Market analysis guide

We hope that our articles will help you to learn how to forecast which way a market is expected to
trend.

It is up to you what to choose: Fundamental Analysis, Technical Analysis, Elliot Wave theory,
Candlesticks, Tomas Demark Theory, Chaos Theory or any other. Whatever you choose try to get as
much experience as possible and never stop studying.

Technical Analysis guide

Bill William's Chaos Theory

Technical Analysis
Overview:
Principles of Technical Analysis
Dow Theory

Trend Analysis:
Trend Lines and Trend Channels
Support/Resistance Levels
Fibonacci Retracement

Reversal Chart Patterns:

Head and Shoulders
Triple and Double Tops and Bottoms
V-Reversal Pattern

Continuation Chart Patterns:

Triangle
Flag
Pennant
Wedge
Rectangle

Trend Indicators:
Moving Average
Envelopes and Bollinger Bands
Moving Average Convergence Divergence (MACD)
Moving Average of Oscillator (OsMA)
Parabolic Time Price System
Average Directional Movement Index (ADX)
Oscillators:
Bullish Divergence / Bearish Convergence
Momentum Indicator
Commodity Channel Index (CCI)
Relative Strength Index (RSI)
Stochastic Oscillator
Force Index
Relative Vigor Index (RVI)
Williams Percent Range (R)
Average True Range (ATR)
Ichimoku Kinko Hyo

Volume Indicators:
Overview
On Balance Volume (OBV)
Money Flow Index (MFI)

An Example of Trading Strategy:

Accumulation / Distribution
Elder Ray Indicator
 Principles of Technical Analysis
History
Among various methods financial analysts utilize for forecasting the markets, the two most common
methods are fundamental and technical analyses.

All in all, different technical theories can be viewed as puzzle stones, the combination of which should
lead us to the ultimate goal of technical analysis - the set-up of the highest probability scenario for a
specific market direction.

The roots of modern-day technical analysis stem from the Dow Theory, developed around 1900 by
Charles H. Dow (1851-1902). His famous market philosophy, price action analysis and other
techniques have been around for over 100 years, yet even in today's volatile and technology-driven
markets, the basic components of Dow Theory still remain useful.

In a series of stunning editorials for the Wall Street Journal at the turn of the century, Dow laid out the
foundations of his own theory on the market. Among them were:

The market is always considered as having three movements, all occuring at

the same time - primary, secondary and intraday.
Averages discount everything.
The market reflects all available information.

Everything there is to know is already reflected in the markets through the price level. Prices represent
the total sum of hopes, fears and expectations of all market participants. Interest rate movements,
earnings expectations, revenue projections, presidential elections, product initiatives and everything
else is already priced into the market. The unexpected occurs, but usually this affects only the short-
term trend. The primary trend remains unaffected.

Dow developed a conception of confirmation which is now better known as a divergence. Traders use it
to compare price movements to oscillator movements to define the strength of the prevailing trend.

Dow placed the emphasis on the importance of trading volume to predict price rebounds and trend
direction. For example, if the market is oversold, selling will be accompanied by low volume, whereas
a rally will result in an increasing volume.

Robert Rhea spent a lot of time on market statistics. He was the first technical analyst who defined
that divergence should have the narrowest range so, that it could be considered as a well-defined
secondary movement.

Richard Schabacker (1902-1938) is considered to be a grandfather of technical analysis who laid the
foundations for modern pattern analysis.

He classified tools which helped technical analysts not only to forecast future market movements, but
also to foresee when the prevailing trend would finish.

He was the first to classify common chart patterns, develop the theory of price gaps, formalise the use
of trend lines and prove the importance of support and resistance levels.

Richard Schabackers most popular tool is Bar charts. The vast majority of chart patterns fall into two
main groups: reversal and continuation. Reversal patterns indicate the trend may change and may be
broken down into top and bottom formations. Continuation patterns indicate that the trend takes a
pause and resumes its previous direction after a while.
Richard Wyckoff traded stocks and bonds in the early and mid 1900's. His subject of interest was
logic behind market actions. He developed a methodology which concentrated on the Volume-Price,
Point and Figure and the process of sifting and ranking analyses. He developed such patterns as
"Swing" and "Upthrust" which provide a trader with the key touch points as they describe test levels
and false breakouts, which are produced when the price fluctuates within a trading range. Richard
Wyckoff also introduced an index comprised of five selected shares (the most sensitive ones) to predict
market reversals in the early stages.

The next logical step of the Dow Theory was Elliott Wave Theory, which was proposed in the early
1930s by R.N. Elliot (1871-1948).

Principles of Technical Analysis

Technical analysis predominantly uses charts to forecast future price movements. Nowadays it is not
necessary to draw charts on paper as the process is automated by specially designed computer
programs. If you want to get more information on such a trading platform, please refer to the page
regarding MetaTrader 4.

There are three sources of information in technical analysis: price, volume and open interest (applicable
only to derivatives contracts such as futures and options).

THe principles of technical analysis are the following:

Price discounts everything. Price is affected by economic, political and other

factors, and all information is already reflected in it. Technical analysis utilizes
the information captured by the price to interpret what the market is saying
with the purpose of forming a view on the future.
Price movements are not totally random, or prices trend. The main purpose of
the charts is to define a trend at an early stage and to trade in accordance with
its direction.
History repeats itself. The techniques which were effective in the past can be
still effective to forecast future price movements.

Dow Theory
Initially, the principles behind Dow Theory were used only for American indices created by Charles
Dow: Transportation and Industrial. Most of them however can be successfully applied to the Foreign
Exchange market.

Indices discount everything. According to Charles Dow any factor which

influences demand and supply will be reflected in the index. These factors
cannot be foreseen but they are nevertheless taken into account by the market
and shown in the price action of the index.

