Standard Two - Getting Serious

Let us recap from previous pre-school basic. Here goes.
There are

  • Contract Spec for FKLI and FCPO
  • Margin Required
  • Over The Counter or Call In or Both ?
  • What market you would like to trade ? 
  • Leverage and Margin call dateline

1.) Contract Spec
I cannot stress how important is a contract spec to any of the traders out there. Anyone who neglect or fail to understand the contract spec in any of the Futures products is doom to fail. There are a few important point that you will have to pay special attention to:
  • Underlying Asset / Instrument
  • Settlement Method (Cash or Physical delivery) and Final Settlement Date
  • Trading Hours
  • Contract Size
2.)Margin Required
Initial margin will be set by Bursa Malaysia and it will change from time to time prior with notice. The way of how margin is calculated is not the point here but it usually will weight about 2%~8% of the contract size for any of the Futures product/Instruments.

3.)OTC or Call In
Make sure you check with the Futures brokerage company how do they execute your trades. If they provide online electronic trading it is even better because you can trade and manage your Futures contract positions on your own and you can lower the transaction cost too !!

4.)What market ?
So which market would you like to trade ? The question is not up to you discretion alone, it is up to your knowledge what is the best market you can comfortably trade. If you cannot handle the fluctuation and volatility in commodities market and always has to monitor the price movement and market, maybe commodities market is not for you!! Pick a market that you can trade comfortably so that you don't have to worry where did it go for the next 5 minutes or 2 hours, trading should be enjoyable not heart wrenching business.

5.)Leverage and Margin  Call
This is the most crucial part of investment prospectus. Trading in Futures market involved leverage, for a small amount of money you gained control of huge value of asset/instrument. Your profit will magnify if the price favor you and your loss will be gigantic if the market go against you. When it comes to dealing with margin call, I recommend that you should not topping up to cover your loss but be a discipline traders to cut loss and stay away from the market for a while.
If your broker has to call you for margin top up (margin Call) it may mean something is really wrong with your entry point and your overall investment strategies !! Stop trading, review what made you pull that trade and improvise it. Nothing is easy even in trading in market, it is even harder when you suffer from streaks and series of draw down !! But don't give up.

Okay, now you have recap the basic we can move on to to the next level, mapping the market through price action. Most technical analyst believe that mass psychology in market are displayed in the chart and price action. These chartists made their living through technical analysis and fine tune their trading (entry, stop and profit trailing) that took years to be perfect. Lets see what is technical and fundamental analysis is all about.

To jump start your learning curve, you can also read this article regarding introduction to Futures market, here.


There are 2 basic types of analysis you can take when trading in any market:

There has always been a constant debate as to which analysis is better, but to tell you the truth, you need to know a little bit of both. So let’s break each one down and then come back and put them together.





Fundamental analysis is a way of looking at the market through economic, social and political forces that affect supply and demand. In other words, you look at whose economy is doing well, and whose economy sucks.  The idea behind this type of analysis is that if a country’s economy is doing well, their currency will also be doing well.  This is because the better a country’s economy, the more trust other countries have in that currency, stock market and business prospect in that country.  
For example, the dollar has been gaining strength because the U.S. economy is gaining strength. As the economy gets better, interest rates get higher to control inflation and as a result, the value of the dollar continues to increase.  In a nutshell, that is basically what fundamental analysis is.

How Do I Know Whether That Country Economy Is Doing Well ?
One way to identify the health of a country economic is by looking at their economy indicators. Economic indicators can be classified into three categories according to their usual timing in relation to the business cycle: leading indicators, lagging indicators, and coincident indicators.

Leading indicators

Leading indicators are indicators that usually change before the economy as a whole changes. They are therefore useful as short-term predictors of the economy. Stock market returns are a leading indicator: the stock market usually begins to decline before the economy as a whole declines and usually begins to improve before the general economy begins to recover from a slump. Other leading indicators include the index of consumer expectations, building permits, and the money supply.

Lagging indicators

Lagging indicators are indicators that usually change after the economy as a whole does. Typically the lag is a few quarters of a year. The unemployment rate is a lagging indicator: employment tends to increase two or three quarters after an upturn in the general economy. In finance, Bollinger bands are one of various lagging indicators in frequent use. In a performance measuring system, profit earned by a business is a lagging indicator as it reflects a historical performance; similarly, improved customer satisfaction is the result of initiatives taken in the past.

