Tools to help traders

[ilearn2t]

I think with so many different Indicators, Tools, Systems, Strategies, Software, Expert Advisors, and so on, to get this thread going, I'll start with all our favorite one "Indicator"
Over time I add as many different indicators and try and give as much information as possible on each one.

Average True Range (ATR)

Developed by Wilder, ATR gives Forex traders a feel of what the historical volatility was in order to prepare for trading in the actual market.

During more volatile movements the ATR moves up, and during less volatile movements ATR moves down. When price bars are short, means there was little ground covered from high to low during the day, and then you'll see the ATR moving lower. If price bars begin to grow and become larger, representing a larger true range, the ATR line will rise.

Wilder used daily charts and 14-day ATR to explain the concept of Average Trading Range.
So the ATR standard settings = 14.

It is not a leading indicator, which means it does not send signals about market direction or duration, but it gauges one of the most important market parameter - price volatility.

Traders use ATR to determine the best position for their trading Stop orders - such stops that with a help of ATR would correspond to the most actual market volatility. When the market is volatile, traders look for wider stops in order to avoid being stopped out of the trading by some random market move. When the volatility is low, there is no reason to set wide stops; traders then focus on tighter stops in order to have better protections for their trading positions and accumulated profits.

But now we'll go one better and try to calculate a signal.

Measure ATR for the previous 14 days. (Check your "Daily" data in History Center)
But lets say EURUSD 14 day ATR stands at 110 pips and our risk is 20% ATR.
So we choose to enter at breakout (zx) + 20% (110 x 20% = 22 pips)

How to quickly workout zx+% = pips

1x20% =0.2
10x20% = 2
100x20% = 20

Breakout = EURUSD 14 day average.

Overall total = 132 pips

So we put this all together as if we're going long.

EUR/USD current price 1.3472 so we add "zx+%" = 1.3604

By adding 20% we lose 22 pips on breakout, but we�ve taken an additional less risk measure to avoid any sudden price fall that can occur in a blink of an eye.

If manual trading allow breakout x 50% = 55 pips before applying trailingstop at 20 pips. Stoploss must always be set at startup (pending orders) this case its 1.3527 (breakout - 55 pips)

True range is the largest value of the following three equations:

1. TR = H � L
2. TR = H � Cl
3. TR = Cl � L

Where:
TR - true range
H - today's high
L - today's low
Cl - yesterday's close

Normal days will be calculated according to the first equation.

Days that open with an upward gap will be calculated with second equation, where volatility of the day will be measured from the high to the previous close.

Days which opened with a downward gap will be calculated using third equation by subtracting the previous close from the day's low.

[ilearn2t]

Commodity Channel Index (CCI) Indicator

The Commodity Channel Index (CCI) Indicator was developed by Donald Lambert, and is a traditional technical indicator. It is based on the average of the deviation between the Moving Average and the Typical Price (Average of high, low and close). It is commonly used to identify periods where price is overbought and oversold - where the price is far from the Moving Average. It is also use to gauge trend direction by looking if it is positive or negative.

The CCI is calculated in the following way:

1. Calculate a 14-bars Simple Moving Average of the Typical Price. The Typical Price is defined as (High + Low + Close)/3.

2. Calculate the Mean Deviation of Typical Price and SMA of TP for the 14-bars.

3. Apply the following formula: CCI = (Typical Price - SMATP) / (0.015 * Mean Deviation)

Practically, the CCI gives a numerical representation of standard deviation of price from its Simple Moving Average. Smaller CCI values indicate that price is closer to its Moving Average, and bigger CCI values indicate that price is more distant than its Moving Average.

Method 1: Woodies CCI Zero-Line-Reject
A method that incorporates the CCI Indicator is Woodies CCI, developed by Ken Wood. He trades the CCI by trading several patterns that occurs on it. One pattern traded is the Zero-Line-Reject. It happens when CCI becomes close to its zero line, but bounces back to its previous direction.
This pattern is actually parallel to the price getting closer to a moving average - and bouncing from it. This is the logic behind the entry - Moving Average that serves as support area.
This is a highly powerful method that provides strong entry signals. However, it is usually more profitable to trade it using the Moving Average itself, rather than by the CCI. By trading with the Moving Average the trader can judge the trend's strength by looking at the slope of the MA. This allows for more reliable signals and filters ranging periods.

