How Do I Read the Stochastic Indicator?

Stochastic Indicator is another type of overbought/oversold indicator that is very popular among stock traders and futures traders. This indicator was developed by George Lane in 1960s. George Lane assumed that as the price of an instrument increases, the daily closes tend to be closer to the upper end of the recent price range. On the other hand, as the price decreases, the daily closes tend to be closer to the lower end of the recent price range.
The STOCH is plotted as two lines called %K, a fast line and %D, a slow line. These two lines have the following characteristics: %K line is more sensitive than %D; %D line is a moving average of %K.; and %D line triggers the trading signals. Confused? Deal %K as a fast moving average and %D as a slow moving average. At the 80% and 20% levels, "trigger" lines are normally drawn on stochastic charts. When these lines are crossed, a signal is generated. Stochastic bands are what we call the zones above and below these two lines.
Apply the following formula in order to calculate the stochastic indicator. A scale from 1 to 100 is used to plot the results from the calculations of the formulas below:
%K = [(CCP - LOWn) / (HIGHn - LOWn)]*100
where:
CCP - current closing price
LOWn - the lowest low for the previous n trade periods
HIGHn - the highest high for the previous n trade periods
n- typically it is 14, may also vary. The %K value is 0 when the CCP is the lowest for the last n trade periods. Likewise, the %K value is 100 when the CCP is a highest for the last n trade periods.
%D = SMAn %K
where:
SMAn - simple moving average across n periods; typically n=3
When using Stochastic Indicator, you should be able to determine on how and when to trade.
Overbought / Oversold: The market is in an overbought or oversold mood when one of the stochastic lines crosses the 20% and 80% levels. It means that when the stochastic falls below 20% level then rises above it, then we should buy. And we should sell when the stochastic rises above 80% level then falls below it.
Crossover: The STOCH is plotted as two lines, the %K line and the %D line. They are like two moving averages indicators, one of them is fast and the other is slow. When %K crosses down up the %D, we should buy. But when the %K crossed above down the %D, we sell.
Divergences: There is a good signal for buying or selling the security when there is a divergence between the stochastic lines. The market is weak if prices are making a series of new highs and the stochastic is trending lower.

Simple Moving Average (SMA) and Technical Analysis

One of the easiest methods in Technical Analysis is the Simple Moving Average or SMA. It is the simplest type of all the moving average. The SMA shows the average price of a given time period. And each period carries the same weight for the average. SMA helps to smooth the price curve for better trend identification. In fact, the longer the SMA period selected, the smoother the curve.
Since it is the simplest of all the moving average, the math behind SMA is also simple. The average price of a certain period is represented by SMA and it is calculated by summing up the prices of instrument closure over a certain number of single periods divided by the number of time periods. Take note that short-term averages respond quickly to changes in the price of the underlying, while long-term averages are slow to react.
SMA = SUM (CLOSE (i), N) / N
Where:SUM - sum; CLOSE (i) - current period closing price; N = number of periods in calculation.
For example you want to plot a 5 period simple moving average on a 1-hour chart, you should add up the closing prices for the last 5 hours and then divide it by 5. If you want to plot 5 period simple moving an average on a 30 minute chart, then you should add up the closing prices of the last 150 minutes and divide it by 5. So if you want to develop an SMA chart for USD/JPY closing price in a 5-day time frame, how would you do it?
For example the first 5 days USD/JPY closing prices are 125.0, 124.0, 126.0, 123.0, and 127.0. The average of the first 5 days USD/JPY closing price that will be the first dots of the SMA graph is 125.0. The second SMA point will be (124.0 + 126.0 + 123.0 + 127.0 + 126.0)/5= 125.2 if we assume the USD/JPY closing price for the day six is 126.0. So the calculation goes on for the following dots. And joining these SMA dots defines the SMA chart. In other words, SMA is the average stock price over a certain period of time.
Formula for the 5 period SMA 5 period SMA = (Price1 + Price2 + Price3 + Price4 + Price5) / 5
Simple Moving Average operates with a delay just like any indicator. You are forecasting of the future price, not a concrete view of the future, because you are just taking the averages of the price. Although all calculations will be provided by most charting packages, it is important to understand how simple moving averages are calculated. By understanding, you can decide on which type of tool is best for you.

Forex?