There are three movements on the market. Uptrend is characterised by the fact
that every following top is higher than the previous one and every next bottom
is higher than the previous one. Downtrend is characterised by the fact that
every following top is lower than the previous one and every bottom is lower
than the preceding one. When the market is in the flat position every next
move (up or down) is approximately at the same level as the preceding one.
 Dow classified market trends as follows:
- primary trend (a broad trend that can last upto several years);
- secondary trend (lasts between three weeks and three months and is
considered as a correcting trend to the primary one. Interim rebounds are one-
two thirds (or even half) of the range formed during the primary trend);
- daily trend (a short-term movement within the secondary trend, which has
very little long-term forecasting value).
Another classification was suggested by Thomas DeMark:
- short-term trend (if the price has moved less than 5%);
- mid-term trend (if more than 5% but less than 15%); long-term trend (if more
than 15%).
DeMark designed a forecasting method to predict the beginning of a trend,
both mid-term and long-term. The method is based on specially designed
coefficients.
The primary trend has three phases. During the first phase all unfavourable
market information has been discounted by the market and the far-sighted and
better informed traders start to buy. The second phase starts when the traders
who do technical analysis enter the market. Once all economic data becomes
more favourable, the third, final phase begins, which is characterised by high
activity on the market supported by the mass media and optimistic economic
forecasts in the newspapers and on TV. Despite the positive sentiment, the
final phase is the first sign that the prevailing trend is about to end.
Indices must confirm each other in order for the signal to have authority
(referred to Industrial and Rail (or Transport) indices). Charles Dow said that
any significant uptrend or downtrend signal on the market must be considered
together in the Industrial and Rail indices. If we applied this principle now on
the basis of modern technical analysis, it would mean that a signal from one
technical indicator must be confirmed by a signal from another technical
indicator.
Trade volume must confirm the prevailing trend. If prices move in accordance
with the prevailing trend, it increases the volume and inversely, when there is
a rebound, volume decreases.
The primary trend remains intact until a change in that trend has been given by
the theory. The last major signal remains in force until a new signal develops.
Many analysts believe that a bull market must always be moving to new highs.
However, the market can undergo extended periods of sideways or lackluster
trading without the primary trend changing. If the last major signal under the
theory is bullish, the primary bull market trend remains in force until a bear
market signal is given.
 Trend Analysis - Trend Lines and
Trend Channels
Trend Lines

A trend is a general direction of the price. Prices do not only rise or fall but most of the time they
actually move in narrow ranges. So, in accordance with the Dow Theory we can therefore divide trends
into three types:

Bull (or "uptrend") - prices rise;

Bear (or "downtrend") prices fall;
Flat (or "sideways") prices are in a narrow range. As a general rule, markets
tend to consolidate prior to a rapid price rise or fall.

First of all, it is very important to determine if the market is uptrending or downtrending (this can be
done with the help of trend indicators and trend lines or channels) and if the prevailing trend is strong
or weak (with the help of oscillators and charts patterns).

Uptrend line in MetaTrader

Uptrend means that every next bottom is above the previous one, and every next high is above the
previous one, so in this case, the trend line is drawn between bottom points. Obviously a trend line
created by joining only two points will be less effective than a trend line created by three or more
points.
Downtrend line in MetaTrader

Downtrend means that every next bottom is lower than the previous bottom and every next high is
lower than the previous high; so in this case, the trend line is created by using the highest points.

Any trend (bullish or bearish) must be confirmed by trade volume. When prices move in accordance
with the prevailing trend, the trade volume increases; when prices move against the prevailing trend
(rebound), then trade volume decreases. Once the situation changes and trade volume during rebounds
becomes greater than that during the trend price movement, it is a serious signal that the trend may not
be so strong (but it is not the signal to open the opposite position, as there is no confirmation of the
trend reversal).
Flat trend line in MetaTrader

A Flat Market means that every next bottom or high is at the same level as that of the previous bottom
or high. In this case, the trend line is drawn by joining both bottoms and highs.

In order to draw a trend line in MetaTrader 4 press the button on the "Line studies" toolbar:

Line studies toolbar

Point the mouse cursor to the first trend line point, click and hold the left mouse button to draw the line
to the second point. Once you have done this, release the button. If you wish to highlight the trend line,
just double click it. Right-click on the highlighted object to enable the context menu:

With the help of a trend line you can identify the moment when the trend will change. Once a trend line
has been broken, chances are that the trend has just changed its direction or its strength has started to
diminish.
Sometimes the trend line is broken by a bar low or high, and the price continues to move in the
direction of the current trend. There are many methods to define if a breakout is true - shown below are
the most popular:

Trend is your friend - do not open positions against the prevailing trend.
The primary trend remains intact until a change in that trend has been
given. Trend line breakout is one of the most important signals that the trend
may reverse.
Do not try to open positions against the prevailing trend hoping that the
trend is weak and that the reversal point is not far away. In most cases
price sweeps through your Stop Loss order and only subsequently does the
trend reverse.

A Stop Loss order should be placed below an uptrend line (or above a downtrend line).

Tomas Demark made his contribution to the theory of trend lines. According to his theory, a trend is
rooted in two critical points through which the trend is drawn. He called these points TD-lines (his
name, Tomas Demark, abbreviation). These points are defined at the basis of extreme points.

Channel Lines
Channel lines are a significant part of trend analysis. Channel lines are like boundaries for price
fluctuations. To create a channel line, draw a parallel straight line next to the trend line: one of them
joins price chart highs, the other price chart lows:

Channel lines are used:

 To point out where to fix profits and losses. If there is an uptrend channel, Take Profit order
may be placed under the upper line and Stop Loss order under the lower line. If there is a
downtrend channel, Take Profit order should be placed above the lower line and Stop Loss
above the upper line.

If the price does not touch the upper line of the uptrend (lower line of the
downtrend) this signifies that the prevailing trend is weak.

In order to create a channel line in MetaTrader 4 double click the left mouse button on the trend line,
press and hold the Ctrl button and drag the newly created parallel line to its place on the chart. Then
release the Ctrl button.

Trend Analysis - Support /

Resistance Levels
Support and Resistance levels are patterns of classical technical analysis. All trend (channel) lines,
reversal and continuation chart patterns are only combinations of support and resistance levels.

A support level is a starting point of an uptrend, and is actually a tangent to the minimum price. It is
commonly thought that when the price falls down to the support level, Bulls (buyers) start to resist
against further price decreases thus giving it support. This explains why in many cases the price will
bounce back and start rising after having reached a support level.

After several attempts the price may break the support level. Once the support level is broken, it
becomes the resistance level:
Support level

Here is an example of when a support level became resistance in September 14, 2003:

September 14, 2003 (after the breakout): support level becomes resistance

The Resistance level is a tangent to the highest price:

Resistance level

Generally, once the price reaches this level it will not get any higher. After several attempts the price
may break the resistance level. Once the resistance level is broken it becomes the support level.

Support and resistance levels are easy to create and are a highly effective method for forecasting price
behaviour. In order to define if the support/resistance level breakout is true, please refer to the criteria
outlined for trend lines.

Trend Analysis - Fibonacci

Retracement
Price correction (retracement) is a short-term, anti-trend price movement. Prices almost never just rise
during the uptrend and fall during the downtrend. Even within the same trend, the price can rise and
then retrace for a while or vice-versa. The most profitable and less risky positions are positions opened
at the end of the retracement. It is therefore important to know how to define the levels at which the
trend will resume after a short retracement. Technical analysis has a correction index which uses
Fibonacci numbers. The Fibonacci sequence is a series of numbers that takes the previous number and
adds it to the current number to get the next number in the sequence. For example, 1, 1, 2, 3, 5, 8, 13,
21, 34, 55, 89, 144 etc.

