The effect of the Victory by Japan's Opposition Party in a Historic National Election

The morning after a historic victory by Japan's opposition party in the national election and yes pressure is already mounting on a Monday morning for quick, definitive action to resolve a host of problems faced by the country, with, of course, reviving the country's economy at the top of the list.

Japan is in its worst economic slump ever since World War II. It is caught in deflation and with the unemployment rate at its record high. The dissatisfaction of country wide voters caused an expected turnaround which led to a landslide victory for the opposition.

With the victory by the Japan's Opposition party, Japan’s Nikkei 225 stock average initially rose as much as 1.5 per cent to 10,767, its highest level in over 10 months. A strong surge in the value of YEN could be seen across majors YEN crosses such as USDJPY, EURJPY, GBPJPY, AUDJPY and CHFJPY. The strong surges occurs at the opening of the Tokyo Market around 0000GMT 31 August 2009. Surge of upto 100 pips could be seen.

Japan's Nikkei 225 stock average gave up the early gains and slipped 0.4 per cent to 10,497.19 by midday. The strengthening of the YEN lasted only around 3 hours and starts to lose its strength after midday too.

So, how will Japan's fare with its government? Will its economy be revived? How will the new Japan's government affect the world's eceonomy? Let's take a back seat now and observed how the trend goes..

Video - How to read Currency Quotes

The video is brought by a third party and I do not promote or try to recommend any products mentioned in the video.

The Mechanics of Currency Markets - PIPS

In currency trading, the smallest and most common increment is the PIP. IF GBPUSD move from 1.6251 to 1.6252, that increment is known as 1 PIP. PIP actually means Percentage increase in Points. The PIP is generally referered to as the last decimal place of a currency quote. Therefore if the currency quotes is in 4 decimal places, the one increment/decrement of 4th decimal place is known as 1 PIP. For currency quote for AUDJPY at 78.68, which has 2 decimal place, one increment/decrement of 4th decimal place is known as 1 PIP.

The PIP in currency trading is often seen as the measurement of profit/loss from the trade.

So what is the worth of a PIP exactly, since it measures profit or loss?

Each currency that is traded, it is therefore important to know the value of a PIP for that currency. We also require a constant value that we can use if there is a need to convert all our trade profit/loss to US Dollar.

In currency where US Dollar is quoted first, the calculation will be as follow: -

USDCAD at 1.0915, the value of 1 pip would be 0.0001/1.0915 = 0.0000916.

USDCHF at 1.0595, the value of 1 pip would be 0.0001/1.0595 = 0.0001808.

USDJPY at 93.95, the value of 1 pip would be 0.01/93.95 = 0.0001061.

The above value for 1 pip might look like some large numbers, but it might not be after we discuss the lot (contract) size later.

If the US Dollar is not quoted first and in order for us to get to the value of US Dollar we have to include one more step, which is to include in the exchange rate.

EURUSD at 1.4301, the value of 1 pip would be 0.0001/1.4301 * 1.4301 (exchange rate) = 0.0000699 * 1.4301 = 0.0001 (round up)

GBPUSD at 1.6267, the value of 1 pip would be 0.0001/1.6267 * 1.6267 (exchange rate) = 0.0000614 * 1.6267 = 0.0001 (round up)

You might be thinking by now, there is so much mathematics involved in Forex Trading! How does it work out? Do I have to do all these calculations myself evertime I trade? Do not worry, all brokers that you choose to trade with will do all the calculations for you automatically.

In the next post, we will touch more on the mechanics of ciurrency markets.

The Mechanics of the FOREX Markets - Currency Quotes

It is clear now that the Forex Market is the largest market in the world. The broker or institution that you trade with collects information on currency quotes from a centralized feed or individual quotes comprising of INTERBANK rates.

So, what are quotes? Well I have discussed previously, "What currencies are traded, and What are the most common pairs?".

You will normally see the USD being quoted in front with a few exceptions such as the Pounds Sterling, Euro Dollar, Australia Dollar and New Zealand Dollar. The first currency quoted is called the base currency.