These components tend to follow changes in the overall economy.
The components are:
  • The average duration of unemployment (inverted)
  • The value of outstanding commercial and industrial loans
  • The change in the Consumer Price Index for services
  • The change in labor cost per unit of output
  • The ratio of manufacturing and trade inventories to sales
  • The ratio of consumer credit outstanding to personal income
  • The average prime rate charged by banks

Coincident indicators

Coincident indicators change at approximately the same time as the whole economy, thereby providing information about the current state of the economy. There are many coincident economic indicators, such as Gross Domestic Product, industrial production, personal income and retail sales. A coincident index may be used to identify, after the fact, the dates of peaks and troughs in the business cycle.
There are four economic statistics comprising the Index of Coincident Economic Indicators:
  • Number of employees on non-agricultural payrolls
  • Personal income less transfer payments
  • Industrial production
  • Manufacturing and trade sales


Technical analysis is the study of price movement.  In one word, technical analysis = charts.  The idea is that a person can look at historical price movements, and, based on the price action, can determine at some level where the price will go.  By looking at charts, you can identify trends and patterns which can help you find good trading opportunities.





The most IMPORTANT thing you will ever learn in technical analysis is the trend!  Many, many, many, many, many, many people have a saying that goes, “The trend is your friend”.  The reason for this is that you are much more likely to make money when you can find a trend and trade in the same direction.  Technical analysis can help you identify these trends in its earliest stages and therefore provide you with very profitable trading opportunities.  
Now I know you’re thinking to yourself, “Geez, these guys are smart.  They use crazy words like "technical" and "fundamental" analysis. I can never learn this stuff!” Don't worry yourself too much. After you're done with this basics of technical analysis, you too will be just as....uhmmm..."smart?" as anyone out there!!

So which type of analysis is better?

Ahh, the million dollar question. Throughout your journey as an aspiring trader you will find strong advocates for both fundamental and technical trading. You will have those who argue that it is the fundamentals alone that drive the market and that any patterns found on a chart are simply coincidence. On the other hand, there will be those who argue that it is the technical that traders pay attention to and because traders pay attention to it, common market patterns can be found to help predict future price movements.
Do not be fooled by these one sided extremists! One is not better than the other...
In order to become a true master you will need to know how to effectively use both types of analysis. Don't rely on just one. Instead, you must learn to balance the use of both of them, because it is only then that you can really get the most out of your trading.

In order to know more about how to read chart you need to know the fundamental of a candlestick. 

1.)What is Candlestick Trading?

Back in the day when Godzilla was still a cute little lizard, the Japanese created their own old school version of technical analysis to trade rice. A westerner by the name of Steve Nison “discovered” this secret technique on how to read charts from a fellow Japanese broker and Japanese candlesticks lived happily ever after. Steve researched, studied, lived, breathed, ate candlesticks, began writing about it and slowly grew in popularity in 90s. To make a long story short, without Steve Nison, candle charts might have remained a buried secret. Steve Nison is Mr. Candlestick. Okay so what the heck are forex candlesticks? The best way to explain is by using a picture:]
Usually the filled candle can be seen as Red (Bearish) color and hollow candle can be know as green (Bullish) candle.



Candlesticks are formed using the open, high, low and close.
  • If the close is above the open, then a hollow candlestick (usually displayed as white) is drawn.
  • If the close is below the open, then a filled candlestick (usually displayed as black) is drawn.
  • The hollow or filled section of the candlestick is called the “real body” or body.
  • The thin lines poking above and below the body display the high/low range and are called shadows.
  • The top of the upper shadow is the “high”.
  • The bottom of the lower shadow is the “low”.

Sexy Bodies

Just like humans, candlesticks have different body sizes. And when it comes to forex trading, there’s nothing naughtier than checking out the bodies of candlesticks!
Long bodies indicate strong buying or selling. The longer the body is, the more intense the buying or selling pressure.
Short bodies imply very little buying or selling activity. In street forex lingo, bulls mean buyers and bears mean sellers.
Long candlestick body versus short 
candlestick body
Long white candlesticks show strong buying pressure. The longer the white candlestick, the further the close is above the open. This indicates that prices increased considerably from open to close and buyers were aggressive. In other words, the bulls are kicking the bears’ butts big time!
Long black (filled) candlesticks show strong selling pressure. The longer the black candlestick, the further the close is below the open. This indicates that prices fell a great deal from the open and sellers were aggressive. In other words, the bears were grabbing the bulls by their horns and body slamming them.

Mysterious Shadows

The upper and lower shadows on candlesticks provide important clues about the trading session.
Upper shadows signify the session high. Lower shadows signify the session low.
Candlesticks with long shadows show that trading action occurred well past the open and close.
Candlesticks with short shadows indicate that most of the trading action was confined near the open and close.
Long shadows
If a candlestick has a long upper shadow and short lower shadow, this means that buyers flexed their muscles and bid prices higher, but for one reason or another, sellers came in and drove prices back down to end the session back near its open price.
If a candlestick has a long lower shadow and short upper shadow, this means that sellers flashed their washboard abs and forced price lower, but for one reason or another, buyers came in and drove prices back up to end the session back near its open price.