These numbers possess an intriguing number of interrelationships, such as the fact that any given
number is approximately 1.618 times the preceding number, and any given number is approximately
0.618 times the following number.
Experienced traders know that in a fast market, the correction is about 0.382 of the price range
movement. In a market with average price movements, correction is about half the price range
movement. Maximum correction is 0.618, which indicates that the trend is rather weak.

Fibonacci Retracement in MetaTrader 4

To estimate if a Fibonacci Retracement breakout is true, please refer to the methods used to estimate
the trend line breakouts.

In order to draw a Fibonacci Retracement in MetaTrader 4 press the button of the "Line Studies"
toolbar:

Line Studies toolbar

Drag the cursor to the uptrend low (downtrend high), click and hold the left mouse button to drag the
cursor to the uptrend high (downtrend low) and release the button. Fibonacci Retracement should now
appear on the chart. Highlight it by double-clicking, then click the right mouse button to enable the
context menu where further settings can be changed.
 Reversal Chart Patterns - Head and
Shoulders
Price chart analysis starts with chart patterns. When you track price movements you may often see that
these movements have predictable configurations, which are called chart patterns. Chart patterns are
tools used to predict trend reversal or trend continuation.

Let's begin with chart reversal patterns - "Head and Shoulders" and "Inverted Head and Shoulders".

"Head and Shoulders" is the most recognizable reversal pattern. "Head and Shoulders" pattern
appears at the end of a bullish trend:

Head and Shoulders pattern

"Inverted Head and Shoulders" is the first sign that a bearish trend is about to end:

Inverted Head and Shoulders pattern

Inverted chart patterns have distinct highs (bottoms). Head Line is a trend line which joins two
bottoms between highs (two highs between two bottoms if the pattern is inverted).

Pattern characteristics:
 If on the bearish trend there is an "Inverted Head and Shoulders" pattern, then
the higher the Right Shoulder the stronger the signal;
If on the bullish trend the Right Shoulder of the "Head and Shoulders" pattern
is higher than the left one, then this makes the signal stronger;
In order to define if the pattern is valid, the volume pattern must also meet
fairly strict requirements.

Once the Head Line has been broken, it is time to open a position. The best time to make a deal is when
the level has been broken and the price rebounds to the Head Line.

Reversal Chart Patterns - Triple and

Double Tops and Bottoms
Other important reversal patterns are:

"Triple Top"
"Triple Bottom"
"Double Top"
"Double Bottom"

Here are some sketch examples of price movements with "Triple Top" and "Triple Bottom" patterns:

"Triple Bottom" pattern:

"Double Top" and "Double Bottom" patterns are seen on the charts more frequently:

"Double Top" and "Double Bottom" are weaker reversal signals than "Triple Top / Bottom" and "Head
and Shoulders". Double Top patterns looks like this:

There are a lot of false signals among Triple and especially Double Tops and Bottoms, so it is
important to make a parallel analysis of market volume, price and oscillators convergence / divergence.

V-Reversal Pattern
Mostl V-Reversal patterns (or Reversal Spikes) are formed subsequent to a rapid previous trend:
There are many gaps on the chart, and support and resistance levels are indefinable. The only possible
solution is to break through the trend line. It is difficult to find the right moment to enter the market if
there is a formation of a spike. The best strategy in this event is to be square (no open positions). This
pattern is frequently seen on the charts of GBP/USD:

Continuation Chart Patterns

o Triangle

Continuation patterns indicate that price sluggishness is only a

pause in the prevailing trend, not a sign of a forthcoming reversal.
Continuation patterns typically take less time to form than reversal patterns.

Triangles are powerful continuation patterns:

There are four different types of triangles:

symmetrical
ascending
descending
expanding

Symmetrical triangle consists of two converging trend lines (upper line goes lower and lower line
goes higher). The point at which they cross is called top:

There must be at least four reversal points in order for a triangle to be recognized, but there may be
more (for example, six: three peaks and three troughs).

In most cases the breakout occurs in the middle to three-quarters of the triangle width. If within three-
quarters of the triangle width the breakout has not occurred, the subsequent price action will be weak
and difficut to predict. The fewer price fluctuations inside the triangle, the more chances that trading
volume will decrease (this is a common rule for most continuation patterns).

The formation ends when a trend line is broken. It is sometimes followed by a pull back to the trend
line (if it was an upside breakout then it would be the support level, if downside breakout it would be
the resistance level). The top of the triangle will be the important support/resistance level. To estimate
if the triangle line breakout is true, please refer to the methods previously used to test trend lines
breakouts.

Ascending triangle is a type of symmetrical triangle:

Its upper trend line is horizontal whereas the lower one is upward sloping. This is a bullish formation as
in this scenario buyers are more active than sellers. When an ascending triangle develops, it is usually a
good chance for an upside breakout to occur.

Ascending triangles are usually formed as a continuation pattern in an uptrend, but sometimes they can
be found at the bottom of a downtrend, signaling a reversal. Even if the market is bearish this chart
pattern should be considered as bullish.

Descending triangle is a bearish formation a mirror image of an ascending triangle:

How to analyze symmetrical, ascending and descending triangles:

 A Classic triangle has five lines (three downward and two upward or vice
versa).
If the price penetrates the triangle downwards then the price may continue to
fall.
If the price penetrates the triangle upwards the price may continue to rise.
If the pattern angle is up-directed the price may move higher.
If the pattern angle is down-directed the price may move lower.
If prices remain within the triangle beyond the three-quarter point, the triangle
begins to lose its potency, and prices may continue to drift out to the apex and
beyond.
Triangle top will be the support/resistance level.
Typically, volume is heavy at the beginning and it contracts during the
formation of a triangle. It increases again during the breakout.
The price continues moving in the direction of the breakout for at least a range
equal to the triangle's height.

An expanding triangle (more often appears at highs) consists of three gradually rising highs and two
gradually falling bottoms:

When the downward price movement crosses the level of the second bottom, this means that the pattern
formation is about to end, and that is a signal to open a Sell position. Once the signal has been given
prices may pull back up to half of the range they have moved downward. After this has occurred, the
bearish trend resumes. Although, as a rule, the third top is higher than the previous two tops, sometimes
it may be at some level of the second one or even a little bit lower. In this case the pattern resembles the
Head and Shoulders chart pattern with a downward Head Line.
 Continuation Chart Patterns
o Flag
Flags are usually preceded by a sharp advance or decline. The flag looks like a rectangle directed
against the prevailing trend:

The formation of this pattern is accompanied by a decrease in volume followed by a sharp increase
after the breakout. The formation takes from 5 to 15 bars. The pattern is considered to be in the middle
of the trend, so after the breakout the price may move the same range as it had moved before the
pattern.
 Continuation Chart Patterns
o Pennant
The pennant resembles a small symmetrical triangle:

The pattern occurs after a rapid trend, as a rule, in the middle of the trend. While the pennant is forming
the volume decreases and then increases sharply after the breakout. 5 to 15 bars are required to form
this model.
 Continuation Chart Patterns
o Wedge
The wedge is a small triangle inclined against the trend:

Typically, like the flag, both the pattern's upper and lower edges are either going up (bearish formation)
or down (bullish formation). Breakout tends to happen between two thirds and one half of the way
through the pattern. The chance of a reversal are great if the pattern inclines along with the trend.
 Continuation Chart Patterns
o Rectangle
The rectangle looks like the Triple Top / Bottom pattern:

In order to define what kind of pattern has been formed ("Rectangle" or "Triple Top / Bottom") you can
use oscillatory and volume analyses. After the breakout, the price usually moves in a range no less than
the rectangle's height. Further edges of the rectangle will become support/resistance levels.