Look at Forex quotes, you will normally see two numbers. For example, EURUSD, you might see 1.4231/1.4233. The first number is referred to as the Bid or the Buy Price while the second number is referred to as the Ask or the Sell price. So, when you want to buy the Euros against the US Dollars, you are prepared to buy (or go Long) at 1.4231. The reverse is the same. When you want to sell the Euros against the US Dollars, you are prepared to sell(or go Short) at 1.4233. The currency quotes are the price that you as a trader are willing to pay for your trades. One of the other typical way of displaying quotes is 1.4231/33. Each broker has its own convention and some will quote the full number and others will show only the last two.

You should have by now notice that there is a difference between the Bid and the Ask Price. This difference is callled the spread. For the major currencies the spread is normally between 2 to 4 pips difference. So, what is pips again. We will discussed about in a later post.

Let's come back to the quotes again. Using the value of the bid, you can buy 1 EUR for a price of 1.4231 US Dollars.

In the next post, we shall discuss more about the term PIPS and how it is calculated.

What is "INTERBANK"? Why is it discussed in FOREX?

When you are involved in Forex Trading,INTERBANK will normally be mentioned and discussed. So What exactly is INTERBANK? The name simply says the exchange of currency rates or informations between large banks and institutions, which will act as platform for their own clients or even themselves to trade (Buy/Sell) in the currency.

The word INTER basically means between two and BANK refers to an institution that takes in deposits from people. The forex market has advanced so much that the term INTERBANK now refers to anyone that is trading the currency market.

The quotes that you obtain for Bid (buy) and Ask (sell) are all from reliable sources. These quotes are normally made up from the top 300 or so large institutions. This ensures that if your broker place an order on your behalf, the institutions that they have placed the order with is capable of fulfilling that order.

Now although we have spoken about orders being fulfilled, it is estimated that anywhere from 70%-90% of the FX market is speculative. In other words the person or institution that bought or sold the currency has no intention of actually taking delivery of the currency. Instead they were solely speculating on the movement of that particular currency.

Over 90% of all currencies are traded against the US Dollar. The next four most traded currencies are the Euro (EUR), Japanese Yen (JPY), Pound Sterling (GBP) and Swiss Franc (CHF).

As currencies are normally traded in pairs or exchanged one for the other when traded, the rate at which they are exchanged is called the exchange rate. These four currencies traded against the US Dollar make up the majority of the forex market and are called major currencies or the majors.

What is Risk to Reward Ratio?

What Does Risk to Reward Ratio Mean (R/R)?
A R/R ratio normally used by traders/investors to compare the expected returns of an investment to the amount of risk undertaken by them to get these returns.

This ratio is mathematically calculated by simply dividing the amount of profit the trader/investor expects to made when the position is closed (i.e. the reward) by the amount he stands to lose if price moves in the unexpected direction (i.e. the risk). The risk portion is normally pre-determine by using the stop-loss order while the profit is pre-determine by using the take-profit order.

Let's take a look at this example. A trader Buy 0.1 Lot of AUDJPY at 77.00. He place a stop-loss order at 76.50 and a take profit order at 78.00. By doing so, he has limited his loss to 50 pips while he expect to make a profit of 100 pips. Therefore the risk-reward ratio is caculated to be 1:2. The optimal risk to reward ratio differs widely among trading strategies. Some trial and error is usually required to determine which ratio is best for a given trading strategy.

In real time trading, it might be good to have stop-loss, take-profit and even R/R, but certain decision making should still falls on the trader himself. Should he still trade during news release? Should he still enter the trade if the price is near a very strong support/resistance line? Should he....

There are too many questions. There is also the fundamental and technical aspect of currency trading to consider too. I shall in my later posts go through some of the experience I experienced.

I Closed my AUDJPY Trade at Take-Profit

I closed my AUDJPY at Take-Profit (78.45) for a profit of USD 21.09 at 2252 GMT plus rollover interest of USD 1.06.

