TECHNICAL INDICATORS

TIMING YOUR ENTRIES AND EXITS

TRADERS ADVISORY DMCC

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Risk Disclosure Statement

The content of this e book are for informational purposes only. No part of this publication is a
solicitation or an offer to buy or sell any financial market. Examples are provided for illustration
purposes only and should not be considered as investment advice or strategy.

The information found in this e book is not intended for distribution or use by any person o entity
in any jurisdiction or country where such distribution or use would be contrary to law or regulation
or which would subject us to any registration requirement within such a jurisdiction or country.

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Chapter 3: TIMING YOUR ENTRIES AND EXITS

What is Technical Indicator?

T echnical indicators are no more than a series of data points plotted in a

chart that are derived from a mathematical formula applied to the price
of any given instrument. In other words, indicators are just a different
way in which price movements can be represented over specified periods of
time (they offer us a different perspective).

Technical indicators are widely used by traders because it produces signals

for possible entry. With the help of technical indicator, trader will have a
better timing in the market.

Technical Indicators can be classified in to two:

Lagging Indicator (Trend Following): This type of indicator gives
signal after the trend has started. This is an indicator that spot trends
when they have been already established.

Leading Indicators (Oscillator): This type of indicators gives signal

before the new trend or reversal will occur. This is an indicator for
identifying overbought and oversold condition.

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Before going through all the indicators it is important to understand the

relationship between these two concepts. Every indicator represents price
movements over a chosen period.

Each indicator gives you the option to decide on how many periods you want
to go back over to do the calculation. If we shorten the period, we will get
more and earlier signals, but at the same time, the percentage of false signals
will also increase. If we increase the number of periods, false signals will
decrease, but the signal will get us in a trade later, giving up some profits.

TYPES OF LAGGING INDICATORS

Moving Average

The Moving Average is one of the most versatile and widely used of all
technical indicators. Because of the way it is constructed and the fact that it
can be so easily quantified and tested, it is the basis for many mechanical
trend-following systems in use today

MAs measure the average price of the previous n-periods. For instance, a
MA(10) measures the average price of the last 10 bars. However, as the name
implies, the average changes as when a new period is added the last period is
dropped. So it is always the MA of the last 10 periods

The two most commonly calculated are the SMA (Simple Moving Average) and
EMA (Exponential Moving Average). The SMA is the average of prices taken at
specified intervals, say an hour or a day. Each price is weighted equally in
calculating the average.

The more complicated EMA weights some prices more than others, on the
premise that some are more relevant. Recent prices are considered more
telling than those further back, hence these are weighted more in the
calculation.

For example, a 10-day EMA calculation will weight the last days more heavily
than the first days.

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40 SMA
30 SMA
20 SMA

On the above example, we are using Simple Moving Average with different
periods. You will notice, that the longer period we use, the more it lags behind
the price.

HOW TO USE MOVING AVERAGE FOR ENTRY

Moving average can be use for entries as well as exits in different ways. To get
you started on using Moving average, we will use Crossover of Price and
Moving Average to generate signal.

In using this strategy, buy signal is generated if the Moving Average cross
below the current market price and sell signal is generated once the Moving
Average crosses above the current market price.

Look at the chart below, we will be using Simple Moving Average with a
period of 14 applied in hourly chart.

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The Moving Average crosses

above the price indicating a
SELL signal

The Moving Average crosses

below the price indicating a
BUY signal

In this chart, every time there is a crossover, the minimum you can get is 50
pips. But be very careful also, not all the time the Crossover give good signal,
sometimes they are misleading or false signal. Consider the chart below, we
are also using the same Simple Moving Average with 20 period applied in 1
hour chart.

False Signal

False Signal

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Bear in mind that there is no technical indicator that will generate you 100%
accuracy. That is why some traders modify their strategy trying to find out
how to avoid false signal.

Using the same chart and using the same strategy of Crossover of Price and
Moving Average, we will now modify this strategy so we can avoid some of the
false signals. We will now use Double Moving Average Crossover.

To use this strategy, instead of looking at the price and Moving Average, we
will now generate our signal using two Moving Averages with two different
periods. We will now add one more Moving Average with a period of 40.

Now that we have two Moving Averages, buy signal is generated when the
shorter period Moving Average (30 period) crosses above the longer period
Moving Average (40 period) and sell signal vice versa.

Short Period MA (30)

Longer Period MA (40)

SELL Entry is generated

when the short MA crosses
below the Longer MA

BUY Entry

Using the same chart and by using two Moving Averages, we have avoided two
false signals

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BOLLINGER BANDS

This technique was developed by John Bollinger. Bollinger Bands are bands
drawn in and around the price structure on a chart. This indicator measures
the present volatility in the market.

The bands are calculated as standard deviations above and below a simple
moving average. The width of the bands will vary depending on volatility. As
volatility rises, they become wider.

As volatility decreases they narrow. Prices tend to stay within the upper and
lower bands, with sharp price changes tending to occur after the bands
tighten. Using two standard deviations it ensures that 95% of the price data
will fall between the two trading bands.