Spinning Tops

Candlesticks with a long upper shadow, long lower shadow and small real bodies are called spinning tops. The color of the real body is not very important.
The pattern indicates the indecision between the buyers and sellers
Spinning Tops
The small real body (whether hollow or filled) shows little movement from open to close, and the shadows indicate that both buyers and sellers were fighting but nobody could gain the upper hand.
Even though the session opened and closed with little change, prices moved significantly higher and lower in the meantime. Neither buyers nor sellers could gain the upper hand, and the result was a standoff. 
If a spinning top forms during an uptrend, this usually means there aren’t many buyers left and a possible reversal in direction could occur.
If a spinning top forms during a downtrend, this usually means there aren’t many sellers left and a possible reversal in direction could occur.

Marubozu

Sounds like some kind of voodoo magic huh? "I will cast the evil spell of the Marubozu on you!" Fortunately, that's not what it means. Marubozu means there are no shadows from the bodies. Depending on whether the candlestick’s body is filled or hollow, the high and low are the same as it’s open or close. If you look at the picture below, there are two types of Marubozus.
Marubozu
A White Marubozu contains a long white body with no shadows. The open price equals the low price and the close price equals the high price. This is a very bullish candle as it shows that buyers were in control the whole entire session. It usually becomes the first part of a bullish continuation or a bullish reversal pattern.
A Black Marubozu contains a long black body with no shadows. The open equals the high and the close equals the low. This is a very bearish candle as it shows that sellers controlled the price action the whole entire session. It usually implies bearish continuation or bearish reversal.

Doji

Doji candlesticks have the same open and close price or at least their bodies are extremely short. The doji should have a very small body that appears as a thin line.
Doji suggest indecision or a struggle for turf positioning between buyers and sellers. Prices move above and below the open price during the session, but close at or very near the open price.
Neither buyers nor sellers were able to gain control and the result was essentially a draw.
There are four special types of Doji lines. The length of the upper and lower shadows can vary and the resulting candlestick looks like a cross, inverted cross or plus sign. The word "Doji" refers to both the singular and plural form.
/school/images/doji-examples.gif
When a doji forms on your chart, pay special attention to the preceding candlesticks.
If a doji forms after a series of candlesticks with long hollow bodies (like white marubozus), the doji signals that the buyers are becoming exhausted and weakening. In order for price to continue rising, more buyers are needed but there aren’t anymore! Sellers are licking their chops and are looking to come in and drive the price back down. 
Long Doji
Keep in mind that even after a doji forms, this doesn’t mean to automatically short. Confirmation is still needed. Wait for a bearish candlestick to close below the long white candlestick’s open.
If a doji forms after a series of candlesticks with long filled bodies (like black marubozus), the doji signals that sellers are becoming exhausted and weakening. In order for price to continue falling, more sellers are needed but sellers are all tapped out! Buyers are foaming in the mouth for a chance to get in cheap.
Black Doji
While the decline is sputtering due to lack of new sellers, further buying strength is required to confirm any reversal. Look for a white candlestick to close above the long black candlestick’s open.

Reversal Patterns

Prior Trend

For a pattern to qualify as a reversal pattern, there should be a prior trend to reverse. Bullish reversals require a preceding downtrend and bearish reversals require a prior uptrend. The direction of the trend can be determined using trend lines, moving averages, or other aspects of technical analysis.

Hammer and Hanging Man

The hammer and hanging man look exactly alike but have totally different meaning depending on past price action. Both have cute little bodies (black or white), long lower shadows and short or absent upper shadows.
Hammer and Hanging Man

Hanging Man
The hammer is a bullish reversal pattern that forms during a downtrend. It is named because the market is hammering out a bottom.
When price is falling, hammers signal that the bottom is near and price will start rising again. The long lower shadow indicates that sellers pushed prices lower, but buyers were able to overcome this selling pressure and closed near the open.
Word to the wise… just because you see a hammer form in a downtrend doesn’t mean you automatically place a buy order!  More bullish confirmation is needed before it’s safe to pull the trigger. A good confirmation example would be to wait for a white candlestick to close above the open of the candlestick on the left side of the hammer.
Recognition Criteria:
  • The long shadow is about two or three times of the real body.
  • Little or no upper shadow.
  • The real body is at the upper end of the trading range.
  • The color of the real body is not important.
The hanging man is a bearish reversal pattern that can also mark a top or strong resistance level. When price is rising, the formation of a hanging man indicates that sellers are beginning to outnumber buyers. The long lower shadow shows that sellers pushed prices lower during the session. Buyers were able to push the price back up some but only near the open. This should set off alarms since this tells us that there are no buyers left to provide the necessary momentum to keep raising the price. .
Recognition Criteria:
  • A long lower shadow which is about two or three times of the real body.
  • Little or no upper shadow.
  • The real body is at the upper end of the trading range.
  • The color of the body is not important, though a black body is more bearish than a white body.

