Technical analysis is the study of financial market action.

The technician looks at price

changes that occur on a day-to-day or week-to-week basis or over any other constant time
period displayed in graphic form, called charts. Hence the name chart analysis.
A chartist analyses price charts only, while the technical analyst studies technical indicators
derived from price changes in addition to the price charts.
Technical analysts examine the price action of the financial markets instead of the
fundamental factors that (seem to) effect market prices. Technicians believe that even if all
relevant information of a particular market or stock was available, you still could not predict
a precise market "response" to that information. There are so many factors interacting at any
one time that it is easy for important ones to be ignored in favour of those that are considered
as the "flavour of the day." The technical analyst believes that all the relevant market
information is reflected (or discounted) in the price with the exception of shocking news such
as natural disasters or acts of God. These factors, however, are discounted very quickly.
Indicators:
1.
2.
3.
4.
5.

Relative Strength Index (RSI)

Moving Average
Parabolic SAR
Stochastics
Moving Average Convergence/Divergence (MACD)

Oscillators
Relative Strength Index (RSI):
The RSI is part of a class of indicators called momentum oscillators.
This is a powerful indicator that signals buying and selling opportunities ahead of the market.
RSI for a share is calculated by using the following formula,

The

most
commonly
used time
period for the calculation of RSI is 14 days. For the calculation a 14 days RSI, the gain per
day or loss per day is arrived at by comparing the closing price of a day with that of the

previous say for a period of 14 days. The gains are added up and divided by 14 to get the
average gain per day. Similarly, the losses are added up and divided by 14 to get the average
loss per day. The average gain per day and the average loss per day are used in the above
formula for calculating the RSI for a day. In this way RSI value can be calculated for a
number of days.
The parameters used for identifying the trends:
When RSI Crosses 70 mark line, it signifies a bullish market ahead for scrip.
As soon as RSI crosses 70 mark line, it signifies the overbought market. Now it is
expected that the peak will be touched.
When RSI declines after touching the peak it signifies the bearish market ahead.
When RSI crosses 70 mark line from upward and continuously declines, buy has not
reached 30 mark line it signifies the bearish market.
As soon as RSI Crosses 30mark line from upward, it signifies the oversold market.
Now it is expected that the bottom will be touched soon. This is the early signal of
bullish market.
When RSI is above 30 nark line and progressing toward 70 mark, it signifies a bullish
marks.

Stochastics:
The Stochastic indicator was developed by George Lane. It compares where a securitys price
closes over a selected number of period. The most commonly 14 periods stochastic is used.
The Stochastic indicator is designated by %K which is just a mathematical representation

of a ratio.

For example, if todays close is 50 and high and low over last 14 days is 40 and 55
respectively then,

Finally these values are multiplied by 100 to change decimal value into percentage for better
scaling.
This 0.666 signies that todays close was at 66.6% level relative to its trading range over last
14 days.
A moving average of %K is then calculated which is designated by %D. The most commonly
3 periods %D is used.
The stochastic indicator always moves between zero and hundred, hence it is also known as
stochastic oscillator. The value of stochastic oscillator near to zero signies that todays close
is near to lowest price security traded over a selected period and similarly value of stochastic
oscillator near to hundred signies that todays close is near to highest price security traded
over a selected period.
Interpretation of Stochastic Indicator
Most popularly stochastic indicator is used in three ways
a. To dene overbought and oversold zone- Generally stochastic oscillator reading above 80
is considered overbought and stochastic oscillator reading below 20 is considered oversold. It
basically suggests that
One should book prot in buy side positions and should avoid new buy side positions in an
overbought zone.
One should book prot in sell side positions and should avoid new sell side positions in an
oversold zone
b. Buy when %K line crosses % D line (dotted line) to the upside in oversold zone and sell
when %K line crosses % D line (dotted line) to the downside in overbought zone
c. Look for Divergences- Divergences are of two types i.e. positive and negative.
Positive Divergence-are formed when price makes new low, but stochastic oscillator fails to
make new low. This divergence suggests a reversal of trend from down to up.
Negative Divergence-are formed when price makes new high, but stochastic oscillator fails to
make new high. This divergence suggests a reversal of trend from up to down