What kind of trading strategy I am using? I will discuss about it as the time comes.

Please continue to follow and support me..

Bye for now.

What is a Take-Profit Order?

What Does Take-Profit Order Mean?
This is usually an order that is used by investors or currency traders whereby they specify the exact rate or number of pips from the current entry price where they would like to close out their current position for a profit. Please note the difference between stop-loss and take-profit. For take-profit, the trade closes with a profit.

The currency rate at which is deemed to be the level where the investor/trader wants to take a profit is sometimes referred to as the "take-profit point".

Look at the name, take-profit are normally used to lock in an investor/trader's profit in the event of favourable move. If the investor/trader is in a short position, you believe that the price will fall to a certain level, but you are unsure how the currency will behave beyond that level. By placing a take-profit order at that point will automatically close out your position allowing you to lock in all your profit.

Short 0.1 Lot of AUDJPY at 78.45. Place a take-profit at 78.00. When the price falls to 78.00, the trade will close automatically and will generate a profit of USD45.00.

Risk to Reward ratio coming up next.......

Anyway I am currently Long AUDJPY @ 78.35 and I am currently at -68 pips.... Oh!.... anyway out............... Hey ! Don't worry, I follow the money management policy.


Look out for my next post.

What is Stop-Loss Order?

What Does a Stop-Loss Order Mean?
It is basically an order placed with your broker to sell your currency pair that you are currently holding when it reaches a certain price. This certain price typically means a loss, as the name stop-loss implies. Therefore, a stop-loss is placed to limit your loss on your position.

Alternatively, it is slso known as a "stop order" or "stop-market order".

To set a stop-loss order for 20% below the price you paid for the currency (assuming that you are Long in the position), this will limit your loss if any to only 20%. This stop-loss strategy allows you to determine your loss limit in advance, and thus preventing emotional decision-making. What should be the limit of your loss? This is discussed in the post on Money Management. The recommended risk that you should take per trade is 2 -4% of your investment.

If your initial investment is $5000, the recommended risk should be between $100 to $200. Depending your lot size, assuming a 0.1 lot purchase, your stop-loss can be placed at a distance of 100 pips to 200 pips from the purchase price.

It's also definitely a great idea to make use a stop-loss order before you leave for holidays or you happen to enter a situation in which you will be unable to watch over the development of your currency pair for an extended period of time.

In the next post, we shall cover the take-profit and risk to reward aspect of Forex trading.

The Effect of Compound Interest

In my last post, I mentioned the effect of compound interest. With the bank interest rate at a pathetic low of 0.2% P.A., some even at 0%, the amount of interest earned with deposits in the bank is so low that it can be considered as wasted deposit.

Why put your money in the bank? You should look at some other forms of investment that might reap higher returns for you. With conservative investment in mind, forex trading might just be the thing for you. Look at the table below. With just 2% interest per week, look at the returns after 52 weeks - Almost 180% return!

However, risk comes with every investment. It is just how we manage the risk. Read my last posting about Risk Management. I will cover in my next post about how we can cut loss if the trade goes against us and also how to take profit. How do we overcome the greed in us?

Money Management

Money Management is an important aspect if you want to live to trade another day. As the saying goes, win or lose, we want to trade again the next day. Normally, when I say to people, my “average risk per trade is about 200 pips and some times even more”, they go blank and stare into empty space. The most important to note is that, the number of pips is not the crucial point. It is the risk (money sense) that you are willing or you can afford to take.

In an example, no matter how you place your stop-loss, be it 75, 100, or even 150 pips, the risk/amount of money that you are willing to lose should not CHANGED.

As a conservative recommendation, you should not risk more than 5 – 7% of your account on one trade alone. But, for those who have just start to learn to trade, I would recommend that maybe you could even start with 2 – 4%.

There are a lot of people talking about money management, and yet there are hardly a hand full of them that actually practice to protect their account. We trade forex to make money, NOT to lose it. Most of the new traders, they could only afford to start with a small capital, but they hope to make it big by playing it big, which is not in path with the real world.

