Basic Building Blocks of Trading, Forex, Commodities & Indices

Welcome to City Trading Academy and congratulations on choosing online trading. This is your course, Basic Building Blocks of Trading, Forex, Commodities and Indices. I am Dipak Shodhan, your Chief Instructor at City Trading Academy. This course is designed to ensure a strong foundation for the start of your Trading Career. Across my experience, I have trained and transformed many aspiring Traders and their Trading careers. I’m sure that’s why you’re here. So let’s get started.

Basic Module 1 – PlatformMetaTrader 4

This is the first step when you learn and experience all the features and functions of the most popular and widely used trading platforms out there, Metatrader 4. Just as how you need to know all the notes and keys of a piano to create music, you definitely need to know these features and functions of the trading platform, to make the most of it while trading.

MT4 or Metatrader 4 is a free software developed by Metaquotes in 2015. Most brokers and traders across the world use MT4 as their default trading platform. MT4 is available for all operating systems and devices such as, Windows, Mac OS, iOS and Android.

The default screen has four charts and, Market Watch, Navigator, Terminal, Menu buttons, shortcuts and many other options. First let’s start with the centre of attraction.

Market Watch – It is where you would look to find all the trading instruments. All trading instruments such as Forex, Commodities and Indices.

Time Frame – It is the selection of the amount of data you would want a Bar or a Candle to contain. Such as M1 (1 Minute), M5 (5 Minutes), M15 (15 Minutes), M30 (30 Minutes), H1 (1 Hour), H4 (4 Hours), D1 (1 Day), W1 (1 Week) and MN (1 Month). A H1 candlestick or bar contains price action data for 60 minutes and then a new candlestick or bar is formed.

Chart Type – Choose between Bar Chart, Candlestick Chart or Line Chart to represent price action in the chart window.

Zoom Function – Lets you zoom in and out of charts. Zooming in would give you a closer view of the price action whereas zooming out will help you look at the overall trend of price on the chart.

Tile/Expand – Toggle between expanding the view of one single large chart or a tile view of smaller multiple charts within the platform.

Lock – Lets you lock the chart to the most current price action.

Heading over to the Market Watch, right clicking on a trading instrument, like AUDUSD symbol, shows a menu with various options available for the trading instrument. Selecting Chart Window, will open a new chart window for AUDUSD.

New Order

Now let’s have a look at how to place a New Order. Click on the New Order button above the chart window, an Order window pops up for the symbol AUDUSD. There are many options in this window.

Volume – To set position size for a trade.

Stop Loss – To set the price at which you would want to close your trade position at your risk appetite for the trade. This is an order designed to limit a trader’s loss.

Take Profit – To set the price you would want to close your trade position once the desired profit is achieved.

The Order Type is selected Market Execution. This mean, once you place a Buy at Ask Price or Sell at Bid Price, the order will be filled immediately at market price. Another type of order is the Pending Order. Selecting Pending Order will show you the options for a pending order. As the name suggests, it is an order that will be filled only at a certain price at a later time.

Expiry – The date at which you wish to automatically cancel the pending order, if the pending order is not filled till expiry.

Type – Different order types such as Buy Limit, Sell Limit, Buy Stop and Sell Stop.

Placing Orders

Buy – Buying at the Ask Price.

Sell – Sell at the Bid Price.

Stop Loss – To set the price at which you would want to close your trade position at your risk appetite for the trade. This is an order designed to limit a trader’s loss.

Take Profit – To set the price you would want to close your trade position once the desired profit is achieved.

Volume – The position size you wish to take in the market.

Volume

Units

Lot Size

1.00

100,000

1 Lot

0.10

10,000

Mini Lot

0.01

1,000

Micro Lot

Units are of the base instrument.

Pending Orders

Buy Limit – Buy at a price lower than the current market price.

Sell Limit – Sell at a price higher than the current market price.

Buy Stop – Buy at a price above the current market price. It is best used when the price breaks out above a previous high or a price range.

Sell Stop – Sell at a price below the current market price. It is best used when the price breaks out below a previous low or a price range.

Slippage

Slippage occurs normally during highly volatile price actions and the order submitted is filled at a price that is different. Volatility occurs due to important news or data released by Countries, Central Banks, Monetary Policy decisions, technical breakouts and political outcomes. The most recent political outcome was the Brexit.

No Slippage – Buy order submitted at 1.1300 and filled at 1.1300.