Trend Indicators
o Moving Average
Moving Average (MA) is the average of prices (more often the closing prices) over a specified number
of periods. It is a smoothed correlation between currency rates and time periods. The time period of any
moving average defines how much it will be smoothed. For example, when a Moving Average is
calculated by adding the closing prices for the last 5 bars, then it is defined as a 5-period MA.

When you select a period for the moving average (table shown below) keep in mind the following:

The greater the time period, the less sensitive the MA is to price movements.
If the MA period is too short, then it will have too many false signals.
A too long MA period will often lag short-term price movements.
For sideways trends it is better to use longer time periods.

Recommended Moving Averages time frames

Chart period Moving Average
Weekly 8, 13, 21
Daily 8, 13, 21, 55, 89
4 hours 8, 34, 55, 89, 144
1 hour 8, 34, 55, 89, 144
15 minutes 34, 55, 144

There are three types of Moving Averages:

Simple Moving Average (SMA)

Weighted Moving Average (WMA)
Exponential Moving Average (EMA)

Formula for the Simple Moving Average (SMA):

where

P - price of i-bar;
n - MA period.

Formula for the Weighted Moving Average (WMA):

where

P - price of i-bar;
W - weight of i-bar.

Often MA is weighted by volume.

Formula for the Exponential Moving Average (EMA):

EMA(t) = EMA(t - 1) + (K x [Price(t) - EMA(t - 1)],

where

t - current time period;

t -1 - previous time period;
K = 2 / (n + 1);
n - EMA period.

The main advantage of the Exponential Moving Average (EMA) is that it discounts both prices of the
previous and current periods. Every subsequent value becomes more significant. In order to create a
Moving Average in MetaTrader 4 use the "Insert->Indicators ->Trend->Moving Average" menu
sequence. This enables the window with the Moving Average parameters. Then specify a period for the
Moving Average and select its type (the "MA Method" field) and then press the OK button. This
enables Moving Average on the chart.

How to analyze Moving Averages:

Find Moving Average and price chart cross-point. If the price line crosses the
Moving Average line from below, then this is a signal to buy. If it crosses from
above, then it is time to sell.
Note that Moving Average usually moves in the direction of the prevailing
trend.
Find points which occur after Moving Average tops or bottoms. There is a
high possibility of a reversal.
 Find points where the divergence between Moving Average and price is
widest.

If you do not have other confirmations it is not recommended to open positions against the Moving
Average's direction.

Moving Average signals are more effective on a trend market and less effective when the market is flat.
As MA is a lagging indicator, it can often create false alarms.

Trend Indicators
o Envelopes and Bollinger Bands
Envelopes are formed with upper border U and lower border L. The formula is:

U = ( 1 + u / 100 ) x SMA (P, n)

L = ( 1 - d / 100 ) x SMA (P, n)

where
U upper border;
L lower border;
u - % above the moving average;
d - % below the moving average;
SMA (P, n) moving average.

The percentage ("u" and "d") should be set so that about 95% of price activity is
contained within the envelope and 5% outside it. The indicator will then be adequate
to the market balance and all prices will come back to the envelope after they exit it.

Bollinger Bands

A Bollinger Band is constructed by placing upper and lower bands around a moving
average the band width is not constant but instead proportional to the mean square
divergence from the moving average over the specified period of time. Based on the
Bollinger Band analysis, the decision to enter/exit the market is made when the price
rises above upper Bollinger Band resistance or falls below lower Bollinger Band
support.

If the price breaks through upper and lower bands and then comes back inside then it
is considered a good time to enter the market. If it breaks through the upper band and
then comes back just below the upper band, it is time to sell. If it breaks through the
lower band and then comes back just above the lower band, it is time to buy. However
if the price breaks through the upper or lower band and then comes back right away it
may be a false signal.

Bollinger Bands measure volatility:

 When the market is more volatile and volume is high the bands widen. It indicates
that the prevailing trend is strong and likely to continue or a new trend has just
started.
During periods of low volatility bands are narrow. It is a period of consolidation to
continue the prevailing trend or just before the reversal of the trend.

In a bullish market, moving average is the support level, whereas in a bearish market
it is the resistance level.

In order to add the indicator on the chart in MetaTrader 4 follow the Insert ->
Indicators -> Trend -> Bollinger Bands menu

Bollinger Bands

Trend Indicators
o Moving Average Convergence
Divergence
Some of the disadvantages of moving averages can be avoided by using the Moving Average
Convergence Divergence (MACD). MACD is the difference between the fast 12-day exponential
moving average (fast EMA) and the slow 26-day exponential moving average (slow EMA). Typically,
this is plotted with the 9-day EMA of the indicator itself.

SIGNAL = EMA(9) [MACD],

where

MACD = EMA(12) [p] - EMA(26) [p];

p price.

Bullish divergence occurs when a new high is not confirmed by a new high of the MACD. It may
indicate that the prevailing bullish trend is weak and about to reverse. However, before opening a
position against the trend, check other signals, for example, the breakout of the trend line.

Bearish convergence occurs when a new low is not confirmed by a new low of the MACD. It may
indicate that the prevailing bearish trend is weak and reversal may be possible. However it is better not
to make a decision based only on this factor and bear in mind that if MACD is close to the zero line
this indicates that the prevailing trend is likely to continue.
Trend Indicators: MACD Bearish Convergence

In order to add Moving Average Convergence Divergence (MACD) to the chart use the Insert ->
Indicators -> Oscillators -> MACD menu sequence.

In MetaTrader 4 MACD is represented as a histogram (MACD) and a signal line (SIGNAL).