You cannot expect, be realistic, to start with an account of $2000 and you expect to make a living out of it. No way man! You need to grow your account slowly and eventually, you could withdraw yourself a paycheck where you could still leave some of the profits to grow your account slowly. This is time period where traders start to lose heart and start to over leverage and thus burst their account.

You might not have notice that with a steady 2% growth on your account per week, how fast you are compounding your account.

I will show you an example of how alarming the compounding looks...

See you then..

Take Profit AUDJPY @ 81.11

I take profit @ 81.11 (11 Aug 2009, 0723GMT) capturing USD 20.67

Long AUDJPY @ 81.01

Currently, I am LONG on AUDJPY @ 81.01 (11 Aug 2009, 0201 GMT).

Trading Strategy Using Moving Averages and RSI

In today's post, we shall discuss one trading strategy which make use of the Moving Averages and the RSI. Before we move on further, I would like anyone who is following the blog now and who have not read the Risk Disclosure Statement to read it now.

Currency Pair: Any
Time Frame: H1, H4, D1, (D1 preferred, you only need to check the chart once daily)
Indicator Used: 7 EMA (Red), 14 EMA (Yellow), 21 EMA (Blue), RSI(14) (Lime)

The steps involved in preparing the chart for trade is as follow: -
1. Plot the 3 moving averages on the currency chart.
2. Plot the RSI(14) on the chart's indicator window with levels 45 and 55 mark out.

The following Entry Rules are to be observed when taking trade using this strategy: -

LONG ENTRY CONDITION
1. When the 7 EMA cross up the 14 EMA and continue to cross up the 21 EMA
2. RSI(14) > 55
3. The last bar has to be bullish
4. Go Long at the closed of the current Daily bar ONLY if No.1, 2 & 3 are met

SHORT ENTRY CONDITION
1. When the 7 EMA cross down the 14 EMA and continue to cross down the 21 EMA
2. RSI(14) < 45
3. The last bar has to be bearish
4. Go Short at the closed of the current Daily bar ONLY if No.1, 2 & 3 are met

The following Exit Rules are to be observed when taking trade using this strategy: -
1. To exit the trade when then 7 EMA cross up (for Short Trade) or cross down (for Long Trade) the 14 EMA

The above was a EURGBP trade which started on 17/May/2009 and ends on 02/July/2009. The trade net a total of +300 pips.

The advantages to this trading strategy are: -

1. It is to use and implement.
2. You only need about 15 minutes a day to check the chart.
3. It gives good trade in a trending market, big price move or breakout.

The disadvantages to the strategy are: -

1. Moving averages and RSI are lagging indicators, and so they might not indicate real future market movement. They only indicate past trend.
2. This strategy does not work well with consolation market conditions, which might give a lot of false trigger.

So Why am I discussing this strategy as it seems from the disadvantages, this strategy is not one of foolproof. The reason why I am discussing this strategy is that it is a easy to use and implement strategy, and due to the nature of the disadvantages stated, there is a need to put in a stop-loss.

Starting from the next post, I will start to discuss on the concept money mangement, risk to reward ratio which will lead to the use of stop-loss and take-profit.

So, Stay with me...

Video - Using Bollinger Bands

The video is brought by a third party and I do not promote or try to recommend any products mentioned in the video.

Bollinger Bands

What is the Bollinger Bands?

Bollinger Bands are a set technical indicator and trading tool created by John Bollinger in the early 1980s. The Bollinger Bands are therefore being used to measure the volatility of the market. When the market is quiet, the bands contract; but when the market is LOUD, the bands expand. when the price was quiet, the bands close up together, but when the price moved up, the bands spread apart.

The other purpose of the Bollinger Bands is to provide an indication of the high and low of the price. It is clear that prices are high at the upper band and low at the lower band. This definition can aid in rigorous pattern recognition and is useful in comparing price action to the action of indicators to arrive at systematic trading decisions.