Positive Slippage – Buy order submitted at 1.1300 and filled at 1.1295. This is an advantage as you received a lower buy price than you intended.

Negative Slippage – Buy order submitted at 1.1300 and filled at 1.1305. This is a disadvantage as you received a higher buy price than you intended.

Login

To Login to your trading account, you click on File, select Login to Trade Account. Fill in your login details, password and the server specified by your broker to login.

Navigator

The Navigator window shows you all the indicators you could use to help analysing and trading charts. Applying trading scripts and expert advisors can also be done through the navigator.

Terminal

Selecting Terminal in the File menu will open the account Terminal where you can view your account details such as,

Balance – The capital available in your trading account.

Equity – The amount available in your account after +/- any open trade positions.

Free Margin – The remaining amount with which you can place more trades in your account.

A closer look at the Terminal with an open position shows buy, 0.10, GBPUSD at price 1.4706 at a loss of $6.20. The balance is $3727.44, Equity is (Balance – Loss) $3721.24, Margin is $294.13, Free Margin (Equity – Margin) $3427.11 which can be utilised to take more positions in the market. Margin Level is [(Equity/Margin)100] = 1265.18.

Account History – This tab provides you with all the historical trades that have been placed in your trading account.

To modify the existing open position, right click on the order and select Modify or Delete Order. The subsequent window that opens will show options to set stop loss and take profit. These prices can be modified as many times as you wish to.

Double clicking on the icon next to order number in the terminal take you to the order closing window. Here you can choose to partially close the position by changing the Volume you wish to close. In the example here, we will close 0.05 of the 0.10 open position.

Japanese Candlesticks.

It has originated from technical charting used by the Japanese for over a century. First used by a man named Homma, a rice trader in Japan. The open and close prices determine the Real Body of the candle. The high and the low form the upper and lower shadows. In the illustration here, the colours are set such that a white real body signifies a bullish candle and the black real body signifies a bearish candle.

OHLC Bar

OHLC Bars provide the same price data on a chart but with a different visual representation. A bullish blue bar opens down towards the left, makes a low, heads up to make a high and then closes towards the right of the bar. On the contrary, the bearish red bar opens from the left, makes a high, heads downward to make a low and close to the right. Both Bars and Candles contain the price action data for the time frame that you select.

Trading Psychology and Risk

Psychology is your mental makeup that helps you determine whether you should be buying or selling a security for a profit. Trading psychology is as important as other attributes such as knowledge, experience and skill in trading successfully.

There are 3 Ms for trading psychology. Mind, Method and Money Management.

Mind, is to have a proper mental approach to trading. This means leaving out unfavourable emotions such as anger, confusion, fear, anxiety, etc.

Method, is to have a strong trade execution plan and executing your plan with utmost discipline. This is how you set rules on when you will take a position, under what conditions and confirmations, and most importantly, when and where to exit trades both in profit situations or losses.

Good money management involves risk to reward ratios, position sizing as per available capital and risk appetite.

OODA Loop

The OODA Loop is a decision making process created by John Boyd, a United States Air Force fighter pilot. OODA stand for Observe, Orient, Decision and Action. Observing the market conditions with market fundamentals & Technicals can help produce good trading results. Orient is to update and adapt to the new information that you have observed. Decision is to move ahead on the data you have gathered. Action is to act on your decision and take responsibility for the outcome. This is a continuous process.

Margin and Leverage

Margin is the minimum capital requirement before you can enter a trade. 1% margin means, a minimum of only 1% of the total value of the asset you wish to purchase. Similarly, Leverage is the amount of debt you can take-on relative to capital in your account. This is expressed in a ratio. 1:100 means for $1,000 capital, you can trade assets with a total value of up to $100,000. In case the margin is 0.5%, the leverage up to 200 times the capital. Margin of 0.25% provides a leverage of up to 400 times your capital.

But you must be warned. Leverage is a double edged sword. It can assist you to trade larger position sizes, but it amplifies both profits and losses.

Q&A

Available on course material.

Basic Module 2 – Asset Classes

This module focuses on Forex, Commodities and Indices providing you with an outlook on various factors that influence their price and cause a shift in supply and demand. You will also have a perspective on the dynamics of how to trade these asset classes.

IndicesWhat is an Index?

An Index measures the change in a portfolio of stocks. It represents the overall market. The first stock index was unveiled in 1896 by Charles Dow, known as the Dow Jones Industrial Average. Two main reasons for fund managers and retail investors trade indices are Diversification, as indices track equities from many different sectors and Cost advantages, as buying a contract of an index costs lower in transaction fees than buying individual stocks of all the components of an index.