Inverted Hammer and Shooting Star

The inverted hammer and shooting star also look identical. The only difference between them is whether you’re in a downtrend or uptrend. Both candlesticks have petite little bodies (filled or hollow), long upper shadows and small or absent lower shadows.
Inverted Hammer
Shooting Star
The inverted hammer occurs when price has been falling suggests the possibility of a reversal. Its long upper shadow shows that buyers tried to bid the price higher. However, sellers saw what the buyers were doing, said “oh hell no” and attempted to push the price back down. Fortunately, the buyers had eaten enough of their Wheaties for breakfast and still managed to close the session near the open. Since the sellers weren’t able to close the price any lower, this is a good indication that everybody who wants to sell has already sold. And if there’s no more sellers, who is left? Buyers.
The shooting star is a bearish reversal pattern that looks identical to the inverted hammer but occurs when price has been rising. Its shape indicates that the price opened at its low, rallied, but pulled back to the bottom. This means that buyers attempted to push the price up, but sellers came in and overpowered them. A definite bearish sign since there are no more buyers left because they’ve all been murdered.

Summary of Candlesticks
Candlesticks are formed using the open, high, low and close.
  • If the close is above the open, then a hollow candlestick (usually displayed as white) is drawn.
  • If the close is below the open, then a filled candlestick (usually displayed as black) is drawn.
  • The hollow or filled section of the candlestick is called the “real body” or body.
  • The thin lines poking above and below the body display the high/low range and are called shadows.
  • The top of the upper shadow is the “high”.
  • The bottom of the lower shadow is the “low”.
-Long bodies indicate strong buying or selling. The longer the body is, the more intense the buying or selling pressure.
-Short bodies imply very little buying or selling activity. In street forex lingo, bulls mean buyers and bears mean sellers.
-Upper shadows signify the session high.
-Lower shadows signify the session low.
-Candlesticks with a long upper shadow, long lower shadow and small real bodies are called spinning tops. The pattern indicates the indecision between the buyers and sellers
-Marubozu means there are no shadows from the bodies. Depending on whether the candlestick’s body is filled or hollow, the high and low are the same as it’s open or close.
-Doji candlesticks have the same open and close price or at least their bodies are extremely short.
The hammer is a bullish reversal pattern that forms during a downtrend. It is named because the market is hammering out a bottom.
The hanging man is a bearish reversal pattern that can also mark a top or strong resistance level.
-The inverted hammer occurs when price has been falling suggests the possibility of a reversal.
-The shooting star is a bearish reversal pattern that looks identical to the inverted hammer but occurs when price has been rising.

This going to be a long ride on this page so I hope you don't expect you to finish it in one day !!

2.)Support and Resistance

Support and resistance is one of the most widely used concepts in trading. Strangely enough, everyone seems to have their own idea on how you should measure support and resistance.
Let’s just take a look at the basics first.

Basic Support and Resistance

Look at the diagram above. As you can see, this zigzag pattern is making its way up (bull market). When the market moves up and then pulls back, the highest point reached before it pulled back is now resistance.
As the market continues up again, the lowest point reached before it started back is now support. In this way resistance and support are continually formed as the market oscillates over time. The reverse of course is true of the downtrend.

Plotting Support and Resistance
One thing to remember is that support and resistance levels are not exact numbers. Often times you will see a support or resistance level that appears broken, but soon after find out that the market was just testing it. With candlestick charts, these "tests" of support and resistance are usually represented by the candlestick shadows.

Notice how the shadows of the candles tested the resistance level. At those times it seemed like the market was "breaking" resistance. However, in hindsight we can see that the market was merely testing that level.
So how do we truly know if support or resistance is broken?
There is no definite answer to this question. Some argue that a support or resistance level is broken if the market can actually close past that level. However, you will find that this is not always the case. Let's take our same example from above and see what happened when the price actually closed past the resistance level.

In this case, the price had closed twice above the resistance level but both times ended up falling back down below it. If you had believed that these were real breakouts and bought this pair, you would've been seriously hurtin! Looking at the chart now, you can visually see and come to the conclusion that the resistance was not actually broken; and that it is still very much in tact and now even stronger.
So to help you filter out these false breakouts, you should think of support and resistance more of as "zones" rather than concrete numbers. One way to help you find these zones is to plot support and resistance on a line chart rather than a candlestick chart. The reason is that line charts only show you the closing price while candlesticks add the extreme highs and lows to the picture. These highs and lows can be misleading because often times they are just the "knee-jerk" reactions of the market. It's like when someone is doing something really strange, but when asked about it, they simply reply, "Sorry, it's just a reflex."
When plotting support and resistance, you don't want the reflexes of the market. You only want to plot its intentional movements.
Looking at the line chart, you want to plot your support and resistance lines around areas where you can see the price forming several peaks or valleys.


