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Trading Divergences

Divergence trading is one of the ways to trade the market. Though divergence trading is not often used but if used correctly it can be highly profitable. Divergences are often used as important trading signals. But it doesn’t mean that divergences will always predict a reversal correctly. Price oscillator divergences have long been acknowledged by technical traders as a solid indicator of potential price reversals. Well defined divergences particularly on the long term charts can be surprisingly accurate in many instances.

Catching a major price reversal at the correct time can be so profitable that only a few accurate divergence signals are needed to offset the inevitable false signals. Price divergence oscillators can be spotted with just two elements on the price charts.

The first element is the price and the second element is an oscillator that runs either above or below a price level. This second element can be Stochastics, RSI, MACD or any similar oscillator.

Many traders use Moving Average Convergence Divergence (MACD- pronounced McDee) as their sole confirming indicator. The MACD is among the most popular technical indicator or an oscillator invented.

Some traders also take trading signals exclusively from MACD. MACD is a multifaceted indicator that acts as a sign of trend momentum by representing the relationship between two moving averages.

You must have used MACD in your trading. MACD is basically the difference between two moving averages. MACD can be traded by taking signals from the crossovers of two lines, crosses above and below the zero line. Relative Strength Indicator (RSI) is another popular oscillator that provides a measure of price momentum.

RSI is an indicator that gives overbought and oversold signals in ranging markets. However, its usefulness like most other indicators tends to diminish during a trending market. RSI may also be used for divergence purposes. Stochastic indicator may also be used for divergence trading.

Technically speaking what is a divergence? When there is an imbalance between the price element and the oscillator element a divergence occurs. This is the point when the oscillator is providing a strong hint that price may be losing its momentum and a change in price direction may therefore be impending. Both the price action and the oscillator begin to go separate ways and start telling opposite stories.

A bearish divergence occurs when the price hits a higher high while the oscillator hits a lower high. A bearish divergence is a hint for an impending reversal back down.

What does a bearish divergence means? It is an indication that price may soon turn and go back down as the higher high in the price may lose its momentum and begin falling in case of a bearish divergence.

On the other hand, a bullish divergence occurs when price hits a lower low while the oscillator hits a corresponding higher low. A bullish divergence hints at an impending reversal back up.

When used in conjunction with other trading tools, divergences can be a remarkably effective method for helping to time major market events. Divergences are often used as hints of possible turns and reversals. However, divergences are not frequently used as a full fledged self sufficient trading strategy.

Mr. Ahmad Hassam is a Harvard University Graduate. Try These Cash Printing Forex Signals From Heaven! Learn Fibonacci Retracement Visit the Uber Article Directory to get a totally unique version of this article for reprint.

Backtesting Explained (Part I)

With Backtesting, traders can actually test their trading strategies and how well they would have done if executed in the past. Backtesting any trading strategy allows a trader to simulate its expected performance using historical price data.

Any trading strategy that does not have any ambiguity in its rules can be backtested effectively. Example of a simple trading strategy that can be backtested can be as follows.

When the MACD histogram has crossed above the zero line and the DMI+ is above DMI-, go long when the 5 period moving average has crossed above the 20 period moving averages.

When DMI- is above DMI+ and the MACD histogram has crossed below the zero line, sell short when the 5 period moving averages has crossed below the 20 period moving averages.

This one example is just meant to illustrate that any trading strategy having clear cut rules can be backtested with the historical data. However, using the past price data to simulate future results often misleads traders into thinking that their backtested results will also give into similar results in actual real time trading.

Many potential factors can and will make hypothetical performance and actual performance differ significantly. So you should not fall into the trap of thinking that Backtesting may be a perfect method for identifying the most profitable trading strategies.

A trading strategy that may have worked very well over the past three years may work in an entirely different manner for the next three years as the market changes and evolves. One of the most important facts that you should always keep in your mind is that market change considerably overtime.

Often technical indicators that have been giving profitable signals in the past are subsequently unable to replicate their performance in the future. This may frustrate you. But this is exactly what makes trading a challenging endeavor.

Secondly in term of trade execution, a trading strategy in real time may be much different from the way the trading strategy behaves on Backtesting. These differences can potentially skew the results.

However, Backtesting is still the best available method for evaluating a trading strategy without actually trading it in real time environment. Backtesting can provide a trader with a reasonable expectation of the trading strategy’s potential worth and usefulness.

Backtesting can be done by using two methods. The first one is the automated Backtesting. This is the most popular method. Automated Backtesting entails using a specialized program. The trader inputs the specific rules and criteria for the trading strategy into the Backtesting program.

