Page 55 - NEW FOREX FULL COURSE

FOREX TRADING COURSE FOR BEGINNERS

linearly weighted moving average multiplies the oldest price by four, the next oldest price by
three, etc., and divides the total by 10.

This weighted average is more sensitive to recent prices than a standard average. The term,
"linearly-weighted," comes from the fact that each day's contribution diminishes by one digit.

The rules for trading a weighted moving average are the same as using a combination of three
moving averages. The weighted average must be above or below the other moving averages, or
the signal is ignored.

A more sophisticated average is the exponential moving average, which is weighted nonlinearly
by using a specific smoothing constant derived for each commodity to allocate the weight
exponentially back over prior trading days. However, it requires high mathematics and a
computer to determine each optimum smoothing constant.

HOW TO USE RELATIVE STRENGTH INDEX

One of the most useful tools employed by many technical commodity traders is a momentum
oscillator which measures the velocity of directional price movement.

When prices move up very rapidly, at some point the commodity is considered overbought; when
they move down very rapidly, the commodity is considered oversold at some point. In either
case, a reaction or reversal is imminent. The slope of the momentum oscillator is directly
proportional to the velocity of the move, and the distance traveled up or down by this oscillator
is proportional to the magnitude of the move.

The momentum oscillator is usually characterized by a line on a chart drawn in two dimensions.
The vertical axis represents magnitude or distance the indicator moves; the horizontal axis
represents time. Such a momentum oscillator moves very rapidly at market turning points and
then tends to slow down as the market continues the directional move. Suppose we are using
closing prices to calculate the oscillator and the price is moving up daily by exactly the same
increment from close to close. At some point, the oscillator begins to flatten out and eventually
becomes a horizontal line. If the price begins to level out, the oscillator will begin to descend.

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