The Bollinger Bands consist of a set of three curves drawn in relation to prices of the currency. The middle band is a shows the intermediate-term trend, usually it is a simple moving average, which serves as the basis for the upper and lower band. The interval between the upper and lower bands and the middle band is determined by volatility, typically a standard deviation of the same data that were used for the average. The default parameters used for the Bollinger Bands are, 20 period simple moving average and standard deviations of 2, and this parameters may be adjusted accordingly to your trading needs.

There are many ways to use Bollinger Bands, the following are a few rules that serve as a good guide to the use of the Bollinger Bands.

1. Bollinger Bands provide a relative definition of high and low.

2. That relative definition can be used to compare price action and indicator
to arrive at rigorous buy and sell decisions.

3. Appropriate indicators can be derived from momentum, volume, sentiment, open
interest, inter-market data, etc.

4. Volatility and trend have already been deployed in the construction of Bollinger
Bands, so their use for confirmation of price action is not recommended.

5. The indicators used for confirmation should not be directly related to one another.
Two indicators from the same category do not increase confirmation. Avoid colinearity.

6. Bollinger Bands can also be used to clarify pure price patterns such as M-type;
tops and W-type bottoms, momentum shifts, etc.

7. Price can, and does, walk up the upper Bollinger Band and down the lower Bollinger
Band.

8. Closes outside the Bollinger Bands can be continuation signals, not reversal
signals--as is demonstrated by the use of Bollinger Bands in some very successful
volatility-breakout systems.

9. The default parameters of 20 periods for the moving average and standard
deviation calculations, and two standard deviations for the bandwidth are just
that, defaults. The actual parameters needed for any given market/task may be
different.

10. The average deployed should not be the best one for crossovers. Rather, it
should be descriptive of the intermediate-term trend.

11. If the average is lengthened the number of standard deviations needs to be
increased simultaneously; from 2 at 20 periods, to 2.1 at 50 periods. Likewise,
if the average is shortened the number of standard deviations should be reduced;
from 2 at 20 periods, to 1.9 at 10 periods.

12. Bollinger Bands are based upon a simple moving average. This is because a
simple moving average is used in the standard deviation calculation and we wish
to be logically consistent.

13. Be careful about making statistical assumptions based on the use of the standard
deviation calculation in the construction of the bands. The sample size in most
deployments of Bollinger Bands is too small for statistical significance and the
distributions involved are rarely normal.

14. Indicators can be normalized with %b, eliminating fixed thresholds in the process.

15. Finally, tags of the bands are just that, tags not signals. A tag of the upper
Bollinger Band is NOT in-and-of-itself a sell signal. A tag of the lower Bollinger
Band is NOT in-and-of-itself a buy signal.

These 15 rules on the use of Bollinger Bands are given with compliments from John Bollinger, CFA, CMT. You may also like to visit him at http://www.bollingerbands.com/ to learn more about the Bollinger Bands.

Parabolic SAR

What is the Parabolic SAR?

The Parabolic SAR is a technical indicator that is used to determine the direction of a currency/share's momentum. It can also measure the point in time in which the momentum has a higher-than-normal probability of changing directions. The Parabolic SAR is also known as the "Stop and Reversal System".

The Parabolic SAR was developed by the famous technician Welles Wilder, creator of the Relative Strength Index (I think I forgot to mentioned that in RSI post). It involves the placing of a series of dots either above or below the price in the chart. The AUDUSD daily chart belows shows how the Parabolic SAR is plotted on the chart.



The position of the "dots" generated by the PSAR can be use as BUY/SELL signals. A dot that is placed below the price is giving a bullish signal, which will generate a BUY signal and traders will expect the momentum to remain in the upward direction. The reverse is true for a bearish signal.

The first PSAR dot on the bullish trend will be plotted when the price of the most recent high price has been breached, it is then at this time that the PSAR dot is plotted at the price of the most recent low. As the price increase, the PSAR dots will also rise slowly, picking up speed and increase with the trend. As the trend develops, the PSAR dots will soon catch up with the price action. The PSAR works extremely well in trending market, and it will lead to false signal when the market is consolidating or a choppy market.