Method 2: Zero-Line Cross
This is a simple method of trading with the CCI indicator, which is based on the Zero-line. Its rules are the following:
Buy when CCI crosses its zero-line from below.
Sell when CCI crosses its zero-line from above.

Method 3: Trend-Line Break
This method is also a part of the Woodies CCI method. It is also used on other indicators, such as the Momentum. Its basis is the breakout of trend lines that are seen on the chart of the CCI. Once trend line is identified, trader enters the trade after it is broken by price.

I've never tried to workout a formula for this one, but would like to hear if someone has any ideas

[ilearn2t]

Bollinger Bands and the related indicators %b and BandWidth are technical analysis tools invented by the famous technical trader John Bollinger in the 1980s. Having evolved from the concept of trading bands, Bollinger Bands can be used to measure the highness or lowness of the price relative to previous trades

Because standard deviation is a measure of volatility, Bollinger bands adjust themselves to the market conditions. When the markets become more volatile, the bands widen (move further away from the average), and during less volatile periods, the bands contract (move closer to the average). The tightening of the bands is often used by technical traders as an early indication that the volatility is about to increase sharply.

This is one of the most popular technical analysis techniques. The closer the prices move to the upper band, the more overbought the market, and the closer the prices move to the lower band, the more oversold the market.

The default choice for the average is a simple moving average, but other types of averages can be employed as needed. Exponential moving averages are a common second choice.
Usually the same period is used for both the middle band and the calculation of standard deviation.

There are two indicators derived from Bollinger Bands, %b and BandWidth. %b, pronounced 'percent b', is derived from the formula for Stochastics and tells you where you are in relation to the bands. %b equals 1 at the upper band and 0 at the lower band. Writing upperBB for the upper Bollinger Band, lowerBB for the lower Bollinger Band, and last for the last (price) value: %b = (last − lowerBB) / (upperBB − lowerBB)

BandWidth tells you how wide the Bollinger Bands are on a normalized basis. Writing the same symbols as before, and middleBB for the moving average, or middle Bollinger Band:

BandWidth = (upperBB − lowerBB) / middleBB

Using the default parameters of a 20-period look back and plus/minus two standard deviations, BandWidth is equal to four times the 20-period coefficient of variation.

Uses for %b include system building and pattern recognition. Uses for BandWidth include identification of opportunities arising from relative extremes in volatility and trend identification.

The use of Bollinger Bands varies widely among traders. Some traders buy when price touches the lower Bollinger Band and exit when price touches the moving average in the center of the bands. Other traders buy when price breaks above the upper Bollinger Band or sell when price falls below the lower Bollinger Band.

Traders are often inclined to use Bollinger Bands with other indicators to see if there is confirmation. In particular, the use of an oscillator like Bollinger Bands will often be coupled with a non-oscillator indicator like chart patterns or a trendline; if these indicators confirm the recommendation of the Bollinger Bands, the trader will have greater evidence that what the bands forecast is correct.

When the average used in the calculation of Bollinger Bands is changed from a simple moving average to an exponential or weighted moving average, it must be changed for both the calculation of the middle band and the calculation of standard deviation.

[ilearn2t]

MACD (moving average convergence/divergence) is a technical analysis indicator created by Gerald Appel in the late 1970s. Thomas Aspray added a histogram to the MACD in 1986, as a means to anticipate MACD crossovers, an indicator of important moves in the underlying security.

Its a trend-following momentum indicator that shows the relationship between two moving averages of prices. The MACD is calculated by subtracting the 26-day exponential moving average (EMA) from the 12-day EMA. A nine-day EMA of the MACD, called the "signal line", is then plotted on top of the MACD, functioning as a trigger for buy and sell signals.

There are three common methods used to interpret the MACD:

1. Crossovers: When the MACD falls below the signal line, it is a bearish signal, which indicates that it may be time to sell. Conversely, when the MACD rises above the signal line, the indicator gives a bullish signal, which suggests that the price of the asset is likely to experience upward momentum. Many traders wait for a confirmed cross above the signal line before entering into a position to avoid getting "faked out" or entering into a position too early.

2. Divergence: Refers to a discrepancy between the MACD line and the graph of the market price. Positive divergence between the MACD and price arises when price hits a new low, but the MACD doesn't. This is interpreted as bullish, suggesting the downtrend may be nearly over. Negative divergence is when the market price hits a new high but the MACD does not. This is interpreted as bearish, suggesting that recent price increases will not continue. Divergence may also occur between the market price and the histogram. If new high price levels are not confirmed by new high histogram levels, it is considered bearish; alternatively, if new low price levels are not confirmed by new low histogram levels, it is considered bullish.

