
Posted on March 16th, 2010 by Rapid Forex5 Comments »
The Moving Average Line
Traders often use a simple moving average created with a larger number of periods (such that it is reflective of long term trends) as an average price line – a line that serves as a base point for the market to move with, above, or below.
This long-term average price line should serve as a support line in an uptrend and a resistance line in a downtrend.
If prices penetrate that long-term average price line, the trend could be slowing, the market heading toward a reversal. Certainly don’t trade on that first average price line penetration alone; wait for confirmation signals that the market is indeed heading to a reversal.
Moving Average Crossover
In addition to using a simple moving average as a long-term average price line against which you can measure current price movement, two moving averages (one fast, one slow) can also be used together to generate buy and sell signals.
This type of indicator is called the moving average crossover, and can be a very nice compliment to the average price line.
The moving average crossover indicator is formed of two exponential moving average lines.
One is considered fast; that is, it incorporates a smaller number of periods and therefore reflects more of the current market volatility.
The other exponential moving average line (EMA) is considered slow; that is, it incorporates a larger number of periods and therefore reflects more long term movement and less of the current market movement.
Different traders create the exponential moving averages with different number of periods. However, a safe default is to set the fast indicator at 10 periods and the slow indicator at 25 periods.
Again, the numbers 10 and 25 refer to the number of previous periods encompassed in the moving average. The moving average set 10 periods back is referred to as the fast moving average because it is more volatile (swings more) because it only encompasses 10 periods.
The moving average set 25 periods back is referred to as the slow moving average because it is less volatile (it swings less, or more slowly) because it encompasses 25 periods.
As the indicator’s name suggests, you will be looking for forex trading signals when one of the exponential moving averages crosses over the other. If the slow EMA (the one set at 25 periods) crosses over the fast EMA (the one set at 10 periods) the market is likely slowing down, possibly heading into a new downtrend. Therefore, when the slow EMA crosses over the fast EMA, the market is offering you a sell signal.
Exponential Moving Average Crossovers
Wait until you have confirmation of the reversal from other indicators (such as a trendline break, a King’s crown, etc.) before trading on the moving average crossover.
Conversely, if the fast EMA crosses over the slow EMA, the market is likely speeding up, possibly heading into a new uptrend. Therefore, when the fast EMA crosses over the slow EMA, the market is offering you a buy signal.
Wait until you have confirmation of the reversal from other indicators (such as a trendline break, a King’s crown, etc.) before trading on the moving average crossover.
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