Guide to Alligator Indicator

The indicator of the Alligator, authored by the well-known trader Bill Williams, became popular after the publication of two books "Trading Chaos" and "New Dimensions in the Exchange Trade," there you will find the most complete description (in connection with the author's vocabulary is not the best).

It is generally accepted that the majority of the time (70-80%) markets are in the state of a trading range or rang, prices at that time fluctuate within certain limits, and only in 20-30% of the time there are really trend movements that are most favorable for profit, because the price change at this time has a clearly expressed directional character.

Alligator indicator is just a very interesting approach to assess the direction of the market and filter the periods of absence of the trend (the side range). Its main goal is to give you the signal of an emerging trend.

Formula of Alligator

The alligator is a simple combination of 3 ordinary moving averages of different lengths and with different forward shifts.

All moving averages in the indicator Alligator use not the closing price, but the median price.

Median Price = (High + Low) / 2
Where:
High - the maximum of this bar (candles) ;
Low - the minimum of this bar (candles) ;

Moving Average 1, called in Bill Williams's The Jawbone Jaw is the Balance Line for the time period that was used to plot the chart. The line is a 13-period moving average, shifted on the chart by 8 bars ahead; It is usually depicted in blue.

Alligators Jaw = Smma (Median Price, 13, 8)
Where Smma - smoothed moving average (Smoothed Moving Average, SMMA)

moving average 2 Bill Williams called "teeth Alligator" - a line balance for a significant time period in order below. The line is an 8-period moving average, shifted on the chart by 5 bars into the future. Usually red.

Alligators teeth = Smma (Median Price, 8, 5)

Moving Average 3 is called in Bill Williams's "Lips of the Alligator" - this is the Balance Line for a significant time period, which is lower by another order than the Line is a 5-period moving average shifted on the chart by 3 bars ahead. Green Line.

Alligators Lips = Smma (Median Price, 5, 3)

The formula of the smoothed moving average used to calculate the indicator of the alligator.

The first value of the smoothed moving average is calculated, as well as the simple moving average, only the closing prices, but the median prices (the formula of which is indicated above ) are summed up.

The second and subsequent moving averages are calculated using the following formula:

Smma i = (Sum 1 - Smma i-1 + Median Price i) / N

Where:
Smma i is the smoothed moving average of the current bar (except the first);
Sum 1 - the sum of Median Price prices for N periods, measured from the previous bar;
Smma i-1 - smoothed moving average of the previous bar;
Median Pricei is the median price of the current bar;
N is the period.

Example of Alligator:

Description of the indicator Alligator:

As it became clear, the Alligator indicator is a usual combination of three smoothed moving averages with different periods (13, 8 and 5) and different biases (8, 5 and 3 respectively), built not at the closing price but at the median price. Each of these moving averages by the author (Bilu Williams) has its own "crocodile" name.

The longest moving average - the "Alligator Jaw" (with period 13 and offset 8) shows the price level, which should be established in the market, if it is not influenced by new factors. It is like a long-term analogue of a fair market price. That is why the author called it the "Balance Line". It is believed that if the price is higher than the "Alligator Jaw" - then the market positively assesses the new factors and will continue to move up. Conversely, if the price is below the Alligator's Jaw, the market negatively assesses the new factors and will continue to move down.

Moving averages with a smaller period are estimated exactly the same, but refer to a shorter period.

Bill Williams himself described these lines in a very peculiar way, so sometimes he needs comments to understand his theory. Moving averages he called the Balance Lines and said that if all the moving averages are intertwined, then the Alligator sleeps, and the longer he sleeps, the hungrier it becomes. This has its own logic, and it is consistent with some concepts of technical analysis. In this case, a long "interlacing" of moving averages means nothing more than a long-term consolidation or a narrow trading range.

Williams points out that when the Alligatorwakes up after a long sleep, he is very hungry and begins to hunt for the price until he is satisfied. This is something other than a breakout of the trading range, which is usually the stronger, the longer and there was the previous consolidation and the lower it was in height.

Williams points out that after the Alligator is full, he begins to lose interest in food, the moving averages begin to converge. This is nothing more than a new consolidation after a rapid trend. At this time and according to his theory, according to the general concept of technical analysis, the trader must close his positions and wait for the new trend to begin.

How to use Alligator indicator?

One of the biggest pluses of the Alligator indicator is that it avoids the ambiguous interpretation of most signals.

• The Alligator indicator can be used to determine how strong the subsequent movement in the market will be. This, as a rule, can be determined by the time that the lines of moving averages are in the intertwined state. The more this time, the more, as a rule, the subsequent trend movement. However, the use of moving averages like Alligator is not the best method. An alternative to this is to monitor any measure of volatility, for example standard deviation (standard deviation), or indicators based on these indicators, for example Bollinger Bands.


• Signals preparing to enter the market. If during the trading period the amplitude of the moving average fluctuations starts to increase and the space between the lines grows slightly, it means that, most likely, a new trend begins, the direction of which will show the first appeared fractal. After the appearance of the first fractal, you can start preparing for trading.


• For signals entering the market, the Alligator indicator is usually not used in its pure form. Usually, the signal for buying is the movement of the alligator lines up and the market penetration of the fractal pointing upwards. Purchase is carried out either at the fractal level, or slightly higher. In this case, the fractal must be higher than all three moving averages. The sell signal is the reverse one, i.e. the movement of the alligator lines down and the penetration by the market of a fractal, directed down, while the fractal should be below the sliding ones. Sometimes to confirm the signal, another fractal is waiting, which should be higher (for a purchase transaction) or lower (for a sale transaction) of the previous fractal, respectively.


• To add to an existing position. Adding a volume to an existing position occurs if the situation of the previous rule remains, and the next fractal appears next to the previous one.


• To determine the trend. If the moving average with a period of 13 ( Alligator Jaws ) is the most distant from the price bars, the 8-period moving average ( Alligator's teeth ) is between the 13- and 5-period moving averages, and the last 5-period moving average ( Alligator Lips ) is the closest to the price schedule, then the market starts a trend. The further these lines are from each other, the stronger the trend. The trend ends if the moving averages begin to intersect with prices and among themselves.


• To set the stop. As the level of stop orders when trading on a trend, use the 13-period moving average 1 - "Jaws of the Alligator". However, depending on what risk the trader is going to bear, he can use any of these lines as the Stop loss level . Setting a stop on the longest line (13-period, blue) increases the risk of losses, since by the time this line reaches the price, the trader may already be at a loss. Setting a stop on the fastest line (5-period, green) leads to the fact that the trader will close the position at the slightest signs of the end of the trend, which means that he can miss the greater part of the trend and not get profit.


• Sometimes the derivatives of the Alligator indicator are used, for example, the oscillator Gator, Awesome Oscillator, Accelerator.

Disadvantages of the indicator Alligator:

Like all indicators built on the moving average system, the alligator lags in its signal about the beginning of the trend formation and gives at this point a lot of false signals

Guide to Williams %R - Percent Range (Williams Percentage Range)

Williams's percentage range (Williams% R sometimes referred to as Williams Overbought / Oversold Index or Williams Percent Range) is a simple but effective price movement oscillator that was first described by Larry Williams in 1973. It shows the closing price level relative to the high-low range for a certain period.

Williams's percentile range (Williams% R) is a dynamic indicator that works similar to the Stochastic oscillator (only Stochastic compares the closing price to the minimum for a certain period). In particular, it is very popular for assessing overbought and oversold markets.

Formula of Williams %R :

Where:
Hhigh - the highest maximum for a certain time, for example, 14 periods.
Llow is the smallest minimum for a certain time, for example, 14 periods.
Close is the closing price.

Usually, Williams% R is calculated using 14 periods and can be used for intraday, daily, weekly and monthly data.

The time period of calculation (minute, hour or day candles) and the number of periods for calculation can be different, depending on the required sensitivity of the indicator and the individual characteristics of the currency, security or commodity.

The values of the indicator range from 0 to -100.

Example of Williams %R

Description of the Williams' percent range :

Each price is an indicator of the equilibrium of the market crowd at a given moment in time.

The maximum of the current price range shows the maximum strength of "bulls" or buyers. The minimum range shows the maximum strength of "bears" -sellers throughout the entire trading range. The most important indicator is the closing price, which shows which of the groups (buyers or sellers) won in this period, and how much this victory is significant. Williams% R compares each closing price with the last trading range, and indicates whether the bulls can close the price closer to the maximum of the range or the bears are stronger and they will be able to close the price at the minimum of the trading range.