How to Price an Index?

First Calculate the market capitalization of every company in the index. If Apple Computers has 5.54 Billion shares and each share is priced at $106.1, then 5.54B*106.1=588 Billion is its market capitalization. You have to repeat this calculation process for all the companies in the index for the total market capitalization. The next step is to add weightage to each stock as it will determine how price change in the stock will affect the price of the index. This is done by dividing a company’s market cap by the total market cap.

For Apple stock, 588 Billion divided by 19,331 Billion, total market cap of S&P 500 will have a market weight of 3.05%.

S&P 500

This index contains the top 500 companies on the NYSE (New York Stock Exchange) and Nasdaq (National Association of Securities Dealers Automated Quotations) based on capitalization. Standard & Poors introduced the index in 1923. Its total market capitalization is over $19 Trillion. Some of the top companies in S&P 500 are Coca-Cola, Exxon Mobil, IBM, Johnson & Johnson, Alphabet, Microsoft, P&G, GE, Amazon, Apple and many more.

UK/FTSE 100

This index was started in 1984 and is maintained by the LSE’s FTSE Group (Financial Times Stock Exchange). It has a market capitalization of £1.9 Trillion. Some of the top companies in UK 100 are Barclays, Aviva, BP, Glaxo Smith Kline, HSBC, Shell and many more.

German DAX 30

This index contains top 30 companies on the FSE (Frankfurt Stock Exchange) based on capitalization. The Index was started in 1987 and has a market capitalization of over €1 Trillion. Some of the top companies in DAX 30 are Siemens, Mercedes-Benz, Adidas, Allianz, Volkswagen, SAP and many more.

S&P/ASX 200

This is an Australian index that contains top 200 companies plus an additional 100 on the ASE (Australian Securities Exchange). The index was started in the year 2000 and is maintained by Standard and Poors. The market capitalization now is over AUD 1.4 Trillion. Some of the top companies in ASX 200 are Woolworths, National Australia Bank, Brambles, Qantas, Commonwealth Bank, Telstra and many more.

CSI 300

This is a Chinese index which reflects the price fluctuation and performance of China A share market. It consists 300 of the largest and most liquid A-share stocks and has a market capitalization of over CNY 22 Trillion. Some of the top companies in CSI 300 are TCL, ZTE, China Merchants Bank, Great Wall, China Merchants Capital, Pingan and many more.

Nikkei 225

The Nikkei Stock Average (Nikkei 225) is known as the premier index of Japanese stocks. It began to be calculated on September 7, 1950 and has a market capitalization of over $4.5 Trillion. Some of the top companies in Nikkei 225 are Panasonic, Canon, Toshiba, Honda, Kyocera, Nissan, Toyota, Ricoh, Sony, Sharp and many more.

Factors Affecting Index Movements

Economic factors tend to influence the stock markets and hence affect indices as well. They are,

GDP – It is the Gross Domestic Product of a country and represents the monetary value of all goods and services produces within a country’s border over a specific period of time, quarterly or annually.

This is a chart of the U.S. Real GDP growth from 2007 to 2015

You can observe the lows of 2008 till mid-2009 in the GDP which is when S&P 500 the index made recessionary lows as well.

Rate of Inflation – Changes in market inflation cause changes in currency exchange rates. A country with a lower inflation rate than another's will see an appreciation in the value of its currency. The prices of goods and services increase at a slower rate where the inflation is low. A country with a consistently lower inflation rate exhibits a rising currency value while a country with higher inflation typically sees depreciation in its currency and is usually accompanied by higher interest rates.

Current U.S. Inflation as of June 2016 is 1% whereas the desired target range is between 1.7% to 2%. In the chart above you can observe the deflationary levels reached during the recession due to sub-prime mortgage crisis.

Interest Rate – Changes in interest rate affect currency value and dollar exchange rate. Forex rates, interest rates, and inflation are all correlated. Increases in interest rates cause a country's currency to appreciate because higher interest rates provide higher rates to lenders, thereby attracting more foreign capital, which causes a rise in exchange rates.

In the chart above you will notice that interest rates are reduced during recession and increased again once a stable recovery is achieved.

Unemployment – Unemployment occurs when people are without work and actively seeking work. The unemployment rate is a measure of the prevalence of unemployment and it is calculated as a percentage by dividing the number of unemployed individuals by all individuals currently in the labour force.

