Forex Indicators Guide

How To Draw TrendLines?

This article will discuss the construction of trendlines, use of trendline in support and resistance analysis, and extended trendlines.

Stoc-2B Indicators

You can choose Stochastic for only 1 current TimeFrame (TimeFrame2 = false; TimeFrame3 = false; TimeFrame4 = false) or up to 4 TimeFrames (TimeFrame2 = true; TimeFrame3 = true; TimeFrame4 = true).

AutoEnvelope Indicator

Another version for AutoEnvelope according to the format described by Dr. Alexander Elder in your book How To Take Profits, Cut Losses, and Benefit from Price Declines.

MT4 Guide - Installation

Download any MetaTrader4 installation program from the broker of your choice.

MT4 Guide - Market Watch Window

The “Market Watch” window can be activated by pressing the Ctrl+M key combination, or by using the View->Market Watch menu sequence or by clicking the

button from the “Standard” toolbar:

MT4 Guide - Close a Position

In order to close a position, highlight the trade in the “Trade” tab of the “Terminal” window and right click to obtain the context menu:

MT4 Guide - Modify Order

Stop Loss – an order to close a previously opened position at a price less profitable for the Customer than the price at the time of placing the order.

MT4 Guide - Trailing Stop

Trailing Stop is an algorithm to manage Stop Loss orders. Once a trailing stop has been placed (for example, trailing stop’s value is 15 pips) the following occurs:

MT4 Guide - Pending Order

Pending Order is an instruction to open a position when the current price reaches the order level.

There are four types of pending orders:

Double Bottom

The Double Bottom technical analysis charting pattern is a common and highly effective price reversal pattern.

The chart below of Altria (MO) stock illustrates the Double Bottom reversal pattern:

To create a double bottom pattern, price begins in a downtrend, stops, and then reverses trend. However, the reversal to the upside is short-term. Price breaks again to the downside only to stop again and reverse direction upwards. With the second bottom of the double bottom pattern, it is usually more bullish if the second low is higher than the first low.

Double Bottom Buy Signal

The signal to buy is given when the confirmation line is penetrated to the upside. The confirmation line is drawn across the top of the double bottom pattern (see chart above).

Often, after price penetrates the confirmation line, price will retrace for a short time, sometimes back to the confirmation line. This retracement offers a second chance to get into the market long.

Volume also plays an important part of interpreting the Double Bottom pattern; this is illustrated in the chart below of Pfizer (PFE):

Generally, volume should explode when the confirmation line is penetrated as it did in the chart of Pfizer (PFE).

The Double Bottom reversal pattern is a heavily used and effective charting reversal pattern. Another similar and popular bottom reversal pattern is the Reverse Head & Shoulders Pattern (see: Head & Shoulders). The opposite of the Double Bottom is the bearish Double Top pattern (see: Double Top).

Double Top

The Double Top technical analysis charting pattern is a common and highly effective price reversal pattern.

The chart below of Altria (MO) stock illustrates the Double Top reversal pattern:

Double Top Formation Components

First High: Bulls push prices upwards making new highs; however, these new highs are short lived and prices retreat.
Second High: Prices don't retreat for long because bulls make another run, making a similar high. Nevertheless, this is bearish, because bulls were unable to push prices higher; bears held their ground at the previous high level. The bears push prices back to support (Confirmation line); this is a pivotal moment - either bulls will make another push higher or bears will take control and push prices even lower, more than likely taking over for good.

Double Top Sell Signal

Sell when price closes below the confirmation line.

Note that traders expect a significant increase in volume to accompany the confirmation line break; if there is very little volume when price pierces the confirmation line, then the move downward is suspect. Small volume usually means weak support of price movement (see: Volume).

Another similar chart pattern is the Head & Shoulders Pattern (see: Head & Shoulders). The opposite of the Double Top is the bullish Double Bottom (see: Double Bottom).

Flag

The Flag pattern usually occurs after a significant up or down market move. After a strong move, prices usually need to rest. This resting period usually occurs in the shape of a rectangle, thus the word "flag". The Flag is considered a continuation pattern because after resting, prices will usually continue in the direction they did before.

