Thursday, January 1, 2009

Some Basic Technical Analysis Indicators

Happy New year!
This is my first post in this blog of the Year 2009! I am thinking to share some very Basic Technical Analysis indicators and Charting in this entry.

Basically there are 3 types of Chart:-
1. Line Chart
2. Bar Chart
3. Candlestick Chart

I am using GBPJPY (Pound Yen) pair in H1 (1 hour) for all the charts below:-

Line Chart
Line Chart in Forex
- Line chart is the most basic Chart. It only has lines, you can not know clearly about how price moves in each hour in the day.

Bar Chart
Bar Chart in Forex
- Bar Chart presents the information inside a chart Better. How to see?
Bar Chart
Each of the bar in consist of 3 lines, horizontal line on left, horizontal line on right and a vertical line. Each of the Bar is in a certain period. The first Bar Chart that I show is in H1, meaning that each bar is equal to one hour. Horizontal line on the left is named as "Open". Horizontal line of the right is named as "Close". The top of the vertical line is named as "High" and the bottom of the chart is named as "Low". In H1, Chart, eg: 2:00 am. At 2:00:00 am, the opening price of the bar will be the Left horizontal line. In that 1 hour, (from 2:00:00 am to 2:59:59), the price will move up and down, you do not know where will the price move. So, the highest price move on that hour, will the the "High" and the lowest price on that 1 hour will be the "Low". At 2:59:59, the price will determine the "Close".

Candlestick Chart in Forex
If I am not mistaken, this Candlestick chart is developed by Japanese about 400 years ago to predict the supply and demand of Rice. It is amazing that it is still using until today. Candlestick chart is actually the most popular charting. How to see it? It is almost the same like Bar Chart, but it is easier to see and you will notice if the price is up or down within some distance from the chart.
Candlestick Chart in Forex 2
It is basically consists of 2 types of candle. White and Black (The colour of the candlestick can be customized). The White candle means that on that period, the price is moving up (Bullish), the Black candle means that on that period, the price is moving down (Bearish). I think example above illustrates the Candlestick Chart well.

Technical Analysis
The First Technical Analysis indicator that I would like to share is Bollinger Bands. Bollinger Bands is created by a person name John Bollinger in early 80s. I will not go into details on the Bollinger Bands here.

What is Bollinger Band?
- In simple world, it is a technical analysis indicator that determine if something is oversold or overbought. I will use Forex pair as example.

Bollinger Bands Parameters
Bollinger Bands Parameters
Period that we are using is 21 and Deviations is 3. The default for this PFGFX platform is 20 and 2. What is Period and Deviations? Well. I will keep it simple for this post, so, will not discuss here.

Chart without Bollinger Bands (BB)
Forex Chart without Bollinger Bands
- From this chart, you see that like only a random price movement. You can not get much information from the Chart.

Chart with Bollinger Bands (BB)
Chart with Bollinger Bands
After I add Bollinger Bands inside, it shows some information. Bollinger Bands determine if a pair in Forex is Oversold (when the price touches the lower Band) and Overbought (when the price touches the upper Band).

I have highlighted the Oversold and Overbought areas at the below chart:-
Chart with Bollinger Bands Highlighted
However, you must understand that that Bollinger Bands is not a Holy Grail.. It is not 100% accurate. In my opinion, the accuracy of Bollinger Bands is only about 60-70%. So, it is actually acts as support indicator in our SRDC (Support Resistance Daily Candle).
Happy Trading Everyone! May all the Good trades be with you in Year 2009!