Other interesting tidbits about support and resistance:
  1. When the market passes through resistance, that resistance now becomes support.
  2. The more often price tests a level of resistance or support without breaking it the stronger the area of resistance or support is.
 Trend Lines
Trend lines are probably the most common form of technical analysis used today. They are probably one of the most underutilized as well.
If drawn correctly, they can be as accurate as any other method. Unfortunately, most traders don't draw them correctly or they try to make the line fit the market instead of the other way around.
In their most basic form, an uptrend line is drawn along the bottom of easily identifiable support areas (valleys). In a downtrend, the trend line is drawn along the top of easily identifiable resistance areas (peaks).
 Channels
If we take this trend line theory one step further and draw a parallel line at the same angle of the uptrend or downtrend, we will have created a channel.
To create an up (ascending) channel, simply draw a parallel line at the same angle as an uptrend line and then move that line to position where it touches the most recent peak. This should be done at the same time you create the trend line.
To create a down (descending) channel, simple draw a parallel line at the same angle as the downtrend line and then move that line to a position where it touches the most recent valley. This should be done at the same time you created the trend line.
When prices hit the bottom trend line this may be used as a buying area. When prices hit the upper trend line this may be used as a selling area.

3.)Price Smoothies

A moving average is simply a way to smooth out price action over time.  By “moving average”, we mean that you are taking the average closing price of a currency for the last ‘X’ number of periods.
Moving Average
Like every indicator, a moving average indicator is used to help us forecast future prices.  By looking at the slope of the moving average, you can make general predictions as to where the price will go.  
As we said, moving averages smooth out price action. There are different types of moving averages, and each of them has their own level of “smoothness”.  Generally, the smoother the moving average, the slower it is to react to the price movement.  The choppier the moving average, the quicker it is to react to the price movement. We’ll explain the pros and cons of each type a little later, but for now let’s look at the different types of moving averages and how they are calculated.

Simple Moving Average (SMA)

A simple moving average is the simplest type of moving average (DUH!).  Basically, a simple moving average is calculated by adding up the last “X” period’s closing prices and then dividing that number by X.  Confused???  Allow me to clarify.
 If you plotted a 5 period simple moving average on a 1 hour chart, you would add up the closing prices for the last 5 hours, and then divide that number by 5.  Voila!  You have your simple moving average.
If you were to plot a 5 period simple moving average on a 10 minute chart, you would add up the closing prices of the last 50 minutes and then divide that number by 5. 
If you were to plot a 5 period simple moving average on a 30 minute chart, you would add up the closing prices of the last 150 minutes and then divide that number by 5.
If you were to plot the 5 period simple moving average on the a 4 hr. chart………………..OK OK, I think you get the picture!  Let’s move on.
Most charting packages will do all the calculations for you.  The reason we just bored you (yawn!) with how to calculate a simple moving average is because it is important that you understand how the moving averages are calculated. If you understand how each moving average is calculated, you can make your own decision as to which type is better for you. 
Just like any indicator out there, moving averages operate with a delay.  Because you are taking the averages of the price, you are really only seeing a “forecast” of the future price and not a concrete view of the future. Disclaimer: Moving averages will not turn you into Ms. Cleo the psychic!
Moving Averages
Here is an example of how moving averages smooth out the price action. 
On the previous chart, you can see 3 different SMAs. As you can see, the longer the SMA period is, the more it lags behind the price. Notice how the 62 SMA is farther away from the current price than the 30 and 5 SMA.  This is because with the 62 SMA, you are adding up the closing prices of the last 62 periods and dividing it by 62. The higher the number period you use, the slower it is to react to the price movement.

Exponential Moving Average (EMA)

Although the simple moving average is a great tool, there is one major flaw associated with it.  Simple moving averages are very susceptible to spikes.
The point I’m trying to make is that sometimes the simple moving average might be too simple.  If only there was a way that you could filter out these spikes so that you wouldn’t get the wrong idea.  Hmmmm…I wonder….Wait a minute……Yep, there is a way! 
 It’s called the Exponential Moving Average!
Exponential moving averages (EMA) give more weight to the most recent periods.  In our example above, the EMA would put more weight on Days 3-5, which means that the spike on Day 2 would be of lesser value and wouldn’t affect the moving average as much.  What this does is it puts more emphasis on what traders are doing NOW. 
Exponetial Moving Average
When trading, it is far more important to see what traders are doing now rather than what they did last week or last month.