If bulls can not close the market near the maximum of the range with the existing uptrend, then they are weaker than they seem, and this creates an opportunity for sale. If bears are unable to close the market near the lows during a downtrend, then they are weaker than imagined, and this gives an opportunity to buy.

In the indicator Williams %R, this is expressed as follows:

• if the closing price is close to the maximum of the range, then the indicator will be near zero (the maximum value of the indicator);


• if the closing price is near the minimum of the range, the indicator will be as close as possible to -100 (the minimum value of the indicator).

How to use Williams %R:

Divergence signals

Divergences between the asset price and Williams% R occur rarely, but are the strongest signals of the Williams% R indicator.

If the price rises to a new high, which is higher than the previous one, and the Williams% R indicator makes a new high, but below the previous one, it is a negative or bearish divergence and a sell signal.

If the price falls to a new low that is lower than the previous one, and the Williams% R indicator makes a new low, but above the previous one, this is a positive or bullish divergence and a buy signal.

Overbought and oversold signals

Another way to use Williams% R is to define overbought and oversold conditions .

The overbought condition occurs when Williams% R becomes higher - 20. Entering the zone above -20 is a sell signal.

The oversold condition occurs when Williams% R becomes below -80. Entering the zone below -80 is a buy signal.

It is important to remember that overbought does not necessarily entail the need for a transaction to sell, and oversold transactions for purchase.

The market can be, for example, in a downtrend, and the indicator in this case will go into the oversold zone and stay there for a long time, as the price moves lower and lower.

Therefore, when the market conditions are overbought and oversold, the trader should wait for the signal to change the direction of the trend. One of the methods is that you can wait for the Williams% R indicator to either exit the overbought zone (cross the -20 from top to bottom) and oversold (cross the -80 value from the bottom up) or just cross the -50 value from one side.

Confirmations of a turn can be given by other indicators or methods of technical analysis.

Signals of the trend entry

One way to use Williams% R can be to determine the main trend, and then search for trading opportunities in the direction of this trend. In an uptrend, traders can wait for the indicator to enter the oversold zone to open long positions. In a downtrend, traders can wait for overbought to create short positions.

Williams% R code for TradeStation, Dealing Desk, MultiCharts

Inputs: Length (14); 
Variables: WilliamsR (0); 
Williams R = ((Highest (H, Length) -C) / (Highest (H, Length) -Lowest (L, Length))) * (-100); 
Plot1 (WilliamsR, "Williams% R"); 
Plot2 (-80, "Oversold"); 
Plot3 (-20, "Overbought");

Guide to Ichimoku Kinko Hyo

The indicator Ichimoku (Ichimoku) was originally developed in Japan for use in conjunction with candlestick analysis, because the lack of candlestick analysis at independent of its use, was the inability to efficiently and accurately determine the levels of entry and exit, as well as stops and limits.

Ichimoku designed analyst named Goichi Hosoda (Goichi Hosoda) (pseudonym literature Ichimoku Sanzhdin (of Ichimoku Sanjin)) for the Nikkei index. Ichimoku (Ichimoku) is considered to be a trend indicator(although there are elements of countertrend analysis inside it): it gives good signals in the trend and normal signals (at the level of common oscillators in the Ranj).

Formula of Ichimoku:

Graphically Ichimoku indicator consists of 3 independent lines and two lines, between which the area of the price chart is hatched.

Tenkan-Sen

Tenkan-sen = (Max (High, N) + Min (Low, N)) / 2, where Max (High, N) - Highest of the highs for a period equal to N-intervals (for example, N days)
Min (Low, N), - Minimum minimum for the period equal to N-intervals
N - length of the period

Kinjun-Sen

Kijun-sen = (Max (High, M) + Min (Low, M)) / 2 M is the length of the period

Chinkou Spen

Chinkou Span = Current Close, shifted back to M

Shaded area (cloud) between

Senkou Spen "A"

Senkou Span A = (Tenkan-sen + Kijun-sen), shifted forward by M intervals

Senkou Spen "B"

Senkou Span B = (Max (High, Z) + Min (Low, Z)) / 2, shifted forward by M intervals
Z - length of the interval
The number of parameters - N, M, Z, indicated by the author himself for the use of Ichimoku is 9, 26 and 52, respectively.

These figures are taken from the following relationships:

On the daily chart:

9 - one and a half working weeks, 26 - the number of working days in the month (in Japan there were 6 working days a week), and 52 - the number of weeks in a year.

On a weekly chart:

9 weeks are approximately 2 months, 26 weeks are half a year, 52 weeks is a year.

Description of indicator Ichimoku :

Indicator Ichimoku Kinko Hyo (Ichimoku Kinko Hyo) consists of 5 lines :

Tenkan-Sen (Tenkan-sen-reverse line) is a short-term trend line showing a "fast" trend. Tenkan-Sen points to the current direction of the short-term trend, being the average of the maximum and minimum prices for a long period of time. Accordingly, if it is directed upwards, it means that there is an uptrend in the market if it moves down, it means a descending trend. If the Tenkan-Sen line is parallel to the time axis, then, most likely, the market is now in the state of a flat.

Kinjun-Sen (Kijun-sen - mainline) is a long-term trend line, (usually considered for 26 periods). Shows a longer-term trend, its direction. Interpretation is the same as for a short-term line.

Senkou-Spen "A", (A Senkou Span - anticipatory line) In general, shows the middle of the distance between Tenkan-Sen and Kindzhun Saint shifted forward by the value of the second time interval. Senkou-Spence "A" is the upper boundary of the cloud, it is believed that it is the line of future resistance and market support.

Senkou-Spen "B" (Senkou Span B - anticipatory line) is calculated as the average of the maximum and minimum prices for the third longer time interval shifted forward by a second time interval Senkou-Spen "B" is the lower limit of cloud Ichimoku, also considered line of future resistance and market support.

The distance between Senkou-Spence "A", Senkou-Spen "B" is usually hatching, forming a kind of "Ichimoku cloud".

Chinkou Span (Chinkou Span) is the line of the closing price chart , usually shifted by 26 periods (ie, the second time interval).

How to use Ichimoku

• The most significant signals of Ichimoku include price intersections and Senkou-Spen "B" lines. If the price crosses Senkou-Spen "B" from top to bottom, then a sell signal is sent, from the bottom up to the purchase. This is the signal Ichimoku is strengthened if prices go beyond the boundaries of the Senkou-Spen cloud.
  The system is similar to the classical suppression strategy at the price of its moving average.


• Using Ichimoku outside the trend. Ichimoku signals during the market's flute state arise when prices are inside the Ichimoku cloud. When crossing a short Tenkan-Sen line from below upward to the long line of Kinjun-Sen, a signal is given to buy. Crossing the short Tenkan-Sen line from the top down the long line of Kinjun-Sen is a signal for sale.


• This type of Ichimoku signal is weak if prices are in the cloud. The entry can be made upwards if the prices are at the bottom of the cloud, and down if they are at the top of the cloud. It is assumed that the cloud should be wide enough.


• The system is similar to the classic strategy of crossing two moving averages.


• When Ichimoku is used inside the trading range, it is considered that if prices are in the cloud and Tenkan-sen is directed upwards, then the movement to the upper boundary of the range occurs, if it is down to the bottom, and if it moves parallel to the time axis, the prices stand still. Therefore, the strategy of Ichimoku can be built on the Tenkan-sen turn. When you turn up the buy, when you turn down the sale, if the prices are inside the cloud.


• When the short and medium-term trend lines (Tenkan-Sen and Kinjun-Sen) become parallel to each other and parallel to the Senkou-Spence "B" line, this means the development of a stable trend in the market. It is believed that when price correction and rollback to one of these lines, Ichimoku gives the signal to add to the position or restore the position on the trend. In an upward trend, it is necessary that the top is Tenkan-Sen in the middle of the Kijun-Sen and from the bottom of the Senkou-Spen B, and in the opposite direction, from above Senkou-Spen B in the middle of the Kijun-Sen from below Tenkan-Sen.


• When the price is inside the cloud, if Chinkou-Spen crosses the price from the bottom up, it gives a buy signal. If the Chinkou-Spen crosses the price from above to below, then a signal is given for the sale. At the same time, the author of the technique recommended placing a stop behind the opposite boundary of the cloud. If the purchase is made, then under the lower limit, respectively, for sale above the upper limit. The aim of the trade is the level inside the cloud, which is about 10-20% away from the border, at this level, profit-taking orders are issued. In addition, the position closes and if any return signal is received (if Tenkan-Sen unfolds, if the price chart crosses Chikou-Spen in the opposite direction or the crossing by the price of Senkou-Spen "A" or "B").