The chart of eBay (EBAY) shows many Flag patterns:

Flag Buy Signal

When price has moved higher and prices have consolidated, creating a channel of support and resistance, a buy signal is given when prices penetrate and close above the upward resistance line.

Flag Sell Signal

Assuming prices previously moved downward, then after a period of price consolidation, a sell signal is given when price penetrates and closes below the support line.

For more information on the concept of support and resistance, (see: Support & Resistance). Another similar pattern discussed is Triangles (see: Triangles).

Head and Shoulders

The Head and Shoulders chart pattern is a heavily used and quite profitable charting pattern, giving easily understood buy and sell signals.

The chart of Home Depot (HD) below shows a Head and Shoulders pattern:

Head and Shoulders Components

Left Shoulder: Bulls push prices upwards making new highs; however these new highs are short lived and prices retreat.
Head: Prices don't retreat for long because bulls make another run, this time succeeding and surpassing the previous high; a bullish sign. Prices retreat again, only to find support yet again.
Right Shoulder: The bulls push higher again, but this time fail to make a higher high. This is very bearish, because bears did not allow the bulls to make a new higher or even an equal high. The bears push prices back to support (Confirmation line); this is a pivotal moment - Will bulls make another push higher or have the bears succeeded in stopping the move higher.

Head and Shoulders Sell Signal

If prices break the confirmation support line, it is clear that the bears are in charge; thus, when price closes below the confirmation line, a strong sell signal is given.

Note that a downward sloping confirmation line is generally seen as a more powerful Head & Shoulders pattern, mainly because a downward sloping confirmation line means that prices are making lower lows.

Reverse Head and Shoulders

The opposite of the Head & Shoulders pattern is the Reverse Head & Shoulders pattern which is another strong pattern, this time a bottoming pattern.

Reverse Head and Shoulders Components

The reasoning behind a Head & Shoulders pattern is as follows:

Left Shoulder: Bears push prices downwards making new lows; however, bulls begin to return and push prices slightly higher.
Head: Price gains don't last long before bears return and push prices even lower than before; a bearish sign. Prices then find buyers at the new lower prices.
Right Shoulder: The bears push downward again, but this time fail to make a lower low. This is generally seen as bullish sign, bears were unable to push prices further down. Decision time occurs when the price is pushed higher back to support (Confirmation line); either bears will push prices back down or bulls will push prices higher, regaining control of the stock, future, or currency pair.

Reverse Head and Shoulders Buy Signal

When price closes above the confirmation line, a strong buy signal is given.

Usually an upward sloping confirmation line is seen as a more powerful Reverse Head & Shoulders pattern, mainly because an upward sloping confirmation line means that prices are making higher highs.

Volume analysis is important when using the Head & Shoulders chart pattern. How to incorporate volume into the study of the Head & Shoulders pattern is discussed on the next page.

Next Page - Volume, Head and Shoulders Pattern

Volume, Head and Shoulders

When the confirmation line of a Head & Shoulders pattern breaks to the downside, a large amount of volume should occur as well.

The chart below of General Electric (GE) shows a sharp increase in volume when the confirmation line of the Head & Shoulders pattern was broken:

In addition to the sharp increase in volume, the gap down on the chart of GE also gave strong indication to sell when the confirmation line was pierced.

The same concept applies to a Reverse Head & Shoulders pattern, the break of the confirmation line should be accompanied by an increase in volume.

The chart below of Gold futures illustrates a rise in volume when the confirmation line was pierced:

The Head & Shoulders pattern is a highly effective classic charting pattern. Other similar chart patterns are the Double Top formation (see: Double Top) and the Double Bottom formation (see: Double Bottom).

Support and Resistance

Support and Resistance is one of the most important and fundamental part of technical analysis:

Support: Prices should rise after touching support.
Resistance: Prices should fall after hitting resistance.