Automated Backtesting is very easy. An entire picture of the past performance is created with the help of that software program. The software automatically applies those rules to the past price data and tallies the past hypothetical profits, losses and other information.

Mr. Ahmad Hassam is a Harvard University Graduate. Try This Cash Printing Forex Signal Service From Heaven! First practice on your Forex Demo Account! Click here to get your own unique version of this article with free reprint rights.

Learning To Trade Multiple Timeframes

Multiple time frame trading is a trading method used extensively by forex traders. It involves the use of multiple timeframes. In this method, a trader first looks at a longer timeframe like a monthly or weekly chart to determine the overall direction of the trend.

Multiple timeframe trading means using three or more timeframes in your trading. If the trader finds a decisive long term trend on this timeframe, he/she then decides to drill down to a shorter timeframe like the daily or 4 hourly chart to look for dips or pullbacks in the trend.

In a strong long term uptrend, a minor downward retracement would represent a potentially high probability entry to get in the trend at a reasonably good price. Finally the trader may drill down to an even shorter timeframe like the 30 minutes or 15 minutes charts to pinpoint and time the exact entry.

How do you trade multiple timeframes? Suppose, you are interested in trading multiple timeframes! You identify the retracement in an uptrend on a 4 hourly chart. What you need to do is to wait for a resistance breakout on a 15 minute chart in the direction of the trend before entering into a long position.

What make multiple timeframe trading so powerful is that it puts the traders on the right side of the market while also identifying the highest probability entries available.

What is Triple Screen trading? Have you heard of the triple screen trading method? One of the multiple timeframe trading strategies is known as Triple Screen. A triple screen resolves the contradiction between the technical indicators and timeframes. The first screen is the long term charts and strategic decisions on long term charts are made using the trend following indicators. How do you decide what is long term? It depends on your favorite timeframe.

The second screen is the intermediate charts. The second screen is used to make technical decisions about entries and exits using oscillators. The third screen can be an intermediate chart or a short term chart. The third screen is used to place buy and sell orders.

How do you decide what is intermediate and what is long term? Begin by looking at your favorite chart, the one that you use the most. Call it intermediate chart. In our case, the intermediate time frame is the 4 hour chart. Multiply its length by five to find the long term chart. A factor of 4-6 is more flexible and practical. Our long term chart is a daily chart (4X6=24 hours). Now use trend following indicators on the long term charts.

Staying out of the trade is a legitimate position. Use these trend following indicators like the moving averages, MACD or trendlines in the long term charts to make your strategic decision to go long, short or stay out of the trade.

Return to the intermediate chart if the long term chart is bearish or bullish. Use oscillators to look for entry or exit points in the direction of the long term trend. Set stops and profit targets before you switch to short term charts to fine tune entries and exits.

Triple screen is a simple but ingenious multiple timeframe approach to forex trading. Use it on your demo account to get familiar with it before you trade live with the triple screen method.

Mr. Ahmad Hassam has done Masters from Harvard University. Try This Cash Printing Forex Signal Service From Heaven! First practice on your Forex Demo Account! Grab a totally unique version of this article from the Uber Article Directory

Pivot Point … Fibonacci Trading (Part II)

Beginning with the main Pivot Point that is calculated from the previous day’s key price points, the resulting support and resistance are subsequently derived from the following calculations. How is the pivot levels calculated? Beginning with the main Pivot Point that is calculated from the previous day’s key price points, the resulting support and resistance are subsequently derived from the following calculations:

Resistance 1 R1 = 2PP- Previous Low. Resistance 2 R2 = PP + (R1-S1). Resistance 2 R3 = Previous High + 2(PP-Previous Low).

PP (Pivot Point) = (Yesterday’s Low + Yesterday’s High + Yesterday’s Close)/3.

S3 (Support 3) = Yesterday’s Low-2(Yesterday’s High -PP). S2= PP- (R1-S1). S1 (Support 1) = 2PP – Yesterday’s High.

After calculating these points they are plotted on the currency price chart. Trader’s can calculate the current days pivot points using the above formulas based on the previous day’s price data.

Breakouts or bounces may be traded with pivot points and they are often also used as profit targets. Once these pivot levels are calculated and plotted, they are used in much the same way as Fibonacci Retracement. Pivot points also indicate whether the market sentiment is bullish or bearish. Traders also use pivot points as reference levels to provide information as to whether the current price is relatively low or relatively high within its expected price range for the day.

S1, S2 and S3 as well as R1, R2 and R3 are used as references in pivot point trading. For example, traders may look for long trading opportunities with the view that the price will reasonably move towards equilibrium around the main PP level if the price is near the day’s S2.