• Senkou-Spen "A" and Senkou-Spen "B", which were described in the description of the indicator of Ichimoku, respectively, form resistance and support to the market that is inside the cloud. When the market is below the cloud, Senkou-Spen "B" (the lower limit) forms the first resistance, and Senkou-Spence "A" (the upper line) - the second resistance.


• When the price is above the cloud, then Senkou-Spen "A" becomes the first support, and the second is Senkou-Spen "B"


• The independent signal of Ichimoku is the direction of Tenkan-Sen, if it is directed upwards, then there is an uptrend, if down, then downtrend. If in parallel, then flat. Therefore, in some cases, you can enter and exit the market after changing direction Tenkan-Sen.


• The Senkou-Spen "B" line is used to set stop orders.

Note:

• In all cases, the intersection is the intersection of the indicator line and the closing price line.


• As variable parameters, Ishimoku sometimes apply reduced by half, i.e., 5, 13, 26.


• At the forums there are recommendations on the following parameters of Ichimoku :
  For graphs from 15 minutes to an hour 15, 60, 120.
  For graphs from hours to days 12, 24, 120.
  For day charts 9, 26, 52.


• It is believed that it works best on charts with a timeframe for more than a day.


• Quite often, the use of input and output signals is combined with other (not Ichimoku- related ) stop and limit techniques (support and resistance, the Fibo line of the trend line of channels, etc.).

Pros of Ichimoku

Ichimoku allows you to separate the trend from the flat with some accuracy . And, as many believe with a high probability to bite off part of the trend.

Ichimoku lines immediately respond to the emergence of new extremes and, accordingly, do not lag as sliding.

Disadvantages of Ichimoku:

There is an opinion that the Ichimoku indicator does not work well here, especially if the flat is narrow.

Additional materials:

There are several practical examples given on DodaCharts.com on how to use Ichimoku with Doda-Donchian effectively.

Codes advisors Ichimoku for Metastock and omega:

advisor code Ichimoku (Ishimoku) for Equis MetaStock (found in the network)

x: = Input ( "period Tenkan-sen", 0, 500, 9);
y: = Input ("Kijun-sen period", 0, 500, 26);
z: = Input ("Senkou Span B period", 0, 500, 52);
ts: = (HHV (H, x) + LLV (L, x)) / 2;
ks: = (HHV (H, y) + LLV (L, y)) / 2;
tsksh: = (ts + ks) / 2;
ssa: = Ref (tsksh, -y);
ssbz: = (HHV (H, z) + LLV (L, z)) / 2;
ssb: = Ref (ssbz, -y);
{If (DayOfWeek () = 1 OR DayOfWeek () = 3 OR DayOfWeek () = 5, ssa, ssb);}
If (Mod (Cum (1), 2) = 1, ssa, ssb);
ts;
ks;
ssa;
ssb;

Strategy code Ichimoku for Omega Research (found on the network)

Cloud
Inputs: Standard (26), Turning (9), Delayed (52);
Variables: Stdline (0), TurnLine (0), Span1 (0), SPan2 (0);
StdLine = (Highest (High, Standard) + Lowest (Low, Standard)) / 2;
TurnLine = (Highest (High, Turning) + Lowest (Low, Turning)) / 2;
Span1 = (StdLine + TurnLine) / 2;
Span2 = (Highest (High, Delayed) + Lowest (Low, Delayed)) / 2;
Plot1 [-Standard] (Span1, "Span1");
Plot2 [-Standard] (Span2, "Span2");

Lines.
Inputs: Standard (26), Turning (9), DelayColor (Yellow), ShowDelayLine (False);
Variables: StdLine (0), TurnLine (0), DelayLine (0);
StdLine = (Highest (High, Standard) + Lowest (Low, Standard)) / 2;
TurnLine = (Highest (High, Turning) + Lowest (Low, Turning)) / 2;
DelayLine = Close [Standard];
Plot1 (StdLine, "Standard");
Plot2 (TurnLine, "Turning");
If Close > DelayLine Then
SetPlotcolor (2, Blue) Else
SetPlotColor (2, DelayColor);
If ShowDelayLine Then
Plot3 [Standard] (Close, "Delayed");

Guide to Momentum indicator

The Momentum indicator is one of the most popular oscillators of forex technical analysis showing the rate of price change, or in other words, the rate of price change, being one of the simplest and most effective tools of technical analysis.

Formula of Momentum indicator

Momentum Simple = C - Cn
Where C is the closing price of the current period.
Where C-n is the closing price of N periods back.
Note: in modern textbooks there is a disagreement about the formulas Momentum. The above formula is taken from Murphy's "Technical analysis of futures markets" and most likely it is the right one.

There is another variation in calculating the indicator Momentum from the book Akelis. Technical analysis from A to Z, in which Momentum coincides with Rate of Change and the formula is used:

Where C is the closing price of the current period
Where C-n is the closing price of N periods back.
Unfortunately, this formula in its time migrated to many technical analysis programs.

There is also a separate formula called Chande Momentum Oscillator (CMO)

Chande Momentum Oscillator is calculated as follows:

MomentumSimple = C-C-1 Where C is the closing price of the current period
Where C-1 is the closing price of the previous period.
If MomentumSimple> 0, then M1 = MomentumSimple, and M2 = 0;
If MomentumSimple <0, then M2 = -MomentumSimple, and M1 = 0;

 

Description of Momentum indicator

Momentum (Momentum) is the simplest trend indicator. Its formula is so simple and intuitive that it does not require a description. Exceeding the current closing prices over the past, shows an uptrend, and if the current prices are lower than the past for the selected time interval, this means a downtrend.

Sometimes a smoothed momentum is used to reduce its volatility. For these purposes, moving averages are used.

The indicator in most cases is ahead of the main price movement. Before the top of the trend indicator turns around (prices in this case usually continue to grow) and begins to fall, only after that the trend usually turns down. Before the market's low, the indicator slows down (prices usually continue to fall, but at a slower pace), unfolds and begins to grow, after which the trend turns up.

How to use Momentum Indicator?

• Oscillator technical analysis Momentum can be used as the oscillator (although such is not in the classic sense is not). A sell signal appears when Momentum or its moving average rises by a significant amount, unfolds and begins to fall. A buy signal appears when Momentum or its moving average falls by a significant amount, unfolds and starts to rise. This "significant amount" will differ on each currency pair in Forex and it should be tested separately.


• The indicator Momentum can be used in Forex as a trend indicator, in this case the crossing of its zero line is used as a signal. When the line crosses from the top to the bottom, a sell signal is given, when a buy signal is sent from the bottom to the top.


• The momentum indicator also uses divergence analysis.


• If prices make a new high on the chart that is higher than the previous one, and Momentum at this time makes a new high on its chart, but lower than the previous one, this means that the upward movement of the movement may begin to turn down soon.


• Conversely, if prices make a new low on the chart on the chart that is lower than the previous one, and Momentum at this time makes a new low on its chart, but higher than the previous one, this means that a downward trend may turn up soon.

Disadvantages of Momentum indicator

Disadvantages of the momentum indicator, the same as in many other indicators: it changes rapidly when entering the calculation of new prices very different from the main channel and when they exit from the calculation. This behavior gives greater instability of results.

The Rate of Change (ROC) Technical Indicator

Introduction to The Rate of Change (ROC)

The rate of change (Rate of the Change - ROC) - one of the most simple and very effective oscillators, which shows the percentage change in prices from one period to another.

The Rate of Change indicator is calculated as a comparison of the current price with the price of the previous period, which is spaced from the current one by N periods. The periods of the ROC indicator as always can be intervals from a minute to a month.

Formula of the The Rate of Change (ROC):

Where P0 is the closing price of the current period;
Where Pn - the closing price today N periods ago;

Note: in modern textbooks there is a disagreement about the Rate of Change formulas . The above formula is taken from Murphy's "Technical Analysis of Futures Markets." S. 305.
However, there is another variation in the ROC calculation from the book Akelis. Technical analysis from A to Z.

Normal ROC

The latest version of the calculation is used in the Metastock and CQG software packages.
Next, we will describe the ROC calculated by Murphy's formula.

Sample chart with The Rate of Change (ROC) Technical Indicator:

Description of The Rate of Change (ROC) Technical Indicator

Rate of Change as the acceleration indicator allows you to track the smoothed rate of price change. The ROC oscillator graph oscillates above and below the level of a unit (or level 100, depending on whether it is 100% multiplied or not), thereby showing how the acceleration of the price changes, whether it is positive or negative. As a rule, the ROC indicator is slightly ahead of the main price trend and reaches a maximum or minimum earlier than the price does.