This chart shows blue bars as jobs created or lost. Unemployment rate is high as thousands of jobs were lost in 2009. But once the economy started creating jobs in 2010, the unemployment rate starts dipping fast.

Forex

Forex, FX, or the foreign exchange market is a global decentralised market for the trading of currencies. This includes all aspects of buying, selling and exchanging currencies at current or determined prices. In terms of volume, it is the largest market in the world. The main participants are Commercial companies, Central banks, Hedge funds, Investment banks, retail traders and money transfer/remittance companies.

Let’s take simple example of the most traded currency pair in the world. The EUR vs USD. If the price of the EURUSD is 1.1300/1.1303, 1.1300 is the bid price at which you would sell the currency pair and 1.1303 would be the ask price at which you would buy it. The price difference between the bid and ask is called the spread. Here the spread is 0.0003, or you could say the spread us 3 pips. If you buy and sell at the same time in rapid succession, you would incur a 3 pip loss. Industry standard spreads are much lower than this example.

Some of the key features of forex are, it is traded 24 hours all across the world for 5.5 days a week. It is a highly liquid market, which means high volume of activity in the market due to high participation of traders and investors. This means quick trade entries and exits. Forex prices move fast on data releases and hence is a volatile market. Global currency distribution shows highest circulation and reserves of USD at 45% of all currencies, followed by EUR and JPY at 17.3% and 12% respectively.

Factors Influencing Currency Prices

Foreign Exchange rate is one of the most important means through which a country’s relative level of economic health is determined. A country's foreign exchange rate provides a window to its economic stability, which is why it is constantly watched and analysed. If you are thinking of sending or receiving money from overseas, you need to keep a keen eye on the currency exchange rates. Some of the leading factors that influence the variations and fluctuations in exchange rates and explains the reasons behind their volatility are,

Trade Balance – The trade balance is the calculation of a country’s export minus its imports.  A deficit in current account due to spending more of its currency on importing products than it is earning through sale of exports causes depreciation. Balance of payments fluctuates exchange rate of its domestic currency.

Interest Rate – Changes in interest rate affect currency value and dollar exchange rate. Forex rates, interest rates, and inflation are all correlated. Increases in interest rates cause a country's currency to appreciate because higher interest rates provide higher rates to lenders, thereby attracting more foreign capital, which causes a rise in exchange rates.

Rate of Inflation – Changes in market inflation cause changes in currency exchange rates. A country with a lower inflation rate than another's will see an appreciation in the value of its currency. The prices of goods and services increase at a slower rate where the inflation is low. A country with a consistently lower inflation rate exhibits a rising currency value while a country with higher inflation typically sees depreciation in its currency and is usually accompanied by higher interest rates.

GDP - The Gross Domestic Product a fundamental economic indicator is one of the most closely watched indicators used by forex traders. The influential data's initial release and its subsequent revisions can often result in swings in the forex market. The level of the GDP is commonly used by economists and fundamental traders to assess the level of growth and economic health in a country's economy. The data can also be used to provide a sense of the standard of living prevailing in a nation.

Unemployment – Poor unemployment figures would probably weaken the currency. If unemployment figures are worse than expected, the Central Bank is likely to delay increasing interest rates. If unemployment rises very sharply they may consider cutting interest rates or even pursue quantitative easing.

Politics – A country's political state can affect its currency strength. A country with less risk for political turmoil is more attractive to foreign investors, as a result, drawing investment away from other countries with more political and economic stability. Increase in foreign capital, in turn, leads to an appreciation in the value of its domestic currency. The Euro-zone is a good example for populistic political parties gaining electoral successes throughout Europe.

Major Currency Pairs

A major currency pair is a pair that contains a lot of liquidity. When trading Forex, it is inevitable that you will come across currencies known as “The Majors”. This term is in reference to the most frequently traded currencies in the world, with the list normally including the Euro (EUR), US Dollar (USD), Japanese Yen (JPY), Great British Pound (GBP), Australian Dollar (AUD), Canadian Dollar (CAD), New Zealand Dollar (NZD) and Swiss Franc (CHF).