 Which is better:  Simple or Exponential?
First, let’s start with an exponential moving average. When you want a moving average that will respond to the price action rather quickly, then a short period EMA is the best way to go.  These can help you catch trends very early, which will result in higher profit. In fact, the earlier you catch a trend, the longer you can ride it and rake in those profits! 
The downside to the choppy moving average is that you might get faked out.  Because the moving average responds so quickly to the price, you might think a trend is forming when in actuality; it could just be a price spike.
With a simple moving average, the opposite is true. When you want a moving average that is smoother and slower to respond to price action, then a longer period SMA is the best way to go.  
Although it is slow to respond to the price action, it will save you from many fake outs.  The downside is that it might delay you too long, and you might miss out on a good trade.


SMA

EMA

Pros:

Displays a smooth chart, which eliminates most fakeouts. Quick moving, and is good at showing recent price swings.

Cons:

Slow moving, which may cause a lag in buying and selling signals. More prone to cause fakeouts and give errant signals.

So which one is better? It’s really up to you to decide.  Many traders plot several different moving averages to give them both sides of the story. They might use a longer period simple moving average to find out what the overall trend is, and then use a shorter period exponential moving average to find a good time to enter a trade. In fact, many trading systems are built around what is called “Moving Average Crossovers”.  Later in this course, we will give you an example of how you can use moving averages as part of your trading system.

4.)Common Chart Indicators

Bollinger Bands

Each time you make it to the next lesson you continue to add more and more tools to your trader’s toolbox.  “What’s a trader’s toolbox?” you say…  Simple! Your trader’s toolbox is what you will use to “build” your trading account.  The more tools (education) you have in your trader’s toolbox (YOUR BRAIN), the easier it will be for you to build.  
So for this lesson, as you learn each of these indicators, think of them as a new tool that you can add to that toolbox of yours. You might not necessarily use all of these tools, but it’s always nice to have the option, right? Now, enough about tools already!  Let’s get started!

Bollinger Bands

Bollinger bands are used to measure a market’s volatility.  Basically, this little tool tells us whether the market is quiet or whether the market is LOUD!  When the market is quiet, the bands contract; and when the market is LOUD, the bands expand. Notice on the chart below that when the price was quiet, the bands were close together, but when the price moved up, the bands spread apart. 
Bollinger Bands
That’s all there is to it. Yes, we could go on and bore you by going into the history of the Bollinger band, how it is calculated, the mathematical formulas behind it, and so on and so forth, but we really didn’t feel like typing it all out.

In all honesty, you don’t need to know any of that junk.  We think it’s more important that we show you some ways you can apply the Bollinger bands to your trading.
Note: If you really want to learn about the calculations of a Bollinger band, then you can go to www.bollingerbands.com

The Bollinger Bounce

One thing you should know about Bollinger Bands is that price tends to return to the middle of the bands. That is the whole idea behind the Bollinger bounce (smart, huh?).  If this is the case, then by looking at the chart below, can you tell us where the price might go next?
Bollinger Bounce
If you said down, then you are correct!  As you can see, the price settled back down towards the middle area of the bands.
Bollinger Bounce
That’s all there is to it. What you just saw was a classic Bollinger bounce.  The reason these bounces occur is because Bollinger Bands act like mini support and resistance levels. The longer the time frame you are in, the stronger these bands are.  Many traders have developed systems that thrive on these bounces, and this strategy is best used when the market is ranging and there is no clear trend.  
Now let’s look at a way to use Bollinger Bands when the market does trend.

Bollinger Squeeze

The Bollinger squeeze is pretty self explanatory.  When the bands “squeeze” together, it usually means that a breakout is going to occur.  If the candles start to break out above the top band, then the move will usually continue to go up.  If the candles start to break out below the lower band, then the move will usually continue to go down.
Bollinger Squeeze
Looking at the chart above, you can see the bands squeezing together.  The price has just started to break out of the top band.  Based on this information, where do you think the price will go?
Bollinge Squeeze
If you said up, you are correct! This is how a typical Bollinger Squeeze works.  This strategy is designed for you to catch a move as early as possible. Setups like these don’t occur everyday, but you can probably spot them a few times a week if you are looking at a 15 minute chart.  
So now you know what Bollinger Bands are, and you know how to use them. There are many other things you can do with Bollinger Bands, but these are the 2 most common strategies associated with them. So now you can put this in your trader’s toolbox, and we can move on to the next indicator.