Crossing with the ROC indicator level 1 (or 100) and its further growth means an acceleration in the rate of price growth and an increase in the probability of its continuation. Turning the indicator on high levels from the top down means that the trend continues, but it is not gaining momentum, but begins to slow down gradually.

The fall of the ROC indicator above line 1 (or 100) means that the current trend of rising prices slows down the speed.

Crossing from top to bottom units and continuing the fall means accelerating the downward price movement.

A turn at levels below one means a slowdown in prices and a high probability of a reversal of the trend upwards.

The growth of the ROC indicator below line 1 means the attenuation of the downward trend.

It is considered that Rate of Change measures the level of optimism or pessimism of the crowd with respect to this asset, if the indicator grows, remaining above unity, this means that there is a new wave of optimism in the market, if a new low appears in the zone below unity, this means that a new wave pessimism in the market increases the likelihood of further price fall.

If prices continue to rise, making the chart a new high above the previous one, while ROC is growing but its new maximum is lower than the previous one, this means that a divergence in the indicator and price indicators has appeared, and one should prepare for a possible drop in prices.

In the opposite case, if the chart prices make a new low below the previous one, but on the graph indicator appears a new low, but higher than the previous, it is necessary to prepare for a market turn upward.

Thus, the slope of the indicator means the acceleration or slowdown of the trend, and its position relative to the level of unity - what is this trend - a fall or growth.

How to use The Rate of Change (ROC) Technical Indicator?

For the most part, the ROC indicator is used simultaneously with other techniques that support its signals.
The ROC indicator can be used in two main types of strategies : trend following and countertrend:

• When the ROC is used as a trend following indicator , it delivers trend signals when crossing the line of a unit (or line 100). When the line of the unit crosses from the bottom up, a buy signal is given, at the intersection from the top down, a sell signal is given. The number of signals and their accuracy in this case will depend on the main parameter of the indicator. As with other indicators, the shorter the ROC , the faster it reacts to price changes, or in other words, it is more sensitive and, accordingly, gives more false signals. The larger the ROC parameter, the greater the accuracy of its signals, but the longer their delay. Sometimes using short- term ROC indicatorsas a signal to enter the market, the intersection of the unit line is not used, but the intersection of certain levels above the unit line for the buy signal and the intersection of the levels under the unit for the sell signal. Thus, ROC movements within a certain range close to zero are not perceived as signals.


• Due to the fact that the main function of the ROC indicator is to measure the speed of the market, it can be effectively used as a countertrend indicator. Signals in this case come when the indicator is turned as high as possible above unity and as low as possible. A turn above a unit from the top down indicates a possible end of the upward movement and gives a sell signal. A turn far below the unit from the bottom up gives a buy signal. To determine the pivot points, you can also use oversold overbought lines, which are drawn on the chart of the indicator at certain levels. Overbought and oversold levels are selected in such a way that the indicator is in them about 10 percent of the total time.


• Breaks of trend lines on the indicator itself are often ahead of breaks in trend lines on the price chart. These breakthroughs can also be used as signals to enter and exit the market.

Disadvantages of The Rate of Change (ROC) Technical Indicator

Rate of Change as a simple moving average reacts to the price twice: when the price appears for the first time in the numerator, i.e. P0 and when the price appears in the denominator PN.

There are variations of the ROC indicator , for example, a smoothed ROC, which compares not the price of the current period with the price several periods ago, but the current value of the exponential moving average with its value several periods ago. This indicator does not have the above disadvantage, it provides rarer, but better signals.

Commodity Channel Index (CCI) Technical Indicator

Introduction to Commodity Channel Index

The Commodity Channel Index ( CCI) was developed by Donald Lambert. Initially, the Commodity Channel Index was created as an indicator for determining the turning points on commodity markets, but over time it became popular in the stock market and in the Forex market. The assumption on which the indicator is based is that all assets move under the influence of certain cycles, and the maxima and minima appear with a certain interval.
CCI refers to the type of oscillators that measure the speed of the price movement.

Formula of the Commodity Channel Index indicator:

First, a typical price (Typical Price) is calculated:

A simple moving average is calculated from the characteristic price:

The probable (median) deviation is calculated.

The formula for the CCI indicator itself will look like this:

For scaling purposes, Lambreth set the constant at 0.015 so that approximately 70 to 80% of the Commodity Channel Index values were between -100 and +100.

Description of the Commodity Channel Index indicator

The CCI indicator oscillates above and below the zero mark. The percentage of Commodity Channel Index values that are between +100 and -100 will depend on the number of periods used to build it. The shorter (with fewer periods) CCI indicator will be more volatile, and less than its values ??will fall in the range between +100 and -100. Accordingly, the more periods will be used to calculate the CCI, the more percentages of the indicator values ??will be between +100 and -100.

The author himself recommended as the main parameter of the CCI indicator 1/3 of the full cycle (for example, from a minimum, to the next minimum or from a maximum to the next maximum).

For example. If the cycle of market fluctuations is 30 days, the recommended value for the CCI indicator is 10 days.
Note: the very definition of the cycle length must be made independently of the Commodity Channel Index and other methods.

CCI is a sufficiently versatile indicator, capable of creating a wide range of signals for buying and selling. Traders and investors use the CCI to determine the reversal price points, extremes on the price chart and the strength of the trend. Like most CCI indicators, it should be used with confirmations from other techniques.

How to use Commodity Channel Index Indicator?

The author's recommendations for work The commodity channel index concerned movements that go above +100 and below -100 and give signals for buying and selling. Since 70 to 80% of the time CCI values are between the levels of +100 and -100, signals for buying and selling will appear 20 - 30% of the time.

• When the CCI indicator crosses +100 from the bottom up, it is considered that the currency pair enters a strong uptrend, and a buy signal is given. The position closes on the reverse signal, when the CCI falls below +100. When the CCI crosses -100 from top to bottom, it is considered that the currency pair is moving into a strong downtrend and a sell signal is being sent. The position closes when the CCI back crosses its level -100.


• In addition to the author's recommendations, the CCI indicator was subsequently used to determine the turning points. CCI can be used to determine overbought and oversold levels of the market. It is believed that the currency pair is oversold if the CCI drops below -100 and is overbought if it grows above +100. After the CCI indicator entered the oversold zone (below -100), a buy signal occurs when the -100 level crosses in the opposite direction (bottom-up). When CCI is in overbought zone(above +100) a sell signal occurs if the CCI crosses the +100 level in the opposite direction (from top to bottom).


• Like most oscillators, the CCI uses divergence analysis, which amplifies the trading signal. A positive divergence below -100 (ie, two consecutive minimums for the CCI, when the second minimum is higher than the first on the indicator, but below the first in the price chart ) increases the signal strength when crossing at a -100 level from the bottom up. Negative divergence above +100 (ie, two consecutive highs above +100, when the second maximum is lower than the first on the indicator, but higher in the price chart) increase the signal strength of the + 100 level applied at the CCI crossing from top to bottom.


• The breaking of trend lines formed on the indicator itself can also be regarded as input or output signals from a position. Trend lines can be drawn by connecting successive highs or lows. At the oversold level (below -100), breaking such a trend line up is considered a signal to the market growth and vice versa at overbought levels (above +100), breaking down the trend line down can be regarded as a sell signal.

Disadvantages of Commodity Channel Index

The Commodity Channel Index is designed for cyclical markets and works well only when the market is really exposed to fairly constant cycles. In the Forex market cycles are difficult to recognize, so the optimal period of the CCI indicator is selected with great ddifficulty.

Average True Range

The Average True Range (Average True Range) developed by J. Welles Wilder, the first time presenting it in a book - "New Concepts in Technical Trading Systems" (1978).

Initially, like most other indicators, it was created for commodity markets (which are more volatile than stocks) and end-of-day prices, but are now used for Forex as well as for other periods. The Average True Range is an indicator of volatility.

Formula for Average True Range

ATR = Moving Average (TRj, n),
where
TRj = the maximum of the moduli of the three values
| High - Low |, | High - Closej-1 |, | Low - Closej-1 |.

Sample chart with Average True Range:

Description of Average True Range

Initially, Wilder determines the True Range (TR), which is defined as the maximum of three values.

• The difference between the current high and the current minimum;


• the absolute value of the difference between the current high and the previous close;


• the absolute value of the difference between the current minimum and the previous close.

If the range of oscillations within the period (the difference between the maximum and minimum) is sufficiently large, then most likely the value of TR will be calculated from it. If the difference between the maximum and minimum is sufficiently small, then the other two methods mentioned above will most likely be used to calculate the TR. The last two options are usually obtained if the previous close is greater than the current high or the previous close is lower than the current low. Recent situations - price gaps or gaps (gaps) are quite rare in Forex and mostly happen on weekends if the serious news has been released during the weekend.