MACD signals:

If MACD is below the zero line then trend is bearish, if it is above it then the
trend is bullish.
SIGNAL line and price bullish divergence/bearish convergence a strong sign
that the prevailing trend is weak.
If MACD is below zero and there is no bearish convergence, and MACD
histogram crosses the slow line (SIGNAL) from below, then there is a greater
chance of an upside price rebound.
If MACD is above zero and there is no bullish divergence and MACD
histogram crosses the slow line (SIGNAL) from above, then there is a greater
chance of a downside price rebound.
 Trend Indicators

o Moving Average of Oscillator (OsMA)

Moving Average of Oscillator (OsMA) is generally calculated as the difference between the oscillator
and the moving average on the oscillator. In MetaTrader 4, MACD is used as an oscillator, and a
SIGNAL (signal line) is used as a moving average:

OSMA = MACD-SIGNAL

Trend Indicators
o Parabolic Time Price System
The Parabolic indicator (sometimes referred to as SAR) was developed by Welles Wilder in 1976 and
was originally called "stop and reverse". The indicator is effective only in a trending market. It helps to
define the direction of the prevailing trend and the moment to close positions opened during the
reversal.

The closing price (parabolic) is calculated for each bar using the following formula:

Long positions:

SAR (i) = ACCELERATION * (HIGH (i - 1) - SAR (i - 1)) + SAR (i - 1)

Short positions:

SAR (i) = ACCELERATION * (LOW (i - 1) - SAR (i - 1)) - SAR (i - 1)

Where:

SAR (i - 1) parabolic value on the preceding bar,

ACCELERATION acceleration factor; for the first bar it is usually 0.20, and
then it is calculated as follows:
o AF = 0.20 + n x 0.02, where n the number of new tops (bottoms),
o HIGH (i - 1) high of the previous period,
o LOW (i - 1) low of the previous period.

If a trend is bullish, SAR is below the price chart; if it is bearish, SAR is above the price chart. When
the price crosses Parabolic SAR, the indicator reverses and its value becomes opposite to the price. The
actual point at which the system is reversed is the high or the low of the previous period.

In order to add the indicator in MetaTrader 4 use Insert -> Indicators -> Trend -> Parabolic SAR
menu sequence:
Parabolic signals:

When the price chart crosses Parabolic SAR it may be a reversal signal or may
indicate temporary consolidation, hence, it is considered as a classic signal to
initiate a position.
Parabolic SAR and trend direction are the same. If parabolic moves higher,
then the trend is bullish and vice versa.
If there is a significant divergence between the price chart and the parabolic,
then their convergence may happen very soon.
When the indicator has completely formed and the Parabolic SAR moves
parallel to the price chart, most of the signals will be true; after this, they tend
to contract and the number of false signals increases.

Trend Indicators
o Average Directional Movement
Index (ADX)
Average Directional Movement Index (ADX) was developed and described in detail by Welles Wilder
in his book "New concepts in technical trading systems". Average Directional Movement Index (ADX)
shows if there is a trend on the market and what potential it has.

ADX represents two opposite +/-DM and ADX lines:

The first goes in the direction of the price movement (+DM).

The second goes in the opposite direction (-DM).

The third (ADX) is the absolute difference between +/-DM lines, so the more divergence between +/-
DM lines, the greater the value of ADX.

In order to add the ADX indicator to the chart in MetaTrader 4 use the "Insert -> Indicators ->Trend
-> Average Directional Movement Index" menu sequence:

Average Directional Movement Index (ADX) signals (table shown below):

Intersection with the extremum lines or reversal at high-low.

+DM and -DM lines intersection precedes a new trend or strengthens the
prevailing one - it is a very strong signal.
If +DM line is above -DM line, then the trend is bullish, and vice versa.
If lines diverge then the ADX value increases and the trend becomes stronger,
and vice versa.
If the ADX is below 20, then the trend is very weak.

+DM . /. .
ADX Trend Buy/Sell
-DM
Very low Weak -
Falling Loses strength -
Higher Buy
Rises Becomes stronger
Lower Sell
Forms local Higher Buy
A new one
low Lower Sell
Chances for a reversal are Take profit on some open
Very high
great positions
Forms local Market is overbought /
high oversold

Oscillators
o Bullish Divergence / Bearish
Convergence
Main principles of oscillators analysis
Oscillators are used to:

Determine the strength of the prevailing trend.

Determine when to open a position in a flat market.

To define if the trend is weak, use bullish divergence / bearish convergence.

Bullish divergence occurs when a new price high is not confirmed by a new oscillator high, i.e the
next high is above the preceding one and the next oscillator high is lower than the preceding one. This
implies that the uptrend is weak:

Bearish convergence occurs when a new bottom is not confirmed by a new oscillator bottom, i.e.
every next bottom is lower than the preceding one and every next oscillator bottom is higher than the
preceding one. This signals that the downtrend is weak:
Both bullish divergence and bearish convergence, however, show that it is better to refrain from
opening a position against the weakening trend. Trend is valid until reversal signals appear.

It is important to be more careful with oscillators when the trend is strong; often false oscillator signals
indicate the strength of the trend. If it is an uptrend then most of the time oscillators are in the
overbought area, if it is a downtrend, they are in the oversold area. Overbought and oversold levels
have to be defined for each indicator individually.

In the figures above Relative Strength Index (RSI) is used as an oscillator. If the indicator is above 70
then it is in the overbought area, if it is below 30 then it is in the oversold area.

When the trend is strong, the oscillator can be in the overbought (oversold) area for a long time and
then it can exit the area but the trend will still be valid.

When the oscillator penetrates the overbought (oversold) area for the second time and then quickly
goes back forming a bullish divergence/bearish convergence, there is a high chance that the trend will
weaken.

Where the market is flat, it may be time to open a position once the oscillator leaves the overbought
(oversold) area. Confirmation of the signal appears when the price is close to the upper (lower) border
of the trading range.

Bullish divergence
Here the price is above and oscillator is below:
Medium signal

The price may rise if the oscillator is within the lower range.

The price may fall if the oscillator is in the middle.

Strong signal

Trend reversal or price consolidation followed by a trend reversal.

Medium signal

Trend may strengthen if the oscillator is close to the lower border.

Price consolidation is possible if the oscillator is close to the upper border.

Both a price increase and price consolidation are possible if the oscillator is in the middle.

Bearish convergence
Here the price is above and oscillator is below:

Medium signal
The price may fall if the oscillator is within the upper range.

The price may stabilize if the oscillator is in the middle.

Strong signal

Trend reversal or price consolidation followed by trend reversal.

Medium signal

The trend may strengthen if the oscillator is within the upper range.

The price may rise if the oscillator is within the lower range.

Both a price decrease and consolidation is possible if the oscillator is in the middle.

Parallel lines
Here the price is above and oscillator is below:

Medium signal
Strong uptrend

Strong signal

Trend may reverse soon.

Medium signal

Strong downtrend.

Oscillators
o Momentum Indicator
The Momentum indicator value is defined as the difference between price levels after a specified time
period. If for example we take a period of 5, then the Momentum oscillator will be defined as the
difference between the current close and the close 5 bars earlier. All negative and positive values are
displayed on the chart with a zero line in the middle.