MACD

MACD is an acronym for Moving Average Convergence Divergence.   This tool is used to identify moving averages that are indicating a new trend, whether it’s bullish or bearish.  After all, our #1 priority in trading is being able to find a trend, because that is where the most money is made. 
MACD
With an MACD chart, you will usually see three numbers that are used for its settings.
  • The first is the number of periods that is used to calculate the faster moving average.
  • The second is the number of periods that are used in the slower moving average.
  • And the third is the number of bars that is used to calculate the moving average of the difference between the faster and slower moving averages.
For example, if you were to see “12,26,9” as the MACD parameters (which is usually the default setting for most charting packages), this is how you would interpret it:
  • The 12 represents the previous 12 bars of the faster moving average.
  • The 26 represents the previous 26 bars of the slower moving average.
  • The 9 represents the previous 9 bars of the difference between the two moving averages.  This is plotted by vertical lines called a histogram (The blue lines in the chart above). 
There is a common misconception when it comes to the lines of the MACD.  The two lines that are drawn are NOT moving averages of the price.  Instead, they are the moving averages of the DIFFERENCE between two moving averages.
In our example above, the faster moving average is the moving average of the difference between the 12 and 26 period moving averages. The slower moving average plots the average of the previous MACD line. Once again, from our example above, this would be a 9 period moving average.  
This means that we are taking the average of the last 9 periods of the faster MACD line, and plotting it as our “slower” moving average. What this does is it smoothes out the original line even more, which gives us a more accurate line.
The histogram simply plots the difference between the fast and slow moving average.  If you look at our original chart, you can see that as the two moving averages separate, the histogram gets bigger.  This is called divergence, because the faster moving average is “diverging” or moving away from the slower moving average.
As the moving averages get closer to each other, the histogram gets smaller.  This is called convergence because the faster moving average is “converging” or getting closer to the slower moving average. And that, my friend, is how you get the name, Moving Average Convergence Divergence!  Whew, we need to crack our knuckles after that one!
Ok, so now you know what MACD does. Now I’ll show you what MACD can do for YOU. 
 MACD Crossover
Because there are two moving averages with different “speeds”, the faster one will obviously be quicker to react to price movement than the slower one.  When a new trend occurs, the fast line will react first and eventually cross the slower line.  When this “crossover” occurs, and the fast line starts to “diverge” or move away from the slower line, it often indicates that a new trend has formed.
MACD Crossover
From the chart above, you can see that the fast line crossed under the slow line and correctly identified a new downtrend. Notice that when the lines crossed, the histogram temporarily disappears. This is because the difference between the lines at the time of the cross is 0.  As the downtrend begins and the fast line diverges away from the slow line, the histogram gets bigger, which is good indication of a strong trend.
There is one drawback to MACD.  Naturally, moving averages tend to lag behind price.  After all, it's just an average of historical prices. Since the MACD represents moving averages of other moving averages and is smoothed out by another moving average, you can imagine that there is quite a bit of lag. However, it is still one of the most favored tools by many traders.

Parabolic SAR

Up until now, we’ve looked at indicators that mainly focus on catching the beginning of new trends.  And although it is important to be able to identify new trends, it is equally important to be able to identify where a trend ends. After all, what good is a well-timed entry without a well-timed exit?  
Parabolic SAR
One indicator that can help us determine where a trend might be ending is the Parabolic SAR (Stop And Reversal).  A Parabolic SAR places dots, or points, on a chart that indicate potential reversals in price movement. From the chart above, you can see that the dots shift from being below the candles during the uptrend, to above the candles when the trend reverses into a downtrend.

Using Parabolic SAR

The nice thing about the Parabolic SAR is that it is really simple to use.  Basically, when the dots are below the candles, it is a buy signal; and when the dots are above the candles, it is a sell signal.  This is probably the easiest indicator to interpret because it assumes that the price is either going up or down.  With that said, this tool is best used in markets that are trending, and that have long rallies and downturns.  You DON’T want to use this tool in a choppy market where the price movement is sideways.

Stochastics

Stochastics are another indicator that helps us determine where a trend might be ending.  By definition, a stochastic is an oscillator that measures overbought and oversold conditions in the market.  The 2 lines are similar to the MACD lines in the sense that one line is faster than the other.
Stochastics

How to Apply Stochastics

Like I said earlier, stochastics tells us when the market is overbought or oversold.  Stochastics are scaled from 0 to 100.  When the stochastic lines are above 80 (the red dotted line in the chart above), then it means the market is overbought.  When the stochastic lines are below 20 (the blue dotted line), then it means that the market is oversold.  As a rule of thumb, we buy when the market is oversold, and we sell when the market is overbought.
 Overbought
Looking at the chart above, you can see that the stochastics has been showing overbought conditions for quite some time.  Based upon this information, can you guess where the price might go?

Stochastics Overbought
If you said the price would drop, then you are absolutely correct!  Because the market was overbought for such a long period of time, a reversal was bound to happen. 
That is the basics of stochastics.  Many traders use stochastics in different ways, but the main purpose of the indicator is to show us where the market is overbought and oversold.  Over time, you will learn to use stochastics to fit your own personal trading style. Okay, let's move on to RSI.