An example of price respecting support and resistance lines is given next in the chart of the Semiconductor HOLDRS (SMH):

When support and resistance has been firmly established: Buy Signal - Price touches support

Buy Signal

Buy when price touches the support line

Sell Signal

Sell when price touches the resistance line.

Breaking Support & Resistance

Another fundamental concept of support and resistance is listed next and is shown in the chart below of Alcoa (AA) stock:

If price breaks below support, then that support level becomes the new resistance level.
If price breaks above support, then that resistance level becomes the new support level.

Support and Resistance are basic yet vitally important technical analysis tools. On every time frame, intra-day, daily, weekly, and monthly, Support and Resistance levels are respected by traders. Knowledge of these levels helps keep a trader on the correct side of the market, thus helping the trader profit.

Candlestick Basics

Candlestick charts are an effective way of visualizing price movements. There are two basic candlesticks:

Bullish Candle: When the close is higher than the open (usually green or white)
Bearish Candle: When the close is lower than the open (usually red or black)

Candlestick Parts

There are three main parts to a candlestick:

Upper Shadow: The vertical line between the high of the day and the close (bullish candle) or open (bearish candle)

Real Body: The difference between the open and close; colored portion of the candlestick

Lower Shadow: The vertical line between the low of the day and the open (bullish candle) or close (bearish candle)

Candlestick Patterns

The power of Candlestick Charts is with multiple candlesticks forming reversal and continuation patterns. OnlineTradingConcepts.com has many detailed explanations of these candlestick patterns; the links are given below:

Bearish Engulfing Pattern

The Bearish Engulfing Candlestick Pattern is a bearish reversal pattern, usually occuring at the top of an uptrend. The pattern consists of two Candlesticks:

Smaller Bullish Candle (Day 1)
Larger Bearish Candle (Day 2)

Generally, the bullish candle real body of Day 1 is contained within the real body of the bearish candle of Day 2.

The market gaps up (bullish sign) on Day 2; but, the bulls do not push very far higher before bears take over and push prices further down, not only filling in the gap down from the morning's open but also pushing prices below the previous day's open.

With the Bullish Engulfing Pattern, there is an incredible change of sentiment from the bullish gap up at the open, to the large bearish real body candle that closed at the lows of the day. Bears have successfully overtaken bulls for the day and possibly for the next few periods.

The chart below of Verizon (VZ) stock shows an example two Bearish Engulfing Patterns occuring at the end of uptrends:

Bearish Engulfing Sell Signal

Three methodologies for selling using the Bearish Engulfing Pattern are listed below in order of most aggressive to most conservative:

Sell at the close of Day 2. An even stronger indication to sell is given when there is a substantial increase in volume that accompanies the large move downward in price (see: Volume).
Sell on the day after the Bearish Engulfing Pattern occurs; by waiting until the next day to sell, a trader is making sure that the bearish reversal pattern is for real and was not just a one day occurance. In the chart above of Verizon, a trader would probably entered on the day after the Bearish Engulfing Pattern because the selling continued.
Usually trader's wait for other signals, such as a price break below the upward support line (see: Support & Resistance), before entering a sell order. However, in the case of Verizon above, the Bearish Engulfing Pattern occured at the same time as the trendline break below support.

An example of what usually occurs intra-day during a Bearish Engulfing Pattern is presented on the next page.

Next Page - Intra-day Bearish Engulfing Pattern

Intra-day Bearish Engulfing Pattern

The following 15-minute chart of Verizon (VZ) is of the 2-day period comprising the Bearish Engulfing Pattern example on the prior page:

Day 1: As is seen in the chart above, Day 1 was an up day, closing near the day's high (bullish sentiment).
Day 2: The open was a gap up, a very bullish sign; nevertheless, the bulls ran out of buying pressure and prices fell the rest of the day, closing near the day's lows (bearish sentiment) and lower than Day 1's lows.

The Bearish Engulfing Pattern is one of the strongest candlestick reversal patterns. Its opposite is the Bullish Engulfing Pattern (see: Bullish Engulfing Pattern).