In MetaTrader 4, the Momentum indicator is defined not as the difference, but the correlation between
the current price and the price n periods before:

MOMENTUM = CLOSE (i) / CLOSE (i - n) * 100

Where:

CLOSE (i) current bar close;

CLOSE (i - n) close n bars before.

Momentum signals:

if the indicator is below 100, then the market is bearish;

if above 100 then the market is bullish;
if the indicator is around 100, it signifies a flat market;
bullish divergence / bearish convergence- the main signal of the weakness of
the prevailing trend;
in a flat market, exit from the overbought (oversold) areas is a signal to sell
(buy).
In order to add Momentum indicator to the active chart in MetaTrader 4, use the "Insert -> Indicators
-> Oscillators -> Momentum" menu sequence.

Bullish divergence / bearish convergence is the main Momentum signal:

Main Momentum signal

Oscillators
o Commodity Channel Index (CCI)
Commodity Channel Index (CCI) measures the price deviation of a particular instrument from its
average traded price.

A very high index value (more than +100) indicates that the price is in the overbought area, and a very
low value (lower than -100) indicates that the price is in the oversold territory.

Commodity Channel Index (CCI) calculations:

1) Find a typical price: add high, low and close of each bar and divide it by 3:
TP = (HIGH + LOW + CLOSE) / 3
2) Calculate the simple moving average of the typical prices over n-periods:
SMA (TP, N) = SUM (TP, N) / N
3) Subtract SMA(TP, N) from the typical prices ( TP) of each preceding n
periods:
D = TP - SMA (TP, N)
4) Calculate simple moving average of the absolute D values over n periods:
SMA (D, N) = SUM (D, N) / N
 5) Multiply SMA (D, N) by 0,015:
M = SMA (D, N) * 0,015
6) Divide M by D:
CCI = M / D

Where:

HIGH - bar high;

LOW - bar low;
CLOSE - close price;
SMA - simple moving average;
SUM - total amount;
N - the number of periods used for the calculation.

Commodity Channel Index (CCI) signals:

Bullish divergence / bearish convergence is the main signal. In distinction

from other oscillators, Commodity Channel Index (CCI) is the most sensitive
one, hence divergence / convergence is not always a signal of the weakness of
the trend, but always quite accurately defines the beginning of the correction;
Under flat conditions exit from the overbought / oversold territory is a sell
(buy) signal.

In order to add the Commodity Channel Index (CCI) indicator in MetaTrader 4, use the "Insert
->Indicators -> Trend -> Commodity Channel Index" menu sequence.

Examples of CCI's bullish divergence / bearish convergence

 Oscillators
o Relative Strength Index (RSI)
Relative Strength Index (RSI) was developed by J. Welles Wilder in 1978. Nowadays, it is considered
to be the most popular oscillator.

Relative Strength Index (RSI) formula:

RSI = 100 - (100 / (1 + U / D))

Where:

U - average value of the positive price changes over a period;

D - average value of the negative price changes over a period.

The most frequently used time periods are 8 and 14.

RSI indicator is considered overbought if it is above the 70 level, and oversold if it is below the 30
level.

Relative Strength Index (RSI) signals:

If the indicator is below the 50 line, then the market is considered to be

bearish;
If above the 50 level - bullish;
If the indicator is around the 50 line it signals that the market is flat;
Bullish divergence / bearish convergence the main signal of the trend
weakness;
Under flat conditions exit from the overbought (oversold) territory is a signal
to sell (buy);
Different types of the trend analysis can be used to analyze Relative Strength
Index (RSI): trend lines, support / resistance levels, chart reversal and
continuation patterns.

The figure below, for example, shows that the trend line on RSI being broken several bars before the
analogical line on the price chart:
In order to add the Relative Strength Index (RSI) indicator in Metatrader 4, use the "Insert ->
Indicators -> Oscillators -> Relative Strength Index" menu sequence.

Oscillators
o Stochastic Oscillator
The aim of the Stochastic Oscillator is to determine price behaviour and reversals by monitoring close
prices within recent highs and lows. The method is based on the observation that when prices are rising
their close levels tend to be closer to the top. If the quotes tend to move downwards, the close is usually
near the bottom.

Stochastic Oscillator consists of two %K and %D lines calculated as follows:

%K = (CLOSE - MIN (LOW (%K))) / (MAX (HIGH (%K)) - MIN (LOW (%K))) * 100

Where:

CLOSE current close price;

MIN (LOW (%K)) the lowest bottom within the number of %K periods;
MAX (HIGH (%K)) the highest top within the number of %K periods.

%D = MA (%K, N)

Where:

N smoothing period;
MA moving average.
To add Stochastic indicator in MetaTrader 4 use the "Insert -> Indicators -> Oscillators -> Stochastic
Oscillator menu sequence. The window with the settings will appear:

Stochastic Oscillator Settings

%K period - number of bars used for Stochastic Oscillator calculation,

Slowdown - the degree of %K line inner smoothing. Value 1 gives a quick
Stochastic Oscillator and value 3 a slow one,
%D period - the moving average period along the %K line. It is used for %D
calculation,
MA method - the %K line smoothing method (exponential, simple, smoothed,
linear weighted) used for %D calculation.

Once the Stochastic Oscillator parameters have been set and the OK button has been pressed, the
indicator appears under the price chart:
Stochastic Oscillator analysis

The %K line is usually displayed as a solid line and %D as a dashed line. At the level of 80% and 20%
the overbought areas (higher than 80%) and oversold areas (lower than 20%) are indicated. Stochastic
signals from these areas are considered to be more significant.

These are several basics of the Stochastic Oscillator analysis:

Bullish divergence / bearish convergence is the main signal that shows that the
current trend is weak;
If the solid line (%K) crosses the dashed line (%D) from below this is a signal
to buy; if the solid line (%K) crosses the dashed line (%D) from above this is a
signal to sell;
Two sequential opposite intersections of %K and %D lines mean that the first
signal was premature and that the previous, stronger price movement may
resume;
If both lines move in the same direction then they move in the trend direction;
In a flat market, exit from the overbought (oversold) area is a signal to sell (to
buy).

Oscillators
o Force Index
Force Index oscillator was developed by Alexander Elder. Its main function is to measure bullish forces
during each upward movement and bearish forces during each downward movement.

The force of each market movement is defined by its trend, range and volume:

If the close of the current bar is higher than that of the previous bar, the force
is positive.
If the current close is lower than the previous one, the force is negative.
The greater the range, the greater the force.
The greater the volume, the greater the force.

Force Index formula:

RAW FORCE INDEX = VOLUME (i) * (CLOSE (i) - CLOSE (i - 1))

FORCE INDEX = MA (RAW FORCE INDEX, N)

Where:

VOLUME (i) - the volume of the current bar;

CLOSE (i) - close price of the current bar;
CLOSE (i - 1) - close price of the previous bar;
MA - any moving average: simple, exponential or linear weighted;
N - smoothing period.
Smoothing by a short moving average (2 period) helps to find favourable moments to open and close
positions. If smoothing is made by a long moving period (e.g. 13-period) the Force Index oscillator
reveals if the trend has changed or not.