Commodities

A commodity is a basic good used in commerce that is interchangeable with other commodities of the same type. Commodities are most often used as inputs in the production of other goods or services. The quality of a given commodity may differ slightly, but it is essentially uniform across producers. When they are traded on an exchange, commodities must also meet specified minimum standards. The sale and purchase of commodities is usually carried out through futures contracts on exchanges that standardize the quantity and minimum quality of the commodity being traded. For example, the Chicago Board of Trade stipulates that one wheat contract is for 5,000 bushels and also states what grades of wheat (e.g. No. 2 Northern Spring) can be used to satisfy the contract.

Metals

Starting with metals, commonly traded metals are Gold, Silver, Platinum, Palladium and Copper.

Gold

Gold is a corrosion resistant metal, malleable and ductile. Its chemical symbol is AU. It is easy to mint into coins and has been use as money since 700 BC. It has been in use for making jewellery and art since 4,400 BC. Its purest form is 99.99% after refining. Gold content is measured in Carats (k). China, Australia, Russia and United States are some of the largest gold producing countries in the world and the United States is also holds the largest gold reserves. Gold can be traded in both futures and spot markets (XAUUSD) where 1 Lot is equivalent to 100 oz., 0.1 Lot is 10 oz. and 0.01 is 1 oz. of gold. It can also be acquired as a physical product and stores in vaults to act as a hedge against inflation. As the value of money decreases, the value of gold is likely to increase.

Silver

Silver is a corrosion resistant metal, malleable and ductile. Its chemical symbol is AG. Like gold, it has been used as a currency since 600 BC in Lydia. In the 16th century, silver became the standard for European commerce. Silver was more precious to the Egyptians than gold and was used in art associated with burial rights of the kings in the 2nd millennium BC. Silver fell from prominence in the late 1900s with large silver deposits discovered in the Americas. The Unites States stopped minting silver in 1970. Silver has little impact on world economies but it still tracks gold prices very closely. Mexico, Peru, China and Australia are some of the largest silver producers in the world. Silver can be traded in both futures and spot markets (XAGUSD) where 1 Lot is equivalent to 10,000 oz., 0.1 Lot is 1,000 oz. and 0.01 Lot is 100 oz. of silver.

Platinum

Platinum is a chemical element with symbol Pt. It is a dense, malleable, ductile, highly unreactive, precious, gray-white transition metal. It is used in vehicle emission control devices, jewellery, chemical production, petroleum refining, computer hard disk drives and medicine. It can be traded in both futures and spot market (XPTUSD) where 1 Lot is equivalent to 100 oz., 0.1 Lot is 10 oz. and 0.01 is 1 oz. of Platinum. South Africa, Russia, Zimbabwe, Canada and United States are some of the top platinum producers in the world.

Palladium

Palladium is a chemical element with symbol Pd. It is a rare and lustrous silvery-white metal. It is used in catalytic converters, jewellery, dentistry, watch making, medical and surgical instruments. It can be traded in both futures and spot market (XPDUSD) where 1 Lot is equivalent to 100 oz., 0.1 Lot is 10 oz. and 0.01 is 1 oz. of Palladium. South Africa, Russia, Zimbabwe, Canada and United States are some of the top platinum producers in the world.

Copper

It is a soft, malleable and ductile metal with very high thermal and electrical conductivity. Copper is traded in futures market where one contract is 25,000 lbs. Copper is prone to a lot of supply issues. Chile, the largest producer imposes local water restrictions on mining companies. A large amount of water is required in copper mining. Escondida in Chile is the largest copper mine. Chile, China and Peru are the top producers of copper. China requires a lot of copper as it is a manufacturing hub and hence they have a vested interest in seeing copper prices cheaper.

Agricultural Commodities

The most commonly traded agricultural commodities are Coffee, Sugar, Corn and Wheat.

Coffee

Coffee is a commodity that is used as a beverage. Coffee can be traded as a futures contract with each contract drawn against 37,500 lbs. of coffee. It is traded OTC as a CFD. Brazil, Vietnam, Columbia, Indonesia, Ethiopia, India and Mexico are the top coffee producers in the world.

Sugar

Sugar is used as a sweetener and is probably the most consumed commodity in the world. It is traded on the NYMEX with the symbol YO. It is priced in Cents. One contract of sugar is 112,000 lbs. Brazil, India, China and Thailand are some of the top producers of sugar in the world.

Corn

Corn is a commodity that is used as a cereal and more recently in biofuels. Corn can be traded as a futures contract with each contract drawn against 5000 bushels. It can be traded OTC as a CFD. Corn is priced in cents. E.g. 388.50 = $3.885. USA, China and Brazil are the top producers of corn in the world.