Relative Strength Index

Relative Strength Index, or RSI, is similar to stochastics in that it identifies overbought and oversold conditions in the market.  It is also scaled from 0 to 100. Typically, readings below 30 indicate oversold, while readings over 70 indicate overbought. 
Relative Strength Index

Using RSI

RSI can be used just like stochastics.  From the chart above you can see that when RSI dropped below 30, it correctly identified an oversold market.  After the drop, the price quickly shot back up. 
RSI Oversold
RSI is a very popular tool because it can also be used to confirm trend formations.  If you think a trend is forming, take a quick look at the RSI and look at whether it is above or below 50.  If you are looking at a possible uptrend, then make sure the RSI is above 50.  If you are looking at a possible downtrend, then make sure the RSI is below 50.
RSI - Cross Above 50
In the beginning of the chart above, we can see that a possible uptrend was forming.  To avoid fakeouts, we can wait for RSI to cross above 50 to confirm our trend.  Sure enough, as RSI passes above 50, it is a good confirmation that an uptrend has actually formed. Okey dokey, we've covered a smorgasbord of indicators, let's see how we can put all of what you just learned together..


Putting It All Together
In a perfect world, we could take just one of these indicators and trade strictly by what that indicator told us. The problem is that we DON’T live in a perfect world, and each of these indicators has imperfections. That is why many traders combine different indicators together so that they can “screen” each other. They might have 3 different indicators and they won’t trade unless all 3 indicators give them the same answer.
As you continue your journey as a trader, you will discover what indicators work best for you.  We can tell you that we like using MACD, Stochastics, and RSI, but you might have a different preference.  Every trader out there has tried to find the “magic combination” of indicators that will always give them the right signals, but the truth is that there is no such thing.
I urge you to study each indicator on its own until you know EXACTLY how it reacts to price movement, and then come up with your own combination that fits your trading style. Later on in the course, we will show you a system that combines different indicators to give you an idea of how they can compliment each other.

5.) Oscillators / Leading Indicators
An oscillator is any object or data that moves back and forth between two points. In other words, it’s an item that is going to always fall somewhere between point A and point B. Think of when you hit the oscillating switch on your electric fan.
Think of our technical indicators as either being “on” or “off”. More specifically, an oscillator will usually signal “buy” or “sell”, with the only exception being instances when the oscillator is not clearly at either end of the buy/sell range. 
Does this sound familiar? It should! Stochastics, Parabolic SAR, and the Relative Strength Index (RSI) are all oscillators. Each of these indicators is designed to signal a possible reversal, where the previous trend has run its course and the price is ready to change direction. 
Let’s take a look at a few examples.
 
Price action can hover in overbought/oversold zone for a very long time.
 Now let’s take a look at the same leading oscillators messing up, just so you know these signals aren’t perfect. Looking at the chart below, you can quickly see that there were a lot of false buy signals popping up. You’ll see how one indicator says to buy, while the other one is still saying sell.

What happened to such a good set of indicators?
The answer lies in the method of calculation for each one. Stochastic is based on the high-to-low range of the time period (in this case, it’s hourly), yet doesn’t account for changes from one hour to the next. The Relative Strength Index (RSI) uses change from one closing price to the next. And Parabolic SAR has its own unique calculations that can further cause conflict.
That’s the nature of oscillators – they assume that a particular chart pattern always results in the same reversal. Of course, that’s hogwash.
While being aware of why a leading indicator may be in error, there’s no way to avoid them. If you’re getting mixed signals, you’re better off doing nothing than taking a ‘best guess’. If a chart doesn’t meet all your criteria, don’t force the trade! Move on to the next one that does meet your criteria.

Momentum / Lagging Indicators
So how do we spot a trend? The indicators that can do so have already been identified as MACD and moving averages. These indicators will spot trends once they have been established, at the expense of delayed entry. The bright side is that there’s less chance of being wrong.


Let’s take a look at the same chart so you can see how these crossover signals can sometimes give false signals. We like to call them “fake-outs”. Look at how there was a bearish MACD crossover after the uptrend we just discussed.
Ten hours later, the 20 EMA crossed below the 10 EMA giving a “sell” signal. As you can see, the price didn’t drop but stayed pretty much sideways, then continued its uptrend. By the time both indicators were in agreement, you would’ve entered a short trade at the bottom and set yourself up for a loss. Bummer, dude!
Trading is about filtering the fake outs and wait for the trade to come to you !!

Disclaimer: Information and opinions contained in this report are for educational purposes only. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness. No liability can be accepted for any loss that may arise from the use of this article.