Another exciting feature of the PSAR is that it can help to set the position of the stop-loss for the trade. It can help traders in locking in profits of the trade in a trending condition. PSAR is a wonderful indicator for use in a trending market. It tells the trader exactly when to enter and exit the market, thus eliminating human emotion in trading. The only disadvantage is when the trade is experiencing whipsaw (consolidation) whereby false signals might be given.

Bonus Video - Top 10 Biggest Mistakes Forex Traders Make

The video is brought by a third party and I do not promote or try to recommend any products mentioned in the video.

Video - Using the RSI or Relative Strength Index

The video is brought by a third party and I do not promote or try to recommend any products mentioned in the video.

Relative Strength Index (RSI)

What Does Relative Strength Index - RSI Mean?

It is a technical momentum indicator that compares the magnitude of recent gains to recent losses in an attempt to determine the overbought and oversold conditions of a currency/share. It is calculated using the following formula:


RS = Average of X days' up closes / Average of X days' down closes

Refering to the chart below, we can see that the RSI ranges from 0 to 100. The currency/share is deemed to be overbought once the RSI approaches the 80 level, meaning that it may be getting overvalued and there is a good chance that the price might fall. It works the reverse if the RSI approaches 20, it is an indication that the currency/share may be getting oversold and undervalued and there exist a possibility that the price might increase.



RSI is a famous tool because it can be used to indicate trend formations. When you find a trend forming, you can take a look at the RSI. If the RSI is up above 50, a up trend is in the making, else a down trend is in the making. If you are looking at a possible uptrend, you should be sure to make the RSI is above 50, and when you are looking at a possible downtrend, you have to make sure the RSI is under 50.

So in summary, RSI
1. Simply measures the overbought/oversold readings
2. Identify potential reversal points
3. Occassional Divergence Strength

Video - Timing Trades with Stochastic Indicator

The video is brought by a third party and I do not promote or try to recommend any products mentioned in the video.

Stochastic Oscillator

George Lane was the originator of the stochastic oscillator in the 1970's. He has observed that as prices increase in an up trend, the closing prices tend to be closer to the upper end of bars and in a down trend the closing prices tend to be nearer the lower end of bars. He therefore developed the stochastics to distinguish the relationship between the closing price and the high and low of a bar.

A stochastic is basically an oscillator that will help us measure the overbought and oversold condition of a currency/shares in the market. The Stochastic is another oscillator that indicate to us the end of a trend. These two lines are similar to the MACD, oen line is faster than the other line. The stochastic consists of two lines, namely the %K and %D. These two line will move between a vertical range of 0 to 100. Readings of the stochastic above 80 indicates overbought while readings below 20 indicates oversold.

The stochastic can also be used as a BUY/SELL indicator. When the faster %K line crosses above the slower %D line and the lines are below 20, a "BUY" signal is generated. When the %K lines crosses below the %D line and the lines are above 80 a "SELL" signal is generated.

There are alot of different ways to use stochastics, but the main use of the stochastic is to deterermine if the market is overbought or oversold.

Video - Timing Your Trade with Moving Averages

The video is brought by a third party and I do not promote or try to recommend any products mentioned in the video.

Simple Moving Average vs Expoential Moving Average

What is Simple Moving Average (SMA)?
A simple, or arithmetic explanation of moving average is that moving average is calculated by adding the closing/opening/average price of the currency/shares for a number of time periods and then dividing this total by the number of time periods. Short-term moving averages respond quickly to changes in the price of the underlying, while long-term moving averages are slow to react.

In simple English, the weightage given to past period is the same as the current time period. The curve of the moving average tends to act as a support/resistance to the price. In other words, the longer the period use to calculate the moving average, the stronger the levels will at the moving average. It is important to note that when "moving average" is mentioned, it generally refers to the SMA.