Wheat

Wheat is a commodity that is used for making cereals and flour. Wheat can be traded as a futures contract with each contract drawn against 5000 bushels. It can be traded OTC as a CFD. Do note that wheat is priced in cents. E.g. 605.25 = $6.0525. Europe, China, India and Russia are some the top producers of wheat in the world.

Factors impacting commodity prices

· Current levels of available commodities

· Currency fluctuations

· Climatic fluctuations

· Production cycle

· Commodity producing country’s economic outlook

· Commodity consuming country’s economic outlook

· Margins and speculative positions

Energy Commodities

Crude oil, heating oil and natural gas are the most traded energy commodities.

Crude Oil

The invention of internal combustion engines in the 1850s gave rise to the prominence of oil. In 1848, James Young refined crude oil into kerosene providing fuel for kerosene lamps. The industrial revolution was fuelled by the discovery of oil in the United States made famous by John D. Rockefeller. Oil was soon discovered all over the world mainly Canada, Britain, Norway, Middle East and Africa. Crude oil is priced in USD as it is important to maintain the stability of world oil prices. The entire world relies on oil for its way of life, even simple things as paint and moisturizers contain petroleum. The United States and China are the largest oil consumer nations. It is traded in the futures market where 1 lot is 1000 barrels and 0.1 lot is 100 barrels. Oil is divided into WTI (West Texas Intermediate) and Brent. WTI is from the US region and Brent comes from the North Sea region.

Heating Oil

Heating oil or oil heat is a low viscosity crude oil by-product used as a fuel oil for heating homes replacing coal. Heating oil is widely used in United States and Canada. Heating oil consists of a mixture of petroleum derived hydrocarbons. Most heating oil products are chemically very similar to diesel fuel. It is traded in the futures market where one contract is 1,000 Barrels. Heating oil prices closely track crude oil prices.

Natural Gas

It is a by-product of producing oil. Natural gas is used extensively throughout United States to heat homes and also has important applications in commercial and industrial settings. It is similar to what is referred to as biogas, which is methane produced from the breakdown of organic matter. Natural gas is economical, environmentally friendly and efficient. It is the cleanest burning fossil fuel and technologies are improving the way it is captured, transported and distributed. Europe, Eurasia, North America and Middle East produce most of the world’s natural gas and is measured in Billion Cubic Metres (BCM).

Q&A

Available on course material.

Basic Module 3 – Technical Analysis

Technical Analysis is a tool kit to forecast the future prices of any tradable instrument. These charting tools, techniques and indicators will give you an excellent perspective on the current market scenario and also forecast future market performance.

Lines

Many types of lines can be used on a chart with price data to create visual trading signals that can determine the future course of the price. They help in both trade identification and confirmation.

Support and Resistance

Support is the price level at which demand is thought to be strong enough to prevent the price declining further and bounce back higher. Logic dictates that as the price declines towards support and gets cheaper, buyers become more inclined to buy and sellers become less inclined to sell. Hence demand increases at a particular attractive price.

Resistance is the price level at which selling is thought to be strong enough to prevent the price from rising further and bounce back lower. Logic dictates that as the price advances towards resistance, sellers become more inclined to sell and buyers become less inclined to buy. Hence supply increases at a relatively high price.

Trend Lines

Trend lines are an important tool in charting for both to identify trends and to confirm trading direction.

Up trend line has a positive slope and is formed by connecting two or more low points. The second low must be higher than the first for the line to have a positive or upwards slope. Uptrend lines act as support and indicate that net demand is increasing or supply reducing as prices rise.

Down trend line has a negative slope and is formed by connecting two or more high points. The second high must be lower than the first for the line to have a negative or downward slope. Downtrend lines act as resistance and indicate that net supply is increasing or demand is reducing as the price declines.

Validation

· It takes two or more points to draw a trend line.

· The more points used to draw the trend line, the more validity attached to the support or resistance level represented by the trend line.

· Sometimes the lows or highs just don't match up, and it is best not to force the issue.

· As the steepness of a trend line increases, the validity of the support or resistance level decreases.

· The lows used to form an uptrend line and the highs used to form a downtrend line should not be too far apart, or too close together.