Longer and sharper divergences�distinct peaks or troughs�are regarded as more significant than small, shallow patterns.

3. Dramatic rise: When the MACD rises dramatically, the shorter moving average pulls away from the longer term moving average, this is a signal that the security is overbought and will soon return to normal levels.

Traders also watch for a move above or below the zero line because this signals the position of the short term average relative to the long term average. When the MACD is above zero, the short term average is above the long term average, which signals upward momentum. The opposite is true when the MACD is below zero, the zero line often acts as an area of support and resistance for the indicator. A crossing of the MACD line through zero happens when there is no difference between the fast and slow EMAs. A move from positive to negative is bearish and from negative to positive, bullish. Zero crossovers provide evidence of a change in the direction of a trend but less confirmation of its momentum than a signal line crossover. They will also vary the parameters of the MACD to track trends of varying duration. One popular short-term set-up, for example, is the (5,35,5).

The MACD is only as useful as the context in which it is applied. A trader might apply the MACD to a weekly scale before looking at a daily scale, in order to avoid making short term trades against the direction of the intermediate trend.

[ilearn2t]

The relative strength index (RSI): The relative strength index was developed by J. Welles Wilder and published in a 1978 book, New Concepts in Technical Trading Systems. This is a technical indicator used in the technical analysis of financial markets. It is intended to chart the current and historical strength or weakness of a stock or market based on the closing prices of a recent trading period. The indicator should not be confused with relative strength.

The RSI is classified as a momentum oscillator, measuring the velocity and magnitude of directional price movements. Momentum is the rate of the rise or fall in price. The RSI computes momentum as the ratio of higher closes to lower closes: stocks which have had more or stronger positive changes have a higher RSI than stocks which have had more or stronger negative changes.

The RSI is most typically used on a 14 day timeframe, measured on a scale from 0 to 100, with high and low levels marked at 70 and 30, respectively. Shorter or longer timeframes are used for alternately shorter or longer outlooks. More extreme high and low levels�80 and 20, or 90 and 10�occur less frequently but indicate stronger momentum.

Wilder put forward as a basis that when price moves up very rapidly, at some point it is considered overbought. Likewise, when price falls very rapidly, at some point it is considered oversold. In either case, Wilder deemed a reaction or reversal imminent.

Wilder believed that tops and bottoms are indicated when RSI goes above 70 or drops below 30. Traditionally, RSI readings greater than the 70 level are considered to be in overbought territory, and RSI readings lower than the 30 level are considered to be in oversold territory. In between the 30 and 70 level is considered neutral, with the 50 level a sign of no trend.

Wilder further believed that divergence between RSI and price action is a very strong indication that a market turning point is imminent. Bearish divergence occurs when price makes a new high but the RSI makes a lower high, thus failing to confirm. Bullish divergence occurs when price makes a new low but RSI makes a higher low.

Wilder thought that "failure swings" above 70 and below 30 on the RSI are strong indications of market reversals. For example, assume the RSI hits 76, pulls back to 72, then rises to 77. If it falls below 72, Wilder would consider this a "failure swing" above 70.

Finally, Wilder wrote that chart formations and areas of support and resistance could sometimes be more easily seen on the RSI chart as opposed to the price chart. The center line for the Relative Strength Index is 50, which is often seen as both the support and resistance line for the indicator.

If the Relative Strength Index is below 50, it generally means that the stock's losses are greater than the gains. When the Relative Strength Index is above 50, it generally means that the gains are greater than the losses.

Since then Andrew Cardwell has developed several new interpretations of RSI to help determine and confirm trend.

While Cutler's RSI is a slight variation of Welles Wilder's original Relative Strength Index. The RSI is a momentum oscillator used to identify overbought and oversold conditions in a commodity futures market by keying on specific levels, generally 30 and 70, on a chart scaled from 0 to 100. The study can also be used to detect the following:

Movement which might not be as readily apparent on the bar chart
Failure swings above 70 or below 30 which indicate reversals
Support and resistance
Divergences between RSI and price

Cutler's RSI is calculated as follows:

RSI = 100 - (100 / ( 1 + RS ) )
RS = UPAV:x / DNAV:x, and . . .
UPAV:x = (E, period's Closes UP) / period
DNAV:x = (z: period's Closes DOWN) / period
A Close UP (or DOWN) = CLOSE - CLOSE previous

If the difference is positive, it is a Close UP. If the difference is negative, the sign is changed and it is a Close DOWN.