The main Force Index oscillator signal is a bullish divergence / bearish convergence:

Force Index

To add Force Index in MetaTrader 4 use the "Insert -> Indicators ->
Oscillators -> Force Index" menu sequence.

Oscillators
o Relative Vigor Index (RVI)
The Relative Vigor Index (RVI) calculation is based on the idea that in a rising market the closing price
is usually higher than the opening price, and in a bearish market the closing price is usually below the
opening price.

To normalize the index the price fluctuation is divided by the maximum price range within the bar:

Relative Vigor Index (RVI) formula:

RVI = (CLOSE - OPEN) / (HIGH - LOW)

Where:

OPEN - open price;

HIGH - the highest price;
LOW - the lowest price;
CLOSE - close price.

To eliminate occasional price fluctuations (so called "noise") the Relative Vigor Index (RVI) oscillator
is smoothed by the 10-period simple moving average. A signal line is also formed as a 4-period moving
average on the oscillator values.

The basic signals of Relative Vigor Index (RVI) are:

Bullish divergence / bearish convergence - the main signal pointing to the

weakness of the current trend;
A good moment to open a sell / buy position is the crossing of the RVI line by
the signal line from above/below once the bullish divergence / bearish
convergence has appeared on the chart;
In a flat market an exit from the overbought / oversold area is a signal to sell /
buy.

To add Relative Vigor Index in MetaTrader 4 use the "Insert -> Indicators -> Oscillators -> Relative
Vigor Index" menu sequence.
How to use Relative Vigor Index (RVI)

Oscillator
o Williams Percent Range (R)
The values of the Williams Percent Range (%R) oscillator lie between 0 and 100.

If the oscillator is between 80% to 100%, it denotes an oversold condition, whereas values in the range
from 0% to 20% signify an overbought condition.

The formula to calculate Williams Percent Range oscillator is similar to the one used to calculate the
Stochastic Oscillator:

%R = (MAX (HIGH (i - n)) - CLOSE (i)) / (MAX (HIGH (i - n)) - MIN (LOW (i - n))) * 100

Where:

CLOSE (i) - the current close price;

MAX (HIGH (i - n)) - the highest top over the previous n periods;
MIN (LOW (i - n)) - the lowest bottom over the previous n periods.

Williams Percent Range (%R) oscillator signals:

bullish divergence / bearish convergence the main signals that point to the
weakness of the current trend;
in a flat market an exit from the overbought / oversold area is a signal to sell /
buy.
To add Williams Percent Range index in MetaTrader 4 use the "Insert -> Indicators -> Oscillators ->
Williams Percent Range, %R" menu sequence.

Williams Percent Range index

Oscillators
o Average True Range (ATR)
Average True Range (ATR) is a market volatility index developed and described by W. Wilder in his
book "New concepts of the technical trading systems".

True Range is the greatest among three following volumes:

the difference between the top and the bottom of the current bar;
the difference between the close of the previous bar and the top of the current
bar;
the difference between the close of the previous bar and the low of the current
bar.

Average True Range (ATR) is the moving average of the true range values. To add Average True Range
index in MetaTrader 4 use the "Insert -> Indicators -> Oscillators -> Average True Range" menu
sequence:
The Average True Range (ATR)

Average True Range (ATR) oscillator analysis basics:

The greater the oscillator value, the greater the possibility for trend reversal.
The smaller the value the weaker the trend.

Oscillator
o Ichimoku Kinko Hyo
The Ichimoku Kinko Hyo charting technique was developed by the Japanese analyst Hosoda, who
wrote under the name of "Ichimoku Sanjin".

The Ichimoku Kinko Hyo indicator consists of five lines:

Tenkan-sen - the average price level, (High+Low)/2, calculated over the first
time period;
Kijun-sen - the average price level over the second time period;
Senkou Span A / Up Kumo - midway between Tenkan-sen and Kijun-sen,
shifted forward for the length equal to the second time period;
Senkou Span B / Down Kumo - the average price level over the third time
period, shifted forward for the length equal to the second time period.
Chinkou Span - current bar close, shifted backward for the length equal to the
second time period.
Ichimoku Kinko Hyo

The "cloud" known as the "Kumo", is the space between "Senkou Span A" and "Senkou Span B".

If the price stays above the cloud then there is an upward trend.
If it stays below the cloud then there is a downward trend.
If the price is within the cloud then the market is flat.
If Tenkan-sen line moves sideways then it is a signal for a flat market.

In order to add Ichimoku Kinko Hyo indicator in MetaTrader 4, use "Insert ->Indicators-
>Oscillators->Ichimoku Kinko Hyo" menu sequence.

Ichimoku Kinko Hyo indicator signals:

When the price exits the cloud downward it is a sell signal, upward buy
signal:
Exit from the cloud

The price ranges before and after the cloud are often the same.
When the price and Chinkou Span (green line) intersect it is a signal to place a
trade. If Chinkou Span crosses the price line from below it is a buy signal, if it
crosses from above it is a sell signal:
Price and Chinkou Span cross

If Tenkan-sen (red line) crosses Kijun-sen (blue line) from above it is a sell
signal, and vice versa:

Tenkan-sen and Kijun-sen cross

When the price is inside the cloud it tends to move in the direction of Tenkan-
sen line (red line). If the Tenkan-sen line is directed downwards then the price
ends to move to the lower edge of the cloud and vice versa:


Tenkan-sen and Kijun-sen cross

Kijun-sen (blue line) and cloud edges are very strong resistance/support levels

Volume Indicators:
o Overview
Absolute volume values on the foreign exchange market are unattainable even for government funded
statistical organisations, so in order to estimate buying or selling pressure in FOREX we use tick
volume, i.e. the total number of quotes for the specified time period. It is worth mentioning that in
practice, absolute foreign exchange market liquidity tick volume values follow the number of total
trades in absolute units.

The main principles of using volume indicators:

when volume decreases it means that there is less interest, so it may be time
for a reversal or price consolidation;
when volume increases it means that there is more interest, so it may
strengthen the prevailing trend or a new trend may appear;
sometimes gradual decreasing in volume is accompanied by rapid price
movements;
volume highs signal that it may be time for a reversal.

As daily FOREX trading volumes are pretty much at the same levels, and with intra-day trading
volumes dependant on the time of day (during the Japanese session trading volume is at its lowest
levels, but when the American session opens and the European session still continues trading, volume
is at the highest levels), it is more advisable to use volume indicators only for short time periods (less
than an hour), and which cover price behavior within one trading session (Japanese, European or
American).