Technical Analysis

Technical Analysis is the forecasting of future financial price movements based on an examination of past price movements. Technical analysis does not result in absolute predictions about the future, but helps investors anticipate what is “likely” to happen to prices over time. Technical analysis is applicable to Currencies, Stocks, Indices, Commodities, Futures or any tradable instrument where the price is influenced by the forces of supply and demand. Price refers to any combination of the OHLC for a given security over a specific time frame. The time frame can be based on intra-day (M1, M5, M10, M15, M30 or H1) to daily, weekly or monthly price data.

Price Discounts Everything

Technical analysts believe that the current price fully reflects all information. Because all information is already reflected in the price, it represents the fair value, and should form the basis for analysis. After all, the market price reflects the sum knowledge of all participants, including traders, investors, portfolio managers, buy-side analysts, sell-side analysts, market strategist, technical analysts, fundamental analysts and many others.

Price Movements Are Not Random

Most technicians agree that prices trend. However, technicians also acknowledge that there are periods when prices do not trend. A technician believes that it is possible to identify a trend, invest or trade based on the trend and make money as the trend unfolds. Because technical analysis can be applied to many different time frames, it is possible to spot both short-term and long-term trends.

“WHAT” Is More Important Than “WHY”

The objective of analysis is to forecast the direction of the future price. By focusing on price and only price, technical analysis represents a direct approach. For technicians, the why portion of the equation is too broad and many times the fundamental reasons given are highly suspected. Technicians believe it is best to concentrate on "what" and never mind "why". Why did the price go up? It is simple, more buyers (demand) than sellers (supply). After all, the value of any asset is only what someone is willing to pay for it. Who needs to know why?

Technical Indicators

A technical indicator is a series of data points that are derived by applying a formula to the price data of a security. These alert the trader and confirm trades and new trade setups. An indicator can act as an alert to study price action a little more closely. Indicators can be used to confirm other technical analysis tools. If there is a breakout on the price chart, a corresponding moving average crossover could serve to confirm the breakout. Some investors and traders use indicators to predict the direction of future prices. There are two types of indicators. Lagging indicators and Leading indicators.

Lagging Indicator

Lagging indicators follow the price action and are commonly referred to as trend-following indicators. Trend-following indicators work best when markets or securities develop trends. They are designed to get traders in and keep them in as long as the trend is intact and let profits run. These indicators are not effective in ranging or sideways markets and will likely lead to many false signals and whipsaws.

Moving Averages

Moving averages smooth the price data to form a trend following indicator. They do not predict price direction, but rather define the current direction with a lag. Moving averages lag because they are based on past prices. Despite this lag, moving averages help smooth price action and filter out the noise. They also form the building blocks for many other technical indicators and overlays, such as Bollinger Bands and MACD.

Simple Moving Average (SMA)

A simple moving average is formed by computing the average price of a security over a specific number of periods. Most moving averages are based on closing prices.

Simple example,

Daily Closing Prices: 11,12,13,14,15,16,17,18,19,22,23,25,26...

First day of 10-day SMA: (11+12+13+14+15+...+22)/10 = 15.7

Second day of 10-day SMA: (12+13+14+15+16+...+23)/10 = 16.9

Third day of 10-day SMA: (13+14+15+16+17+...+25)/10 = 18.2

Exponential Moving Average (EMA)

Exponential moving averages reduce the lag by applying more weight to recent prices. The weighting applied to the most recent price depends on the number of periods in the moving average.

· SMA: 10 period sum / 10

· Multiplier: (2 / (Time periods + 1)) = (2 / (10 + 1)) = 0.1818 (18.18%)

· EMA: {Close – EMA (previous day)} x multiplier + EMA (previous day)

· A 10-period exponential moving average applies an 18.18% weighting to the most recent price.

· A 10-period EMA can also be called an 18.18% EMA. A 20-period EMA applies a 9.52% weighing to the most recent price (2/ (20+1) = .0952).

· Notice that the weighting for the shorter time period is more than the weighting for the longer time period.

SMA vs EMA

The yellow line is the EMA which is weighted to the most recent price action and hence reacts faster to the market. This reduces the lag. The white line is the SMA.

Using Moving Averages

Moving averages can be used as support and resistance and two moving average crossover.

Moving Average Convergence Divergence (MACD)

Moving Average Convergence/Divergence oscillator (MACD) is one of the simplest and most effective momentum indicators available. The MACD turns two trend-following indicators, moving averages, into a momentum oscillator by subtracting the longer moving average from the shorter moving average. As a result, the MACD offers the best of both worlds:

Trend following and Momentum.