[cafedeart]

Dear ilearn2t
You are really a great person, u don't know what u started here....its really that which i wanted to now since my first day of this career, u just wrote exactly what i wanted to know about ATR and CCI, i personally love those two and here i got clear soft explanation of them from you.
I usually use ATR (10) in 4H chart will it cause difference in deeper seance from ATR(14) ?
I use ATR for determining my SL so i asked.
U R REALLY TOO GOOD. Lov U man lov u.
and thanks to fxopen for this place where i got my lessons of fx.

[ilearn2t]

Hello cafedeart

Firstly, hope your family and yourself are in great health, I was away myself for a while and on returning you were one of my first I looked for as I really enjoy and missed your colourful (Hope we can see it back again soon) posting.

The ATR is one of my pet hates as I find it based loosely on the "candle" method, I use the line chart so all my maths and calculations are done by using my "History Center" you don't get the same reading but who cares if you're 1 or 2 pips out as long as you win.

I do have a simple formula hidden in my computer delete files for safe keeping (only way I don't lose it as I shread all files now) I'll dig it out and post it here for yourself and others to view.

Good luck
ilearn2t

[rexleon]

Hi ilearn2t

I want to know about Fractal and Envelope.
Can you give me an explaination?

Thanks in advance.

Regards,

[ilearn2t]

Hello rexleon

Working on it, I'll have it posted here for you before end of the night.

[ilearn2t]

Fractals - an indicator introduced by Bill Williams.

The use of fractals in forex trading can inform the trader of potentially rewarding reversals in price movement. While the fractal indicator is not associated with the mathematical phenomenon of fractals, it nonetheless refers to recurring patterns that appear in the auction cycle of any trading vehicle. When looking at past price charts, the presence of fractals at key turning points is obvious. They consist of five price bars with the highest point in the middle and lower highs on each side.

Educate yourself on the characteristics of a fractal pattern. Adjacent bars to this extreme must exhibit a stairstep-like pattern where each bar further away from the middle is a lower high or a higher low.

A bearish turning point occurs when there is a pattern with the highest high in the middle and two lower highs on each side.

A bullish turning point occurs when there is a pattern with the lowest low in the middle and two higher lows on each side.

The longer the time period (i.e. the number of bars required for a fractal), the more reliable the reversal. However, you should also remember that the longer the time period, the lower the number of signals generated. As its a lagging indicators - that is, a fractal can't be drawn until we are two days into the reversal. While this may be true, most significant reversals last many more bars, so most of the trend will remain intact

It is best to plot fractals in multiple time frames and use them in conjunction with one another.

Example:
Only trade short-term fractals in the direction of the long-term ones.
While long-term fractals are more reliable than short-term fractals.

Like many trading indicators, fractals are best used in conjunction with other indicators or forms of analysis. Perhaps the most common confirmation indicator used with fractals is the "Alligator indicator", a tool that is created by using moving averages that factor in the use of fractal geometry. The standard rule states that all buy rules are only valid if below the "alligator's teeth" (the center average), and all sell rules are only valid if above the alligator's teeth.

[ilearn2t]

Alligator Technical Indicator another by Bill Williams

In principle, Alligator Technical Indicator is a combination of Balance Lines (Moving Averages) that use fractal geometry and nonlinear dynamics.

The blue line (Alligator�s Jaw) is the Balance Line for the timeframe that was used to build the chart (13-period Smoothed Moving Average, moved into the future by 8 bars);

The red line (Alligator�s Teeth) is the Balance Line for the value timeframe of one level lower (8-period Smoothed Moving Average, moved by 5 bars into the future);

The green line (Alligator�s Lips) is the Balance Line for the value timeframe, one more level lower (5-period Smoothed Moving Average, moved by 3 bars into the future).

Lips, Teeth and Jaw of the Alligator show the interaction of different time periods. As clear trends can be seen only 15 to 30 per cent of the time, it is essential to follow them and refrain from working on markets that fluctuate only within certain price periods.

When the Jaw, the Teeth and the Lips are closed or intertwined, it means the Alligator is going to sleep or is asleep already. As it sleeps, it gets hungrier and hungrier � the longer it will sleep, the hungrier it will wake up. The first thing it does after it wakes up is to open its mouth and yawn. Then the smell of food comes to its nostrils: flesh of a bull or flesh of a bear, and the Alligator starts to hunt it. Having eaten enough to feel quite full, the Alligator starts to lose the interest to the food/price (Balance Lines join together) � this is the time to fix the profit.

