Course Terms & Concepts - Technical Analysis 2

3. Pattern Recognition

Market Sentiment

Market sentiment refers to the general feeling of the majority of traders in a given market. If because of a weak Nonfarm Payroll report the majority of currency traders feel that the US Dollar will weaken; market sentiment surrounding the Dollar is thus negative. Often, a negative market sentiment surrounding a particular currency or economy can become reality. If many traders feel that the dollar should be weak and subsequently start selling the Dollar, the initial market sentiment may become a market reality as a mass of traders all selling the Dollar would in theory weaken it's global standing.

Trend Reversal

Professional traders know that spotting a true reversal in the current direction of a trend can be paramount to the success of their analysis. Trend reversals occur typically after price consolidation (see next Course Term), and if spotted early can provide excellent entry points into the market. By definition, any dramatic change in the direction of a trend can be considered a reversal, but shorter term directional trends should be viewed only as retracements; directional changes lasting the duration of mulitple candles, or hours and days on the other hand can be considered actual reversals.

Consolidation

Price consolidation refers to the narrowing of price highs and lows in a given time frame. This is usually a result of buyers and sellers that are unsure of market direction. Often, consolidation occurs as a means to test the strength of a trend. Lower highs and higher lows demonstrate a lack of domination from either the buyers or sellers, and as if being squeezed through a narrow passage, prices eventually break free and typically do so in favor of a strong move up or down.

Stop Loss

A stop loss is designed to protect traders from excessive losses in the event that a market's price dramatically changes in one direction or another. As a general rule of thumb, even professional traders with years of experience should utilize stop losses. Traders should establish a threshold of pain before entering into a trade and set a stop loss at said level. When and if the price moves to the stop loss the trade will be closed. Stop losses do not guarantee that the trader will be protected from loss. In certain market conditions the stop loss will be filled at the next available price which may be at a different price than the trader has specified.

Short

The Term 'short' refers to the selling side of the market and is most often used by traders as a verb, i.e 'I went short the Euro', thus meaning that I sold the Euro. Traders might also say that they are 'short 20 lots on the Pound', meaning of course that they have sold 20 lots of the Great British Pound.

Long

The Term 'long' refers to the buying side of the market and is most often used by traders as a verb, i.e 'I went long the Euro', thus meaning that I bought the Euro. Traders might also say that they are 'long 20 lots on the Pound', meaning of course that they have bought 20 lots of the Great British Pound.

5. Moving Averages

Market Expectations

The idea of market expectations should seem simple enough; essentially, the point is this: Forex traders must be educated! The mass of well educated traders generally have similar expectations in terms of where prices will head. For example, given a poor showing in Nonfarm payroll, the mass of traders are going to expect the Dollar to weaken on the first Friday of the month. A trader focused on nothing but moving averages and who is ignorant to obvious market expectations will have very limited success. Do your homework, read the commentary of market analysts, prep your daily trading; in short - know what the market is expecting!

Range

Currencies tend to trade within certain price ranges. Traders need to understand trading ranges in conjunction with average daily pip movements before they can make a logical trading plan, or before they prepare a profit target level. If trading the Euro, for example, a trader had better be aware that the Euro price range over the last week has been somewhere in between 4100 and 4400. That information considered, very few currencies move more than 80 to 90 pips in a single day, and the Euro is not an exception. If a trader intends to place a short term trade (3 - 4 days or less), they must first consider price range, and then the likelihood of a movement to their desired price level. Can 80 pips be made inside of 2 days? Not likely, set your sights a bit lower and always consider price range and average daily pip movements.

Sideways Market

Simply stated, traders need volatility in order to be successful, that is to say, prices need to move. Sideways markets typically suggest low volatility and a trading period in which, prices are neither trending up or down. Certain trading strategies can work well in sideways markets; if traders are after smaller gains pip wise. However, most traders are looking to avoid sideways prices, unless of course prices are consolidating or narrowing, which of course would indicate a potential price breakout.

Lagging Indicator

A lagging indicator refers to a technical indicator that gives traders an indication that a trend has already begun, in other words the notification is a bit after the fact, hence the term 'lagging'. Though lagging indicators can be a bit behind, they still help traders catch onto trends that otherwise might have gone overlooked. Moving averages are considered lagging indicators. The opposite of lagging indicators would be 'leading indicators', indicators that work to warn traders ahead of time that something is developing. The best technique is not to use only one indicator type or the other, but a combination of both.

Fibonacci Levels

Fibonacci is not only the name of a famous mathematician; it is also the name of a very common technical indicator. Essentially, Leonard Fibonacci's number sequence is used as a means to gauge potential market retracements. The math behind the indicator is subject matter for an entire course, as is much of the related philosophy and strategy. However, the short explanation is that Fibonacci levels offer traders a look at where prices might retrace or extend to in the form of a series of numbers (price levels) that are represented as lines plotted on a chart. Fib levels are most commonly used after a major move up or down, in an effort to predict a possible price retracement.

7. MACD

EMA

EMA (exponential moving average) refers to the type of moving average that more heavily weighs recent price data when calculating average levels. Simple moving averages (SMA) sometimes react too slowly to price changes because they give equal weight to even the oldest prices in the equation. EMAs attempt to resolve this problem, and as such are a common choice of today's Forex traders.

Oscillate

To oscillate is to volley between two key levels or values within a specified technical indicator. Most often, oscillating indicators are attempting to plot short-term overbought and oversold levels, thus offering traders a visual look at where prices might be too high or two low when an obvious trend is otherwise unidentifiable. Oscillating indicators are very popular, and include: Stochastic Oscillator, RSI, and many others.