· MACD Line: (12-day EMA - 26-day EMA)

· Signal Line: 9-day EMA of MACD Line

· MACD Histogram: MACD Line - Signal Line

MACDs can provide two types of trading signals. Signal line crossovers and Centre line crossovers.

Signal Line Crossover

Signal line crossovers are the most common MACD signals. A bullish crossover occurs when the MACD turns up and crosses above the signal line. A bearish crossover occurs when the MACD turns down and crosses below the signal line.

Centre Line Crossover

Centre line crossovers are the next most common MACD signals. A bullish centre line crossover occurs when the MACD Line moves above the zero line to turn positive. A bearish centre line crossover occurs when the MACD moves below the zero line to turn negative.

MACDs can also be used to identify divergences based on price momentum.

Leading Indicators

Leading indicators are designed to lead price movements. Early signalling for entry and exit is the main benefit, hence generates more signals and allow more opportunities to trade. Early signals can also act to forewarn against a potential strength or weakness. Because they generate more signals, leading indicators are best used in trading markets. These indicators can be used in trending markets, but usually with the major trend, not against it.

Relative Strength Index (RSI)

Relative Strength Index (RSI) is a momentum oscillator that measures the speed and change of price movements. RSI oscillates between zero and 100. Traditionally, RSI is considered overbought when above 70 and oversold when below 30. Signals can also be generated by looking for overbought, oversold, failure swings and centreline crossovers. RSI can also be used to identify the general trend.

RSI = 100 – (100/ 1 + RS)

RS = Average Gain / Average Loss

Overbought

Price of a market has risen due to demand for a product, pushes the price to unjustifiable levels. It is an indication that the market is becoming overvalued and may experience a pullback. In such a scenario, if the RSI is over 70, we can expect a pullback in price.

Oversold

Oversold is simply the opposite to overbought when the price of a market has declined too steeply and too fast in relation to underlying fundamental factors. This signals that the price of the asset is becoming undervalued and may represent a buying opportunity for investors. In such a scenario, if RSI is under 30, we can expect an advance in prices.

Ichimoku Cloud

The Ichimoku Cloud, also known as Ichimoku Kinko Hyo, is a versatile indicator that defines support and resistance, identifies trend direction, gauges momentum and provides trading signals. Ichimoku Kinko Hyo translates into “one look equilibrium chart”. With one look, chartists can identify the trend and look for potential signals within that trend.

Calculation

Four of the five plots within the Ichimoku Cloud are based on the average of the high and low over a given period of time.

· Tenkan-sen (Conversion Line): (9-period high + 9-period low)/2))

The default setting is 9 periods and can be adjusted. On a daily chart, this line is the midpoint of the 9-day high-low range, which is almost two weeks.

· Kijun-sen (Base Line): (26-period high + 26-period low)/2))

The default setting is 26 periods and can be adjusted. On a daily chart, this line is the midpoint of the 26-day high-low range, which is almost one month).

· Senkou Span A (Leading Span A): (Conversion Line + Base Line)/2))

This is the midpoint between the Conversion Line and the Base Line. The Leading Span A forms one of the two Cloud boundaries. It is referred to as "Leading" because it is plotted 26 periods in the future and forms the faster Cloud boundary.

· Senkou Span B (Leading Span B): (52-period high + 52-period low)/2))

On the daily chart, this line is the midpoint of the 52-day high-low range, which is a little less than 3 months. The default calculation setting is 52 periods, but can be adjusted. This value is plotted 26 periods in the future and forms the slower Cloud boundary.

· Chikou Span (Lagging Span): Close plotted 26 days in the past

The default setting is 26 periods, but can be adjusted.

· The Cloud (Kumo) is the most prominent feature of the Ichimoku Cloud plots.

· The Leading Span A (green) and Leading Span B (red) form the Cloud.

· The Leading Span A is the average of the Conversion Line and the Base Line.

· Because the Conversion Line and Base Line are calculated with 9 and 26 periods, respectively, the green Cloud boundary moves faster than the red Cloud boundary.

· Red Cloud boundry is the average of the 52-day high and the 52-day low.

Trading Ichimoku

There are two ways to identify the overall trend using the cloud.

1. Trend is up when prices are above Cloud, down when prices are below Cloud and flat when prices are in the Cloud.

2. Uptrend is strengthened when Leading Span A (green cloud line) is rising and above Leading Span B (red cloud line) and downtrend is reinforced when Leading Span A (green cloud line) is falling and below Leading Span B (red cloud line).

Q&A

Available on course material.