What is Exponential Moving Average (EMA)?
The EMA is a type of moving average that is similar to a simple moving average, with the exception that weightage is applied to the different time period. The latest time period is given a higher weightage while the earliest time period is given a lower weightage. The EMA is also known as the "exponentially weighted moving average".

EMA reacts much faster to the recent price changes than the SMA. The 12- and 26-days EMAs are the most popular type of short-term averages used. They are often used to create indicators, for example the moving average convergence divergence (MACD) mentioned in an earlier post. The 50- and 200-days EMAs are generally used as trend signals for long-term trending.

In summary, the best way to make use of moving averages is to plot different types of moving averages on a chart so that you can see both short term and long term movement of the currency/stock. Once the short/long term trend of the chart is determine, you can trade with better ease.

Example of a trade using the MACD

The above shows a BUY signal indicated on 30 July 2009 at 11:30 GMT and a SELL signal indicated on 30 July 2009 at 1830 GMT. The trade alone will net us a +48 pips gain in profit.

Next, we will discussed the advantages and disadvantage of using MACD in trading FOREX. The advantages are,

1. It is simple and esay to understand.
2. The plotting of the MACD curve is readily available in any charting software, where the parameters of the Fast and Slow EMA and the MACD SMA can be changed according to one's need.
3. The BUY and SELL signals are clear cut.

The disadvantages of the MACD are: -

1. To be able to use the MACD to trade, you need to look at the chart the whole day to know when to BUY and to SELL.
2. MACD is a form of lagging indicator. This means that it shows what happens in the past and does not predict the future.
3. MACD has little use in sideways trading (consolidation).
4. It is never used alone, but it should be used in conjunction with other indicators.

But, it is still a tool whereby a lot of traders still use in this present day to help them to understand how the market is going to be moving, and I personally still use it as a guide for me to trade. I don't use it every time, but it is still something that I like.....

Moving Average Convergence-Divergence (MACD)

MACD was originally constructed by Gerald Appel, an analyst in New York. Originally it was designed for analysis of the trend of stocks, but it's ease of use, it is in the study of many markets, such as FOREX.

MACD is constructed by making a moving average of the difference between two exponential moving averages, namely the Fast EMA and Slow EMA. This moving average and the MACD SMA can be plotted as two lines, one fast and one slow. MACD is normally defined as (12, 26, 9) where the Fast EMA is 12, Slow EMA is 26 and the MACD SMA is 9.

In the modern charting software, MACD is included as a standard package. Once selected, you can change the value of the Fast EMA, Slow EMA and even the MACD SMA. The MACD will plotted as two lines in the indicator window. These two lines are normally of two different colors.

1. MACD as a BUY/SELL signal
The simplest way to use the MACD is to locate the cross of two lines. If the faster signal line (the difference between the fast and alow EMA), crosses above the slower signal line (MACD SMA), a BUY signal is generated. The reverse to give a SELL signal.

2. MACD as an overbought/oversold indicator
The MACD can also be used as overbought or oversold indicator. As the level of both lines rises sbove the zero line, it starts to indicate the overbought state of the currency. The higher the two lines goes, the more the currency is into overbought condition.The reverse is true for the oversold conditiom.

The SELL signal will be very strong if the fast signal line cross down the slow line while both lines are in the overbought condition and the BUY signal will be very storng if the reverse occurs.

3. MACD as a divergence indicator
The last common use of MACD is that of divergence. If the MACD is making new lows and the price of the currency is not making new lows that is one form of divergence (bullish divergence).

Also, if the MACD has made a high and starts to heads down, but the currency is still making new highs, this is also a form of divergence (bearish divergence). The occurance of these divergence might lead to an indication of a possible reversal in direction.

Video - What is FOREX market & Why Trade FOREX?

Now let's relax and watch a video titled "What is the FOREX market & Why Trade Forex?"

It tells in simple words: -

1. What Forex market is?

2. It describes why people choose to trade Forex, and

3. What are advantages and disadvantages of trading Forex?

The video is brought by a third party and I do not promote or try to recommend any products mentioned in the video.