The average True Range (ATR) is derived from the TR by averaging over any of the methods-a simple averages, exponential, or other.

How to use Average True Range?

Usually use a 14-period ATR, which can be calculated for intraday as well as daily or weekly or even monthly data.

Extreme values ??of the indicator often indicate the turning points and the beginning of a new movement. Like other indicators showing volatility, such as the Bollinger Bands, the Average True Range cannot predict the direction or duration of the movement, it only indicates the level of activity.

Low level indicator Sredniy true range (Average True Range) represents a quiet trade in a small range, and higher values denote intensive trade in a wide range. A long period of low ATR means consolidation, which is likely to lead to a rapid continuation of the movement or reversal. High ATR values are usually the result of rapid movements and rarely remain for a long period. Since ATR shows the absolute value of volatility, the currency pairs in the Forex with low prices will have a lower ATR and, vice versa, other things being equal.

The main concept of the indicator is the average true range (Average True Range) can be expressed as follows: the greater the value of the indicator, the greater the probability of a trend reversal; The smaller the indicator value, the weaker the trend orientation.

Disadvantages of Average True Range

As a disadvantage, usually one is indicated - for a long period ATR may be late, indicating not current and past volatility.

Guide to Bollinger Bands Indicator

Introduction to Bollinger Bands

The bands of Bollinger (the Bollinger Bands, sometimes there is a transcription "Bollinger") - can be defined as an indicator, similar to moving average envelopes, but based on the current volatility in the market. Unlike the envelopes of moving averages, the Bollinger bands vary not only depending on the direction of the price movement, but also on the nature of this movement (the speed of the price movement).

Bollinger bands provide a statistical assessment of how far short-term traffic can go before it returns to the mainstream.

A measure of volatility in the Bollinger bands is the mean-square deviation (SDE), which in the Western literature is called the Standard Deviation term.

Formula for Bollinger Bands

The indicator consists of three bands:

Central band - is a moving average, which can be simple, weighted, exponential or sliding of another type.

The upper band is the moving average + (coefficient x RMS)

The lower bar represents the moving average - (coefficient x RMS)

The standard deviation (Standard deviation) is calculated by the formula:

where P is the price of the asset, N is the number of periods for the calculation.

[caption id="attachment_541" align="aligncenter" width="636"] Bollinger Bands Indicator[/caption]

Description of Bollinger Bands

Bollinger bands are formed by three moving averages. In the Bollinger indicator, the distance of the bands from the center line depends on the behavior of the prices. Corridors of the Bollinger indicator strip are called standard deviation corridors, respectively, the bandwidth is proportional to the standard deviation of the price value from the given order of the moving average for the time period under study.

The distance between the bands is determined by the standard deviation of prices, the bands expand when price volatility increases and narrows down when their volatility decreases. If the band narrows, then we see a lateral movement of the market. If the band expands, then we have a directed movement of the market up or down - that is, a trend. On the position of the middle line relative to the price, we make a conclusion about the direction of the market.

Analysis of graphs using the standard deviation corridor of John Bollinger is an independent and original method that allows you to assess the volatility of the market, as well as determine the beginning of strong movements in the market. In combination with other analysis tools, the indicator gives the trader an opportunity to use a wide range of trading strategies.

John Bollinger outlined the following characteristics of his indicator:

1. The movement of the price chart from the outside of the bands may signal a continuation of the trend;


2. If the ups and downs outside the band are followed by rises and fall inside the strip, a trend reversal is possible;


3. Price movement started from one of the borders of the band, strive to reach the opposite strip;


4. Sharp price fluctuations usually occur after narrowing the band, corresponding to a decrease in volatility.


5. Experience shows that strong price movements occurred after the narrowing of the bands to about the same level.


6. Investigations of the indicator on intraday intervals in the stock market showed that in most cases no more than four bars in a row go beyond the Bollinger line, after which a rollback follows. At the end of the formation of the fourth bar, which in a row break through the Bollinger line, it is usually recommended to open a position against the trend;


7. Bollinger Bands successfully play the role of lines of support and resistance. It is believed that 95% of the price should be within the formed price band, and 5% - go beyond these lines. The exit of the price from the narrow corridor of the Bollinger band upwards is a signal to buy, down - a signal to sell.

 

John Bollinger recommends using a coefficient for the RMS of 2.

How to use Bollinger Bands

The most recognized and common are the following trading methods for the Bollinger Bands :

1. Trade at the removal of prices from the central line at the time of their confident crossing.
   If the price has crossed its central sliding from the bottom up, then there is a purchase, the purpose of which is the level slightly below the upper band. If the price crossed its central moving average from top to bottom, then there is a sale, the goal of which is a level slightly above the lower Bollinger Band.


2. Trade vs. exit prices from the strip to the middle.
   According to this trading tactic, the position is opened against the movement for the Bollinger Band after a certain time after the breakthrough. After the break of the lower band, a position opens to buy, after the breakout of the upper band, a position for sale opens.


3. Another way to use the Bollinger Indicator is to use extreme bands as support and resistance levels. The bands are constructed so that they form support / resistance levels for prices. You can trade from these levels. When approaching the upper level of resistance, you must sell, and when you approach the lower level of support, buy.

The very options for using the indicator depending on the market on which they are used and all of them must be tested before applying them on real money. It must be remembered that the methods themselves were developed long ago for the stock market, and not for the currency markets.

Disadvantages of Bollinger Bands

From the shortcomings of the Bollinger bands, one can distinguish high subjectivity, an insufficient sampling of data when tuning to the recommended orders of means, which underestimates the statistical significance of the data, and at high orders, the sensitivity of the indicator is lost. The author of the method points out the possible inapplicability of the bands in illiquid markets and markets with low activity.

Moving Average Envelopes

Introduction to Moving Average Envelopes

The simplest moving averages can be transformed into a new tool - envelopes of moving averages. This tool, like the Bollinger Bands, is used to determine the boundaries of the current price movement.

Formula of Moving Average Envelopes

The indicator consists of three bands:

The upper band of the envelope: Moving Average Upper Band = Moving Average + (K / 100) x Moving Average

Where K is the percentage of the price at which the sliding moves upwards

Lower band of the envelope: Moving Average Lower Band = Moving Average - (N / 100) x Moving Average
Where N is the percentage by which the moving average moves down.

Sample chart using Moving Average Envelopes

Description of Moving Average Envelopes

The envelopes moving averages (Moving Average Envelopes) consist of two moving average (which may be considered as a simple exponential or on a different principle), displaced one up and the other down by a percentage (called envelope coefficient).

Sometimes we draw the third line - the central sliding from which there is a shift.

For example, a 2% envelope of moving averages will look like 2 lines, the first one - sliding shifted by 2% up, the second - 2% down. It is believed that the envelope defines the boundaries (upper and lower) of the normal price fluctuation of the currency pair.

The principle of using the moving average bands is as follows: the price always returns after some fluctuations to its main trend (to its central moving average). This is due to the fact that the more the price differs from its main trend, the more traders fix the profit, returning the price to the "normal channel".

The greater the volatility of the analyzed market, the more the boundaries of the bands need to be selected.

How to use Moving Average Envelopes

There are a number of methods for using envelopes:

1. After careful selection of the bias coefficient, the use of the upper line as a resistance line, and the lower one as a support line. The corresponding tactic is selling at the top line and buying at the bottom.


2. Use of the breaking of bands as the identifiers of the development of the movement. Sometimes when using the signals of the tactics of crossing the price of your own moving average, Moving Average Envelopes is used as a filter. Thus, the purchase, for example, is carried out when the price of the currency first crosses its moving average up, and then the upper envelope strip. Selling in the opposite case: when the price first crossed its sliding down from the top, and then the bottom of the envelope. Such tactics significantly reduces the number of false signals (since the trader does not enter the market in the outset when the price is inside the envelope), however in the case of this trend the correct signal comes later and the trader loses part of the trend movement (equal to or greater than the envelope coefficient). This tactic is well described in the book LeBo, Lucas "Computer analysis of futures markets."

As in the case of determining the parameters of a normal moving average, a trader becomes preoccupied with a dilemma - either to receive more false unprofitable inputs or to skip a part of the trend.

The first tactic is used mainly for short-term trading, the second - for medium and long-term.

Disadvantages of Moving Average Envelopes

Like any indicator built on the basis of moving averages, envelopes of moving averages are late. Slip envelopes are not able to adjust to the current volatility of the market, such as the Bollinger Bands.