[ilearn2t]

Canadian trader Charles Drummond invented Drummond geometry a series of technical analysis tools in the 1970s.
One in particular involved an envelope consisting of two trading bands. So this is were the Envelope indicator might have originated (Please don't quote me on it)

But this is now the Envelope indicator works:

Using envelopes to find overbought and oversold price levels. Each envelope is comprised of two major pieces, defined in the indicator settings:

Upper envelope band – The upper band is comprised of a moving average of the highs for periods with a percentage shift up. Set between 1 and 10%, the upper envelope band’s shift makes sure the upper envelope is almost always above the current price.

Lower envelope band – The lower band is a moving average of the lows for each bar or candlestick period shifted down by a range of 1-10%. The price is almost always above the lower envelope band.

Traders can use envelopes to make trading decisions. Most commonly, traders seek out overbought or oversold levels defined by a rise above or below the upper or lower band. If the price were to dip below the lower band, then the trader would long the pair after a rise above the lower band. If the price were to rise above the upper band, the trader would go short as the price crosses back through the band.

Traders who modify the envelope indicator settings can use moving average envelopes to find momentum trades, as well. Using the envelope as a momentum indicator means that a trader would buy on a cross above the upper band, and sell on a move below the lower band. Remember to set the envelopes with new settings; most traders use 2% for momentum trading. Setting the envelopes too high will generate losing trades; setting it too low will trigger too many trades, most of which end up unprofitable.

Short-Term Indicator

Each technical indicator has its own personality, and envelopes are no exception. This indicator works best for short-term trading where large movements are statistically less likely. Using the envelope indicator for long-term technical trading often creates far too many buy and sell signals to be used profitably. Remember, in the long-term, very large movements are the norm, not the exception. Traders interested in using envelopes as a long-term indicator should use it for momentum, not as an oscillator.

Moving Average Envelope Calculation

Those who wish to explore the envelope indicator fully will want to know about the technical indicator’s function. The equation below describes how the indicator is calculated:

Upper Band = SMA(CLOSE, P)*[1+(K/100)]
Lower Band = SMA(CLOSE, P)*[1-(K/100)]

SMA = Simple Moving Average
P= Periods
K= Percentage change expressed as a whole number percentage (36%=36)

[ilearn2t]

Hello Everyone

The first member that can confirm: Who was the first person to invent the Envelope indicator will receive a $1 "FXO bonus" donation by myself. Simply post your answer here Welcome to ilearn2t's chatroom If Charles Drummond is correct and you find the answer first the bonus offer still stands.

Good luck
ilearn2t

[cafedeart]

Hello cafedeart

Firstly, hope your family and yourself are in great health, I was away myself for a while and on returning you were one of my first I looked for as I really enjoy and missed your colourful (Hope we can see it back again soon) posting.
I do have a simple formula hidden in my computer delete files for safe keeping (only way I don't lose it as I shread all files now) I'll dig it out and post it here for yourself and others to view.
Good luck
ilearn2t

Sometimes winning 180 pips in a single trade is less important and brings less happiness in-respect of reply like you wrote for me, a simple 3 or 4 lines written by some guy named "ilearn2t" far far away from my eyes - but this 3 or 4 lines brings more warm and close relationship and brings more happiness then winning 4 trades in a row. I always said Fxopen is my first love and guys like "ilearn2t" is like my soul friend - once aging - "ilearn2t" U R TOO GOOD and I Lov U man, . man, U really have a big Good and lovable heart. take respect once again from this little soul named cafedeart.

[ilearn2t]

Hello cafedeart

Timeframe: 4 hour
Indicator: ATR (14) on the 4H chart.

THE STRATEGY

On a 4H chart find the high and low of the last previous days candle.
Or check 4H in "History Center"

Entry:

Place BuyStop at 10 pips above the "High".
Place SellStop at 10 pips below the "Low".

BuyStop the StopLoss is the previous day "Low".
SellStop the StopLoss is the previous day "High".

Your TakeProfit is the "Weekly" chart ATR (14) current Value � 10.

Example: AUDUSD "Weekly" chart ATR(14) 0.0298 � 10 = 29 pips.

Good luck
ilearn2t