Volume Indicators
o On Balance Volume (OBV)
On Balance Volume (OBV) was developed by Joseph Granville. This indicator compares volume to
price movements. Final bar volume is positive if the bar close price is higher than the close price of the
preceding bar and vice versa. Cumulative value is calculated by adding and deducting volume
depending on the movements of the closing price.

On Balance Volume (OBV) indicator

On Balance Volume (OBV) formula:

1) If the current close price is above the preceding one, then:

OBV (i)= OBV (i-l)+VOLUME (i)
2) If the current close price is below the preceding one, then:
OBV (i)= OBV (i-l)- VOLUME (i)
3) If the current close price is at the same level as the preceding one, then:
OBV (i)= OBV (i-l)

Where:

OBV (i) - On Balance Volume (OBV) indicator current value;

OBV (i-l) - On Balance Volume (OBV) indicator value in the preceding
period;
VOLUME (i) - current bar volume.

Note that On Balance Volume (OBV) indicator interpretation is based on the direction of the curve and
not actual values:

If a new price high is confirmed by a new On Balance Volume (OBV)

indicator high it means that the bullish trend is strong.
If a new price bottom is confirmed by a new On Balance Volume (OBV)
indicator bottom it means that the bearish trend is strong.
Bullish divergence (bearish convergence) warns of the weakness of the
downtrend (uptrend).
A breakout of the trend line drawn on the On Balance Volume (OBV) indicator
warns of a breakout of the trend line on the price chart.

In order to add On Balance Volume (OBV) indicator in MetaTrader 4 use the "Insert -> Indicators ->
Volume -> On Balance Volume" menu sequence.
 Volume Indicators
o Money Flow Index (MFI)
Money Flow Index (MFI) is similar to the Relative Strength Index (RSI). It is calculated as follows:

Define a "Typical Price" (TP) for the specified period:

TP = ( HIGH + LOW + CLOSE ) / 3
Calculate "Money Flow" value (MF):
MF = TP x VOLUME
If "Typical Price" is higher than the preceding one then "Money Flow" is
positive. If "Typical Price" is lower than the preceding one then "Money
Flow" is negative.
Calculate "Positive Money Flow" and "Negative Money Flow":
"Positive Money Flow" is the total value of all positive money flows for the
specified time period.
"Negative Money Flow" is the total value of all negative money flows for the
specified time period.
"Money Ratio" (MR) is calculated as follows:
MR = POSITIVE MONEY FLOW / NEGATIVE MONEY FLOW
Then using "Money Ratio" calculate "Money Flow Index":
MFI = 100 - ( 100 / ( 1 + MR ) )

Where:

HIGH - current bar top;

LOW - current bar bottom;
CLOSE - current bar close price;
VOLUME - current bar volume.

Overbought territory: 80-100; oversold territory: 0-20.

Use the "Insert -> Indicators -> Volume -> Money Flow Index" menu sequence to add Money Flow
Index (MFI) indicator in MetaTrader 4.

Money Flow Index (MFI) signals:

if a new price high is confirmed by a new indicator high it means that the
bullish trend is strong;
if a new price bottom is confirmed by an indicator bottom it means that the
bearish trend is strong;
bullish divergence warns of the weakness of the uptrend:

Money Flow Index

bearish convergence warns of the weakness of the downtrend.

An Example of Trading Strategy

Volume Indicators- Accumulation /

Distribution
The Accumulation/Distribution indicator tracks the relationship between price and volume. The basic
premise behind the indicator is that higher-volume moves in price are given greater emphasis than
lower-volume moves (over the specified period of time).

If the bar close is near to its high, then part of volume is added to the Accumulation/Distribution
indicator value (the closer the price the more percentage of volume is added). If the bar close is near its
low, then part of volume is deducted from Accumulation/Distribution (the closer the price the more
percentage of volume is deducted). If the closing price is halfway between the bar high and low, then
the value of the indicator is unchanged:
Accumulation / Distribution (A/D) indicator formula:

A/D = SUM (((CLOSE-LOW)-(HIGH-CLOSE))x VOLUME/(HIGH-

LOW),N)

Where:

CLOSE - a closing price.

LOW - bar bottom.
HIGH - bar top.
N - the number of periods which are used for calculations.
SUM (...,N) - the amount for N periods.
Accumulation / Distribution (A/D) indicator is similar in most aspects to the On Balance Volume
(OBV) indicator but it is more complex. Accumulation / Distribution indicator signals are also similar
to those of the OBV indicator:

If a new price high is confirmed by a new Accumulation / Distribution (A/D)

indicator high this means that the bullish trend is strong.
If a new price bottom is confirmed by a new Accumulation / Distribution
(A/D) bottom this means that the bearish trend is strong.
Bullish divergence warns of the weakness of the uptrend.
Bearish convergence warns of the weakness of the downtrend.
A breakout of the trend line drawn on Accumulation / Distribution (A/D)
indicator warns of the high possibility of a breakout of the trend line on the
price chart.

In order to add Accumulation/Distribution (A/D) indicator to the chart in MetaTrader 4 use the Insert-
>Indicators->Volumes->Accumulation Distribution menu sequence.

An Example of Trading Strategy

Elder Ray IndicatorElder Ray indicator is a mechanical trading

system which measures buying and selling pressure over
a specified period of time.

Elder Ray indicator

The calculation is based on the following principles:

Price is an agreement between sellers, buyers and square traders.

The Moving Average is the averaged price agreement.
The highest price is the maximum of the bullish force over a specified period
of time.
The lowest price is the maximum of the bearish force over a specified period
of time.

Elder Ray consists of three horizontal screens:

A chart with a 13-period exponential moving average. When the moving

average rises there is a bullish trend. When the moving average falls there is a
bearish trend.
A chart with a histogram of the Bullish Force.
A chart with a histogram of the Bearish Force.

Bullish / Bearish Force is calculated as follows:

Bull Power = High-EMA

Bear Power= Low-EMA

where
 High - the maximum price over the period;
Low - the minimum price over the period;
EMA - exponential moving average.

If the price top is higher than the moving average, then the Bullish Force is above zero, so the bullish
trend is confirmed. Otherwise, bulls are weak. If the price low is below the moving average this means
that the downtrend is very strong. In this case, the bears are weak.

Elder Ray Buy signals

Moving average rises and Bullish Force indicator is below zero. The best time
to buy is when the Bearish Force first falls below zero and then immediately
rises.
If new price highs are confirmed by new Bullish Force indicator highs, then it
is a good confirmation of the bullish trend.
Bearish convergence is another strong signal.

Elder Ray Sell signals

Moving average moves downward and Bullish Force is above zero.
Bearish trend is confirmed if the price lows and Bearish Force indicator lows
move downward in parallel.
Bullish divergence is another strong signal.

Moving Average shows the direction of a deal, and when the price approaches the moving average it is
time to enter the market.