Guide to Exponential Moving Average

In the previous article, we've learned Simple Moving Average and Weighted Moving Average In this article, we'll learn Exponential Moving Average.

Introduction to Exponential Moving Average

As already mentioned, various moving averages smooth out price data and facilitate the possibility of identifying trends, which is especially important in volatile markets.

In order to reduce the lag using moving averages, technical analysts often use the Exponential Moving Average- EMA). The exponential moving average reduces the lag, giving more weight to the last prices compared to more distant prices. This allows you to respond much more quickly to the current price changes compared with the simple moving average.

The weight given to the last price depends on the period of the moving average. The shorter the period of the Exponential Moving Average, the more weight will be given to the last price. For example, the 10-period beginning of the Exponential Moving Average gives the weight of the last price of 18.18%, while the 20-period period - 9.25%. However, in this case, the calculation of the exponential moving average is much more complicated than the calculation of the conventional moving average.

Formula of Exponential Moving Average

The exponential moving average can be defined in two ways - as a percentage moving average or as a period moving average. Accordingly, in the percentage sliding, the only parameter is weight (percentage), and in the periodical - the period of the moving average.

The basic formula is as follows:

where i is the current time, i - 1 is the previous time, K = 2 / (n + 1), n ??is the average period in bars.

As mentioned above, you can change the exponential moving average period in two ways:

1. By changing the coefficient K itself
   Changing the time period of the sliding one. Then the coefficient K will be recalculated as 2 / (1 + N), where N is the period you set.


2. For example, for a 10-period moving average, the coefficient will be equal to.

This means that the 10-period exponential moving average is equivalent to the percentage exponential moving average with a coefficient of 18.18%.

It looks like this.

It should be noted that theoretically in the calculation of this sliding all prices are used, for the entire period of its construction and, in spite of the fact that the influence of old prices disappears with time, it does not disappear until the end. The effect of old prices disappears more quickly for shorter EMAs, compared to longer ones.

On a real chart, the difference between a simple moving average and an exponential is not very large, although it is present. It is believed that the exponential sliding ray reflects the market prices, all other things being equal because the effect of each previous price decreases exponentially with its remoteness from the current price.

Which type of sliding choose - depends entirely on your trading and investment style. A simple moving average certainly has a log, but an exponential moving average can react too strongly to rapid price changes. Some traders prefer to use exponential sliding for short-term trading to catch rapid changes in the market. Other traders prefer a simple moving average for long-term trading, allowing to identify long-term trend price changes.

In addition to everything, the use of the moving average depends on the currency pair on which you trade. The choice of the sliding always leads to the old dilemma of technical analysis - the choice between sensitivity and the desire to reduce the number of false signals.

The more sensitive the indicator, the more false signals it usually gives. The less sensitive the indicator, the fewer false signals it gives, but the longer it lags.

Guide to Weighted Moving Average

In the previous article, we've learned Simple Moving Average. In this article, we'll learn Weighted Moving Average.

Introduction to Weighted Moving Average

As already mentioned, one of the disadvantages of the conventional moving average is the assignment, when calculating it, to all prices of the same weights when averaging, regardless of whether they are closer or further from the current moment. This disadvantage is eliminated in the weighted moving average (Weighted Moving Average). The weighted moving average, therefore, is the usual modification of a simple moving average with weights matched so that the latest prices have an average greater weight.

Formula of Weighted Moving Average:

where Pi are the values of the price of the i-periods back, (i today = 1)
Wi of the weights for the price of the i-periods back

Weights can be chosen in different ways, for example, in the case of a linearly weighted moving average:
Wi = | in-1 | - the weight of the moving average is selected so that the latest prices have the maximum weight, and the longest ones - the minimum.

For example, for a linearly weighted moving average with period 5, the formula will look like this:

P1, P2, etc. prices today, yesterday, etc.

Weights can also vary in terms of a logarithmic or parabolic function. Prices can also be different: Close, Open, High, Low, Median Price, Typical Price.

A linearly-suspended moving average with a period of 14 is as follows:

Description of  Weighted Moving Average

The weighted moving average is an arithmetic weighted price fluctuation for a certain period. As an analytical tool, it removes some of the shortcomings of the usual sliding but does not completely eliminate them. There are many modifications of the weighted moving average, using different variants of calculation of weights.

Usage of Weighted Moving Average

All forms of using the weighted moving average are similar to using the usual moving average.

Disadvantages of Weighted Moving Average

The delay at the entrance to the trend and at the exit from the trend is usually significant, but less than the simple sliding, because thanks to giving the latter prices of large scales, it reacts faster to price changes.

Like a simple sliding in the outset (trading range), the weighted one gives a lot of false signals and leads to losses.

When entering the price calculation, which is different from the price level in the market, the weighted moving average changes stronger than usual, since the last price is given the largest weight, however, when this price leaves the sliding one, a secondary false signal is not given.

Guide to Simple Moving Average

Moving Average is probably one of the simplest and most popular indicators in technical analysis (including the Forex market).

Moving average refers to the class of indicators following the trend, it helps to determine the beginning of a new trend and its completion, its force angle (speed) can be determined from its angle of inclination, it is also used as a basis (or smoothing factor) in a large number of other technical indicators . Sometimes the moving average is called the trend line.

Simple Moving Average Formula

Where Pi - Prices in the market (Prices are usually taken Close, but sometimes they use Open, High, Low, Median Price, Typical Price).

N - the main parameter - the length of the smoothing or the period of the moving average (the number of prices included in the calculation of the sliding one). Sometimes this parameter is called the moving average order.

Example of a scooping average :

A moving average with a parameter of 5.

Description of Simple Moving Average

A simple moving average is the usual arithmetic mean of the prices for a certain period. The moving average is a measure of the equilibrium price (the equilibrium of supply and demand in the market) for a certain period, the shorter the moving average, the less the equilibrium is taken over a shorter period. Averaging prices, it always follows a certain lag behind the main market trend, filtering small fluctuations. The smaller the parameter of the moving average (say that the moving average is shorter), the faster it determines the new trend, but simultaneously makes more false fluctuations, and vice versa, the larger the parameter (say the long moving average), the slower a new trend is determined, but fewer false fluctuations occur.

Usage of Simple Moving Average

The use of moving averages is quite simple. Moving averages do not predict changes in the trend but only signal about the trend that has already appeared. Since moving averages are trend following indicators, they are better used in trend periods, and when the trend is not present on the market, they become absolutely inefficient. Therefore, before using these indicators, it is necessary to conduct a separate analysis of the properties of the trend of a particular currency pair. In the simplest form, we know several ways to use the moving average.

There are 7 basic methods of moving average :

1. Determination of the trade side using the moving average. If it is directed upwards, then you make only purchases, if down - then only sales. In this case, the entry and exit points from the market are determined on the basis of other methods of moving averages (including on the basis of a faster moving one).


2. Turning the moving average from the bottom up with a positive slope of the price chart itself is seen as a buy signal, moving the moving average from top to bottom with a negative slope of the price chart itself is considered a sell signal.


3. The moving average method, based on the intersection of the price of its sliding downward (with a negative slope of both) is considered a sell signal, the intersection of its moving average price from the bottom up (with a positive slope of both) is considered a buy signal.


4. The intersection of the long moving average with a short bottom-up is considered as a signal to buy and vice versa.


5. Moving averages with round periods (50, 100, 200) are sometimes considered as sliding levels of support and resistance.


6. Proceeding from the fact that the sliding is directed upward, and which down determine what is the upward trend and what is the descending (short, medium, long-term).


7. The moments of the greatest discrepancy between the two averages with different parameters are understood as a signal to a possible trend change.

Disadvantages of the moving average method

1. When using the moving average method for trend trading, the delay at the entrance and exit from the trend is usually very significant, so in most cases, the majority of the trend movement is lost.


2. In the outset (trading range) and especially in the lateral trend in the form of a saw, gives a lot of false signals and leads to losses. In this case, a trader trading on the basis of a simple sliding cannot skip these signals, since each of them is a potential signal of entering the trend.


3. When you enter the price calculation, which differs from the level of prices in the market, the moving average varies greatly. When this price leaves the sliding calculation, a strong change occurs again. This effect A. Elder called "bad dog barks twice."


4. One of the most serious shortcomings of the moving average method is that it gives the same weight to both newer prices and to older prices, although it would be more logical to assume that new prices are more important because they reflect a market situation closer to the current moment.

Note 1: In the market in a state of a trend, it is better to use a shorter sliding one, in the market in the outset it is better to use a longer sliding one, as giving less false signals.

