Page 47 - Module 4 - Trading_Ways_and_Means

Module 4 - Lesson 7 Popular Analysis Tools

4. Stochastic Oscillators
This tool was developed by George Lane in the 1950s. As the name suggests it indicates points of
reversal as the market oscillates up and down whilst moving in a given direction. It is made of two
lines that compare the current price with the high and low of a set number of periods, most
commonly 14. This could be 14 days on a day chart or any other period on intraday. The lines lie
between 0 and 100 and an upward crossover of the two lines from below 20 indicates a possible
upward move and a downward crossover from above 80 may indicate a downward move. Lines
above 80 and below 20 also indicate the market is beginning to reach overbought and oversold
territory.

5. Moving Average Convergence Divergence (MACD)
Pronounced “Mack-dee”, this indicator was developed by the well-known Technical Analyst Gerald
Appel. It uses two moving averages to create a single Main average line. Then it calculates the moving
average of that line to create a “trigger” line.
When this line crosses below or above the Main average line a signal to sell or buy is produced.

6. Candlesticks
Candlesticks are the DNA of price action. All of the activity and movement of a currency pair are
shown in candle formations. At times a single candle will tell you everything you need to know.
Another time a small group of candles will paint a picture that can lead you in the right direction or
keep you out of trouble.

7. Fibonacci
Fibonacci lines are usually used to determine support and resistance levels. These levels are
determined in the following method: drawing a trend line between low and high points. Then using
horizontal lines to divide the vertical area, created by the trend line, according to the Fibonacci ratios
(always: 0%, 23.6%, 38.2%, 50%, 61.8% and 100 %.). These horizontal lines indicate support and
resistance levels

8. Bollinger Bands
John Bollinger, author and financial analyst, came up with this tool in the 1980s. These bands use the
volatility of a Forex pair along with a Moving Average over a number of days to create a high and
low-price range. The bands are then used to predict points from which price will move back towards
its equilibrium.

9. Directional Movement Indicator ADX/DMI
This indicator was also developed by J Welles Wilder JR and uses 3 lines; Average Divergence Index
(ADX) and Divergence up (D+) and Divergence down (D-) lines. The ADX line indicates the strength of
the current trend; the D+ above D- or vice versa indicate whether the trend is up or down.

10. Ichimoku Cloud
Also known as Ichimoku Kinko Hyo, which means one glance equilibrium chart. Ichimoku Cloud
indicators are overlaid on a candlestick chart. Their main feature is the cloud itself which is
considered as the equilibrium area, but this tool has 3 more indicators. The cloud and additional
indicators are created by using various moving average calculations. The main advantage of the
Ichimoku Cloud is that it provides numerous data points in one chart, which allows a more informed,
accurate decision making.

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