What is it, anyway?The marketThe currency trading (FOREX) market is the biggest and fastest growing market on earth. Its daily turnover is more than 2.5 trillion dollars. The participants in this market are banks, organizations, investors and private individuals, just like you.The goods (merchandise)Markets are places to trade goods, and the same goes with FOREX. The Forex goods are the currencies of various countries. You buy Euro, paying with US dollars, or you sell Japanese Yens for Canadian dollars. That's all.How does one profit in Forex?Obviously, buy cheap and sell for more! The profit potential comes from the fluctuations (changes) in the currency exchange market.The nice thing about the FOREX market, is that regular daily fluctuations, say - around 1%, are multiplied by 100! .
How risky is Forex trading?You cannot lose more than your "margin" (your initial investment)! You may profit unlimited amounts, but you never lose more than what you initially risked. However, risk only what you can afford and is not vital for your well-being.How do I monitor my Forex trading?Online, from anywhere, anytime. You have full control to monitor status, check scenarios, change some terms in the deal, or close it.
Foreign Exchange Market
An informal network of trading relationships between the world's major banks and other market participants, sometimes referred to as the 'interbank' market. The foreign exchange market has no central clearinghouse or exchange, and is considered an over-the-counter (OTC) market.
Spot Market
Market for buying and selling currencies usually for settlement within two business days (the value date). USD/CAD = 1 day.
Rollover
The process whereby the settlement of a transaction is rolled forward to the next value date with the cost of this process being based on the interest rate differential between two currencies. Rollover typically occurs at 5PM EST/10PM GMT. For example, if you open a position on Monday, the settlement date will be Wednesday, however, if you hold this position past rollover cutoff on Monday, the new value date will be Thursday. Most brokers will automatically roll over your open positions, allowing you to hold a position for an indefinite period of time. Depending on your broker's rollover policy, if you are holding a currency with a higher rate of interest in the pair, you will earn credits, however if you are holding a currency with a lower rate of interest in the pair, you will pay it. Current central bank interest rates.
Exchange Rate
The value of one currency expressed in terms of another. For example, if the EUR/USD exchange rate is 1.3200, 1 Euro is worth US$1.3200.

What is Forex

In the international currency exchange market, the currency trader's goal is to earn as much profit as possible as a result of purchasing and selling foreign currencies. Currency exchange rates fluctuate perpetually based on continuous supply and demand by traders in addition to other more significant factors discussed below. Currency traders derive substantial gains by taking advantage of considerable fluctuations in currency price while using the well-known "buy low - sell high" principle. In comparison to all other sectors of the financial world, foreign currency exchange is quite unique in that it is highly sensitive to myriad factors, open access to many classes of investors, high liquidity, and 24 hour access. Such day-long access to foreign exchange allows traders the luxury of dealing after normal hours or even during national holidays in their country of residence. Much as is the case in equity markets, trading currency comes with potential risk and considerably higher potential for ROI. However, in currency trading, as a consequence of the drastic and fluid fluctuations in currency valuation, the potential for risk, as well as return, is exceedingly high. It is essential to become familiar with the factors that affect prices and the levels of risk involved. When beginning to enter the foreign currency exchange arena, it is crucial to prepare, much like a saavy investor spends hours analyzing a stock's fundamentals or technical data before investing in equity. One way to achieve such preparation is to first look at some key factors and recent newsworthy events related to the currencies that one wishes to deal with. In addition, it is also important to use a demo account with "virtual" money in order to get one's feet wet and get a sense for how FOREX really works. Why would you want to learn and experiment with your own capital when you can make mistakes and get some experience by using imaginary capital. You'll minimize your material damage considerably by getting some practical experience in this fashion. If you do your homework, you'll notice that there are many firms out there offering demo accounts on a trial basis to help you get a taste for what it is like to trade foreign currency. Such demo accounts and proprietary software are usually available for free. We wish you the best of luck in your trading endeavors.

Modes of Trade

Trading in the foreign currency market requires considerable skill and knowledge. Those trading for the first time must learn the basic rules carefully. People who wish to experience market forces more strongly and to enjoy the colossal profit-making possibilities, should restrict the risk level in all transactions. Xforex™ offers the best tools for restricting risks, such as an advanced system for carrying out Stop-Losses, and a unique application for giving Take Profit instructions.Market Location The foreign currency markets are located across the globe and are not concentrated in specific locations, as opposed to certain exchanges.Transactions are carried out via internet and by telephone using an "over the counter" method, and without actual handling of money. Rather, transactions are carried out exclusively by means of calculating the differences between the transactions and their realization.

Maximum Flexibility – 3 Forms of TradeThree forms of trade are customarily used in the market:

1. Day Trading
2. Spot Transactions
3. Forward Transactions

Day Trading

Daily trading is a transaction which is opened and closed on the same trading day. Currency exchange rates vary over the course of a trading day.

Spot Transaction

An immediate transaction between a pair of currencies at an agreed rate. The rate according to which the currencies will be exchanged is the rate at the time the transaction was announced. The monies are actually only transferred two trading days after the declaration.

Forward Transaction

A contract for the execution of a purchase transaction or a sale transaction at an agreed future date and at an agreed rate. The rate agreed upon generally includes interest differences for both currencies.

Methods for Analyzing the Foreign Currency Market

The foreign currency market is fascinating and complicated in a way which is unparalleled. The potential for profit is colossal. However, trading requires considerable caution and discipline, and above all:

in order to succeed it requires experience and know-how.

In order to become a successful trader one has first to familiarize oneself with analysis techniques, the data that affects the market and financial management and risk management methods.

There are two main methods for analyzing future market behavior: fundamental analysis and technical analysis.

Fundamental Analysis emphasizes collecting massive amounts of data and examining all the data that affects the market. The most important pieces of information include various economic data concerning markets across the globe. However, one should also consider political, religious, geographical and even climatic events. The method assumes that the more market-related data we have, the better can we forecast its results.

Technical analysis states that all the information required to identify future behavior of a certain currency, including the external factors which the previous method takes into account, are represented on a graph at any given point in time. Thus, one can forecast the behavior of the graph in the future, based on the currency’s fluctuation on the graph up to a particular point.