Note 2: there are a lot of more effective modern variations: exponential moving average, weighted moving average, there are also a number of adaptive moving averages AMA, KAMA, Jurik MA, etc.

Risk warning: we do not recommend using any indicators on real accounts without first testing their work on a demo account or testing as a trading strategy. Anyone, even the best indicator, applied incorrectly, gives a lot of false signals and as a consequence can bring significant losses in the process of trading.

50 basic combinations of Japanese candles

When determining the reversal signals, the investor can use various instruments of technical analysis: oscillators, trend indicators, support and resistance levels. But, in addition, a variety of candle combinations are useful tools that can be used in combination with the above methods. Candlestick analysis can provide answers to the question of what moods in the market, because each candle is a struggle between buyers and sellers. In this article, we would like to present you the main candle combinations that will help to predict a turn on a bull or vice versa bear market or a continuation of the trend.

Japanese candles as a tool for technical analysis was invented before the others, but the wide application was not immediately obtained. By name, it's easy to guess that Japan became the "motherland": local rice traders used this method already in the 18th century. It is believed that for the first time a chart in the form of a sequence of "candles" was invented by the Homma Munahis rice merchant to visualize the price maximum and minimum for a certain period of time, as well as the prices for the beginning and the end of this period. However, due to geographical remoteness and closeness of Japan from external "visitors", this type of graphics became popular much later, when the exchange life was actively boiling in Europe and the United States. According to the absolute majority of experts, "Japanese candles" can be called the most convenient schedule - it shows not only the direction of movement,

Combinations confirming the reversal of the "bearish trend"

The first combination, which we will consider, is a hammer and an inverted hammer. The hammer has a big shadow at the bottom and a small white body at the top, and the inverted hammer is a big shadow up and a small black body underneath. It appears, like all subsequent combinations, at the bottom of the downtrend.

[caption id="attachment_416" align="aligncenter" width="94"] hammer[/caption]

[caption id="attachment_417" align="aligncenter" width="95"] inverted hammer[/caption]

"Bull Harami" consists of two candles: the first with a long black body that covers the second with a short white body. A distinctive feature is that this model assumes a price gap. The fact that "harami" in translation from Japanese means pregnant, so if you look closely at the picture, you can see that the body of the right candle is located inside the body of the left candle.

[caption id="attachment_418" align="aligncenter" width="94"] Bull Harami[/caption]

If, on the contrary, the first appears a short black body, and then a long white body, it means a combination of "bullish absorption".

[caption id="attachment_419" align="aligncenter" width="94"] bullish absorption[/caption]

These were the most common combinations. Now consider the more rare.

Short candles in the "star position". "Star" is a candle with a fairly small body, formed after the break with the closure of the previous candle, usually with a large body. Therefore, in this model the candle should appear at the bottom of the downward trend, have a short body and open with a gap down compared to the previous candle. The third black candle with a short body should close higher than the first candle.

[caption id="attachment_420" align="aligncenter" width="94"] star position[/caption]

"Morning Star in Three - Candle Position". Here the first candle should be black, denoting a strong downward movement, the second has a short body and is formed with a gap relative to the feather candle, and the third candle is necessarily white, at which the price has risen to at least half the body of the first candle. Ideally, the morning star should have a gap before and after the second candle, however, the gap between the second and third candles is rare.

[caption id="attachment_421" align="aligncenter" width="94"] Morning Star in Three[/caption]

A short candle in the "harami" position. This combination is similar to the "bull hara", which we described earlier, only in this case the second candle is short and black, but it is also in the body of the first candle. The third candle is necessarily white.

[caption id="attachment_422" align="aligncenter" width="95"] short candle in the "harami" position[/caption]

Japanese candles "Doji" are candles that have either a very narrow body or a body that represents a line (the opening price is equal to the closing price is the ideal case), and the shadows are long enough. Pay special attention when the doji stands among the candles with long bodies, as it can foreshadow the trend reversal.

One of the combinations with such a candle is the doji in a "stellar position." In fact, it's the same thing as short candles in a "stellar position", only "dodges" come to replace short candles. If after the formation of the "Dodge" in the "star position" prices open with a gap against the trend, then we can safely say that the uncertain market situation on the day of the formation of "Dodge" ended in the victory of bulls.

[caption id="attachment_423" align="aligncenter" width="94"] doji in a "stellar position."[/caption]

The cross is "harami". Here everything is simple: in place of the second candle in the "harami" position is located dodge. "Cross Harami" consists of two candles. The first candle has a long body, and the second is a doji. The second candle is as if in the body of the first candle.

[caption id="attachment_424" align="aligncenter" width="79"] harami[/caption]

Clearance in the clouds, or Piercing line. This combination consists of two candles, the first with a long black body, and the second with a long white body. At the same time, the white candle opens below the price of the black candle and closes above its middle. The stronger the second body "penetrates" into the first, the higher the chances that it is a strong signal about a trend reversal.

[caption id="attachment_425" align="aligncenter" width="94"] Piercing line[/caption]

"Double push". In this model, white candles seem to push upward downward dynamics. The first white candle should open below the low of the previous black candle, and close below the middle of the black candle. If in a downward trend, this situation is repeated twice, you can expect a reversal.

[caption id="attachment_426" align="aligncenter" width="94"] Double push[/caption]

Tweezers are formed from two or more candles that have the same minimums in a declining market, and they can be formed by bodies, shadows or doji. Their significance is higher after a long trend, but as a whole they give not a strong enough signal.

[caption id="attachment_427" align="aligncenter" width="94"] Tweezers[/caption]

"Absorption" in combination with "hammer". This combination consists of three candles. The first candle is a hammer, and the second and the third form the bullish absorption, which we described earlier.

[caption id="attachment_428" align="aligncenter" width="94"] Absorption[/caption]

"Penetrating line in forceps" - this combination consists of two candles and, as you may have guessed, combines the forceps and the penetrating line.

[caption id="attachment_429" align="aligncenter" width="94"] Penetrating line in forceps[/caption]

The bullish "abandoned child" consists of a long black candle, doji through a rupture, and a long white candle through a rupture, as shown in the figure.

[caption id="attachment_430" align="aligncenter" width="94"] abandoned child[/caption]

Strong bottom, "fortress" is a strong range, which for some time keeps the quotes from the decline. Then the candle opens with a gap up, and the trend changes with the bull.

[caption id="attachment_431" align="aligncenter" width="109"] fortress[/caption]

A quick breakthrough and three new bottoms. This combination consists of 3 black candles at the end of a downtrend, and before the first candle there is a break with the previous candle, and after the third candle there is also a gap before the first white candle.

[caption id="attachment_432" align="aligncenter" width="109"] three new bottoms[/caption]

"Bull line of the meeting". On the first day there is a black candle, and the second one is white, and the closing prices are the same or almost the same for both days.

[caption id="attachment_433" align="aligncenter" width="94"] Bull line of the meeting[/caption]

Triple gap on black candles. This model consists of 3 days of decline, each of which opens with a gap below the closing of the previous day. After three days of decline, the market becomes critically oversold and ready for a reversal.

[caption id="attachment_434" align="aligncenter" width="109"] Triple gap on black candles[/caption]

8-10 new bottoms. With a downward trend, candlesticks are counted with new lows and profit is recorded in the formation of reversal patterns or candles. If the correction formed 8-10 new lows, then this is the signal to a possible reversal, if less, then the count is reevaluated.

[caption id="attachment_435" align="aligncenter" width="169"] 8-10 new bottoms[/caption]

The Bullish Window. At the bottom of the downtrend appears a white candle that signals a possible reversal. The next day the market produces a strong upward movement, opening with a gap to the closing level of the previous day and confirming a trend change.

[caption id="attachment_436" align="aligncenter" width="109"] The Bullish Window[/caption]

"Bull" game, ending with a gap (gap). This combination can be described as a frequent change in the mood in the market, which, in the end, ends up with a gap up and a reversal of the trend.

[caption id="attachment_437" align="aligncenter" width="139"] Bull game[/caption]

And so it looks like a combination of four previously listed formations: an inverted hammer, a "fortress", a dodge and a "bullish absorption."

[caption id="attachment_438" align="aligncenter" width="124"] combination of four[/caption]

Combinations confirming the turn of the "bullish trend"

"Bear Harami" is the same as "bull haraami", only a long white body should appear first, and short black - the second, and the body of the right candle is in the body of the left.

[caption id="attachment_439" align="aligncenter" width="94"] Bear Harami[/caption]

"Bearish absorption." Here the first is a short white candle, and the second is a long black candle, and if you look at it, the body of the left candle is inside the body of the right candle.