HOW TO USE BOLLINGER BANDS

One way to use Bollinger Bands is to measure the volatility in the market.
Bollinger Bands contract when the market is quiet, without sharp price
movement. It is during this time you will know whether the market is
consolidating or will continue the prevailing trend.

By knowing whether there will be movement in the market or none, you can
then adjust your strategies. For instance, you are utilizing breakout entry and
the moment there is a pressure in the support area to break, if the Bollinger is
contracting, it will be best to wait because you know the market is quiet.

The Bollinger band widens or expands when the prevailing trend becomes
stronger. A good confirmation of a trend is when the Bollinger bands expand.

Applying the same breakout strategy, if the price breaks the support area and
at the same time the Bollinger is expanding, then most likely the breakout is
true. If the breakout is true, the next thing you need to watch is the
contraction of the Bollinger bands. By the moment it contracts and you are
still holding the position, monitor if the market is moving sideways or will
continue the prevailing trend.

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Bollinger Band is Contracting

Upper Band
means the market is quiet
Bollinger Band is Expanding
means the market is moving

Lower Band

Bollinger Band is very helpful in many ways. If you are looking for a trading
opportunity in the market, the best time will be once the Bollinger Band is
contracting. You will know when the market is moving once the Bollinger
Band starts to expand. It is up to you now to find out where will be the move,
upside or downside and you can use other indicator to help you identify the
trend.

PARABOLIC SAR (Stop and Reverse)

The Parabolic/SAR indicator was developed by J. Welles Wilder in 1976. It is

often used to select trailing price stops and is commonly referred to as SAR
(Stop and Reverse).

Parabolic SAR also signals the reversing of a trend, thus providing traders
with a good tool for choosing trade exit points. The unique feature about the
parabolic indicator is that it takes into account both the factors of time and

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changing prices. Most traders unfortunately focus mainly on prices and ignore
the effects of the passage of time.

The parabolic indicator is a very useful indicator to adopt in the FOREX

market, mainly because the FOREX market often trends strongly.

HOW TO USE PARABOLIC SAR

Parabolic SAR is more popular for identifying and setting up of stop loss. If
you want to execute a buying position, the Parabolic SAR should be below the
current price. The dot below the currency market price now serves as your
stop loss placement. For selling position, the trend should be down and the
dot should be above the currency market price. The dot above the price now
serves as the placement of your stop loss

If you will buy

in this candle Placement of stop loss
will be in this dot

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TYPES OF LEADING INDICATORS

Leading indicators are also known as the Oscillator. As previously discussed,

these indicators are used to gauge the momentum of the market.

Momentum measures the strength of the movement of the market, it helps

trader to know whether the current movement will be sustainable and will
still continue to its course, or the trend is already exhausted and is about to
make a correction or even possibly new trend trend reversal.

Important uses of Oscillator

The oscillator is most useful when its value reaches an extreme reading
near the upper or lower end of its boundaries.

A divergence between the oscillator and the price action when the
oscillator is in extreme position is usually an important warning of a
possible trend reversal.

The crossing of the midpoint can give important trading signals or a

confirmation of the direction of the trend.

General rule for interpretation of Oscillator Indicator

When the oscillator reaches an extreme value in either upper or lower levels,
this suggests that the current price may have gone too far too fast and is due
for a correction or consolidation. It is also best that traders should only make
an entry positions if the oscillator is in extreme levels. Consider taking buying
position only if the oscillator line is in the lower end, and selling if the
oscillator line is in upper end.

Although this type of indicator is very useful in trading decision, it is best to

combine this with other indicators to give you a much more precise entries
and exits.

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Relative Strength Index (RSI)

The Relative Strength Index (RSI) is an oscillator that measures a particular

financial instrument's current relative strength compared to its own price
history.

The RSI is plotted on a vertical scale numbered from 0 to 100. A reading above
70 is considered to be an overbought area and a reading below 30 is said to be
in oversold level.

When the market is in overbought level, it means the current upward trend is
exhausted and most likely the market will give a good retracement. If the
market is in oversold condition, it means the current downward trend drops
too fast already and it is expected to give a correction.

The market reached

The market reached
oversold area,
overbought area,
indicating a BUY entry
indicating a SELL entry

The signal provided by RSI is not a standalone strategy, meaning in order to

generate a much reliable signal; it must be use in combination of other
technical indicators.

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Stochastic

Stochastics was developed by George Lane; this is a range-based indicator

with the readings set between 0 percent and 100 percent.

This indicator is a popular technical tool used to help determine whether a

market is overbought, meaning prices have advanced too far, too soon, and are
due for a downside correction, or oversold, meaning prices have declined too
far, too soon, and are due for an upside correction.

A buy signal is given when the readings are below 20% and rises above this
level (buy signal oversold condition). A sell signal occurs when the reading is
above 80% and falls back down below that level (sell signal - overbought
condition). When the market is trending, it is advised to take only those
signals that are in direction of the trend.

The market reached The market reached

overbought area, oversold area,
indicating a SELL entry indicating a BUY entry

Like the RSI, it is very hard to rely solely on the signal provided by Stochastic.
It is always best to use this indicator and combine it with other technical
indicators.

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