Many traders use different time frames in their trading decisions. You can also calculate the pivot levels for a week and for a month time frame too. Instead of calculating the pivot points for the current day you can also calculated the above levels for 4 hour charts as well as 8 hour charts.

Both Fibonacci and Pivot Points are excellent technical tools that often encompass entire trading discipline in themselves. Just replace the day’s highs, lows and the closing prices with the appropriate time frame highs, lows and closing prices when calculating the pivot points for the other time frames.

The main pivot point indicates the mood of the market. Any price level above the main pivot point indicates a bullish sentiment in the market and any price level below the amin pivot point indicates the bearish sentiment in the market. The pivot point can become the target low for the trading session in an extremely bullish market condition. This number represents the true value of a prior session. It is important to understand that especially in strong bull or bear market conditions, it can be used as an actual trading number in determining the high or the low of a given time period.

Traders will step in and buy the pullback until that pivot point is broken by prices trading below that level. A retracement back to the pivot will attract buyers if the market gaps higher above the pivot point in an uptrending market. The opposite is true for the pivot point will act as the target high for the session in an extremely bearish market condition.

Technically speaking, in a bearish market, the highs should be lower and the lows should be lower than in the preceding time frame. Generally prices come back up to test the pivot point if a news-driven event causes the market to gap lower after traders take time interpreting the information and the news. Sellers will take action and start pressing the market lower again if the market fails to break that level and trade higher.

Mr. Ahmad Hassam is a Harvard University Graduate. Try These Cash Printing Forex Signals From Heaven! Learn Fibonacci Retracement This and other unique content ‘forex’ articles are available with free reprint rights.

Fibonacci And Pivot Point Trading (Part I)

Traders frequently use the Fibonacci retracement levels and pivot points in their trading. Many day traders are diehard fans of the Fibonacci retracement levels and the pivot points. The use of Fibonacci retracement levels and pivot points are often considered by their adherents as complete, self contained trading strategies. Why some traders are diehard fans of the Fibonacci and pivot point trading? Continue reading the article to know why!

Don’t confuse the two methods as one. I want to make it clear the Fibonacci Retracement and the Pivot Points are two different methods and must not be confused as a single trading method. Both produce mathematically derived support and resistance levels that traders may use either as indicators of possible retracement turns or as zones to watch for breakouts. The horizontal price levels that are generated through Fibonacci retracement levels and the pivot points are calculated using different methods and formulas.

Why Fibonacci retracement levels and the pivot points work most of the time? What makes these tools work surprisingly well under diverse market conditions is the simple fact that many traders both small and large use Fibonacci retracement levels and pivot points in their trading.

Therefore the levels derived from these two tools become self fulfilling prophecy. This is why significant price action occurs around these levels due to the fact that many traders are watching and reacting to these price levels.

This phenomenon contributes to the Fibonacci retracement levels and pivot points frequent effectiveness and accuracy in describing the market movement. The most common Fibonacci retracement levels are 23.6%, 38.2% and 61.8%. These three Fibonacci retracement levels are most frequently followed by the traders.

As said above, Fibonacci retracement levels are very popular among the traders. There is a full fledge Fibonacci trading method. You will hear very often, the commentary on CNBC or Bloomberg that price is approaching the 38.2% retracement level and something important like a turn could occur at this level. This shows the popularity of Fibonacci retracement levels among the trading community.

Both methods have clear cut locations for the stop loss placement similar to most support/resistance trading methods. Fibonacci retracements can be traded either as a breakout opportunity or as a retracement bounce. Fibonacci levels can also be used as profit targets for existing open trades.

Most of the technical indicators used in technical analysis are lagging in nature. Pivot points are leading indictors of the price action in the market. This makes them very useful for the traders. Pivot points are derived mathematically from the previous day’s data that includes the previous day’s high. Low and close. The main pivot point (PP) is calculated by taking the average of the high, low and close of the previous days’ price action.

From the PP, four other primary pivot points are calculated. Two are above the main PP and two are below the main PP. The levels above are R1 and R2 where R stands for resistance.

You can easily find a pivot point calculator online. Most of the charting software also can calculate the pivot points. The two levels below the main PP are the S1 and S2 where S stands for the Support. Often these pivot points are further extended to R3 and S3.

However, it is always good for the trader to know how these numbers are calculated. This will give the trader an understanding of how these numbers are calculated and what are the variables that are used to calculate them.

Mr. Ahmad Hassam is a Harvard University Graduate. Try These Cash Printing Forex Signals From Heaven! Learn Fibonacci Retracement Get a totally unique version of this article from our article submission service