[caption id="attachment_440" align="aligncenter" width="94"] Bearish absorption[/caption]

The "shooting star" is a short candle with the missing lower shadow and a very long upper one.

[caption id="attachment_441" align="aligncenter" width="94"] shooting star[/caption]

Bearish cross "harami" is formed when the first candle is long and white, and the second candle ("child") is a "doji".

[caption id="attachment_442" align="aligncenter" width="94"] Bearish cross harami[/caption]

"Three-linear star in thoughtfulness" or in another way "repulsed offensive of three white soldiers". This combination reflects a gradual steady price increase and consists of three candles, the opening price of each of them being located within or adjacent to the previous white body. The price of closing candles is equal to the maximum prices or approaching them. If the second and third candles (or only the third candle) show signs of weakening, that is, their body is gradually decreasing or relatively long upper shadows are formed, then the model "repulsed offensive of three white soldiers" is formed. This model should be especially alarming if it appears after a long upward trend.

[caption id="attachment_443" align="aligncenter" width="94"] Three-linear star[/caption]

"Southern evening cross" consists of three candles. The first candle should be with a white body and have a maximum above the maximum of the previous candle. The second should be doji, and the closing price should be higher than the maximum of the first candle. The third candle with a black body with an opening price equal to the maximum, and this maximum should be lower than the closing of the second candle.

[caption id="attachment_444" align="aligncenter" width="94"] Southern evening cross[/caption]

"Star turn" is a combination consisting of three candles, and the second candle should have a closing price with a gap to the maximum of the first candle. The third candle should have a black body and the opening price equal to the maximum, and this maximum should be higher or equal to the closing level of the second candle.

[caption id="attachment_445" align="aligncenter" width="94"] Star turn[/caption]

Dodge in the position of "star turn" - the same combination as the "star turn" , only the second candle should be doji, and the third candle should open above the maximum of the doji.

[caption id="attachment_446" align="aligncenter" width="94"] Dodge in the position of star turn[/caption]

"Bull tongs" are formed from two or more candles that have the same maximums in a growing market, and they can be formed by bodies, shadows or doji. Their significance is higher after a long trend, but on the whole they do not give a strong enough signal.

[caption id="attachment_447" align="aligncenter" width="94"] Bull tongs[/caption]

"Bear's Window" consists of 3 candles, and the market signals a reversal by changing the color to the second candle, which opens with a gap to the opening level of the previous day. The third candle opens roughly on the same level as the second candle and also has a black body.

[caption id="attachment_448" align="aligncenter" width="94"] Bear's Window[/caption]

Three-candle "evening star". In this pattern, the second middle candle has a very small body, and the smaller the body, the more reliable the reversal signal. It opens through a gap to the level of closure of the previous candle. Color does not play a significant role. The third candle opens through a gap down to the closing level of the previous candle. It should close lower than the center of the first candle. A long black candle confirms the bearish mood of the market.

[caption id="attachment_449" align="aligncenter" width="94"] Three-candle "evening star"[/caption]

"Bear" line of the meeting. On the first day there is a white candle, and in the second black, and the closing prices are the same or almost the same for both days. The third black candle opens at the level with the closing of the second candle.

[caption id="attachment_450" align="aligncenter" width="94"] "Bear" line of the meeting[/caption]

"Bearish three-linear breakthrough and resistance line"

[caption id="attachment_451" align="aligncenter" width="94"] Bearish three-linear[/caption]

"Hangman" is very similar to a hammer, but appears on a growing trend. It looks like a candle with a small body at the top and a long shadow at the bottom. The color of the body is not important, but there is no shadow on top of the body.

[caption id="attachment_452" align="aligncenter" width="94"] Hangman[/caption]

"Bearish abandoned child" is the same combination as previously described by us, only not in a bearish trend, but in a bullish one.

[caption id="attachment_453" align="aligncenter" width="94"] Bearish abandoned child[/caption]

The "dark covering cloud" is the reverse case of a "gap in the clouds". This combination consists of two candles, and the first has a long white body, while the second has a long black one. At the same time, the black candle opens below the price of the white candle and closes above its middle. The stronger the second body "penetrates" into the first, the higher the chances that it is a strong signal about a trend reversal.

[caption id="attachment_454" align="aligncenter" width="94"] dark covering cloud[/caption]

A strong top, "fortress" is a strong range, which for some time keeps quotes from growth. Then the candle opens with a gap down, and the trend changes to bearish.

[caption id="attachment_455" align="aligncenter" width="109"] A strong top, "fortress"[/caption]

8-10 new peaks (the reverse situation is 8-10 new bottoms). With a growing trend, candlesticks are counted with new highs and profit is recorded when forming reversal patterns or candles. If the correction formed 8-10 new highs, then this is the signal to a possible reversal, if less, then the count is re-run.

[caption id="attachment_456" align="aligncenter" width="169"] 8-10 new peaks[/caption]

"Bear game, ending with a break". This combination can be described as a frequent change in the mood in the market, which, in the end, ends up with a gap up and a reversal of the trend.

[caption id="attachment_457" align="aligncenter" width="124"] Bear game, ending with a break[/caption]

Combinations confirming the continuation of the trend

In addition to reversal signals, candlestick patterns can give an idea of what moods are on the market today. And to correctly define them and have time to use them competently, you can rely on the following combinations.

"Three white soldiers" is one of the most understandable, "right" models, allowing to interpret the current situation on the market as having the potential for further growth. It is a set of three white candles, with the closing price of each next candle above the closing price of the previous one, and the opening price is within the white body of or near the previous candle. If this model appears in the area of low prices after a downtrend or consolidation period, this indicates a potential market strength capable of accelerating upward in the near future. Candles should preferably be of medium size, since heavily stretched bodies can talk about overbought markets.

[caption id="attachment_458" align="aligncenter" width="95"] Three white soldiers[/caption]

The reverse situation is formed in the combination "Three Crows", which consists of three consecutive black candles, with the closing price of each next candle being lower than the closing price of the previous one, and the opening price is within the black body of the preceding candle or near it.

[caption id="attachment_459" align="aligncenter" width="95"] Three Crows[/caption]

"The method of three drops" and "The method of three ascents" is a candle combination, where after a big candle, a short consolidation in a narrow range followed by a trend followed by a continuation of the main trend.

Let us consider in more detail the example of the method of three ascents. A candle with a long white body appears on the chart. Then follow three (maybe two or four) candles with small bodies, each of which does not go beyond the first white candle. Next is another candle with a large white body, the closure of which occurs well above the highs of the first white candle. After the second white candle, which is the final signal for the formation of the model, as a rule, further growth follows, which is the main goal for newcomers.

Mandatory condition - the closing price of the last candle should be higher than the maximum price of the first candle for the bull model, or below its minimum price for the bearish model.

[caption id="attachment_460" align="aligncenter" width="109"] The method of three drops[/caption]

[caption id="attachment_461" align="aligncenter" width="109"] The method of three ascents[/caption]

"Bear" and "Bull" gap "Tasuki." The gap "Tasuki" - a model of the continuation of the trend, is a figure of three candles. The first two of them must be white in case of an uptrend (and set), and there must necessarily be a gap between the price of closing the first candle and the price of opening the second. The third candle of the model has the opposite color. It opens inside the body of the second candle and closes inside the gap or just below it.

[caption id="attachment_462" align="aligncenter" width="94"] bear-Tasuki[/caption]

[caption id="attachment_463" align="aligncenter" width="94"] bull-Tasuki[/caption]

"Three simultaneous wings" is a candle pattern consisting of three candles, and the price of opening the second and third candles are equal to the closing prices of the previous ones.

[caption id="attachment_464" align="aligncenter" width="79"] Three simultaneous wings[/caption]

"Bull gap to the edge of white lines" is built on the basis of three candles of white color, while between the first and subsequent opens a gap, and the second and third candlestick in the size of the bodies are approximately equal. Further price increases should be expected in the event that the fourth candle closes above the level of the highest of the two candles.

[caption id="attachment_465" align="aligncenter" width="124"] Bull gap to the edge of white lines[/caption]

Conclusion

In conclusion, once again, it should be recalled that any system should consist of a certain number of signals in order to achieve a high quality forecast (and filter false movements), and also contain a corresponding allocation of potential profit and risk.

Candle models, especially reversal patterns, need to be confirmed with additional signals. It can be graphic technical signals or at least just a fundamental assessment of the external background. An additional filter will significantly reduce the number of losing trades and allow in practice to understand what system trading is.

Candlestick combinations are a useful addition to technical analysis. Therefore, we hope that our memo will help you in the trade.