MOVING AVERAGE
In statistics, a moving average (rolling average or running average) is a calculation to analyze
data points by creating a series of averages of different subsets of the full data set. It is also
called a moving mean (MM) or rolling mean and is a type of finite impulse response filter.
Variations include: simple, and cumulative, or weighted forms
A moving average is commonly used with time series data to smooth out short-term
fluctuations and highlight longer-term trends or cycles. The threshold between short-term and
long-term depends on the application, and the parameters of the moving average will be set
accordingly. For example, it is often used in technical analysis of financial data, like
stock prices, returns or trading volumes. It is also used in economics to examine gross
domestic product, employment or other macroeconomic time series. Mathematically, a
moving average is a type of convolution and so it can be viewed as an example of a low-pass
filter used in signal processing. When used with non-time series data, a moving average
filters higher frequency components without any specific connection to time, although
typically some kind of ordering is implied. Viewed simplistically it can be regarded as
smoothing the data.
MACD:
MACD stands for Moving Average Convergence / Divergence. It is a technical analysis
indicator created by Gerald Appel in the late 1970s. The MACD indicator is basically a
renement of the two moving averages system and measures the distance between the two
moving average lines.
The MACD does not completely fall into either the trend-leading indicator or trend following
indicator; it is in fact a hybrid with elements of both. The MACD comprises two lines, the
fast line and the slow or signal line. These are easy to identify as the slow line will be the
smoother of the two.
The importance of MACD lies in the fact that it takes into account the aspects of both
momentum and trend in one indicator. As a trend-following indicator, it will not be wrong for
very long. The use of moving averages ensures that the indicator will eventually follow the

movements of the underlying security. By using exponential moving averages, as opposed to

simple moving averages, some of the lag has been taken out. As a momentum indicator,
MACD has the ability to foreshadow moves in the underlying security. MACD divergences
can be key factors in predicting a trend change. A negative divergence signals that bullish
momentum is going to end and there could be a potential change in trend from bullish to
bearish. This can serve as an alert for traders to take some prots in long positions, or for
aggressive traders to consider initiating a short position.
MACD can be applied to daily, weekly or monthly charts. The MACD indicator is basically a
renement of the two moving averages system and measures the distance between the two
moving average. The standard setting for MACD is the difference between the 12 and
26period EMA. However, any combination of moving averages can be used. The set of
moving averages used in MACD can be tailored for each individual security. For weekly
charts, a faster set of moving averages may be appropriate. For volatile stocks, slower
moving averages may be needed to help smooth the data. No matter what the characteristics
of the underlying security, each individual can set MACD to suit his or her own trading style,
objectives and risk tolerance.
MACD generates signals from three main sources:
Moving average crossover
Centreline crossover
Divergence
Crossover of fast and slow lines
The MACD proves most effective in wide-swinging trading markets. We will first consider
the use of the two MACD lines. The signals to go long or short are provided by a crossing of
the fast and slow lines. The basic MACD trading rules are as follows:
Go long when the fast line crosses above the slow line.
Go short when the fast line crosses below the slow line.
Centreline crossover
A bullish centreline crossover occurs when MACD moves above the zero line and into
positive territory. This is a clear indication that momentum has changed from negative to

positive or from bearish to bullish. After a positive divergence and bullish moving average
crossover, the centreline crossover can act as a conrmation signal. Of the three signals,
moving average crossover are probably the second most common signals.
A bearish centreline crossover occurs when MACD moves below zero and into negative
territory. This is a clear indication that momentum has changed from positive to negative or
from bullish to bearish. The centreline crossover can act as an independent signal, or conrm
a prior signal such as a moving average crossover or negative divergence. Once MACD
crosses into negative territory, momentum, at least for the short term, has turned bearish.
Divergence
An indication that an end to the current trend may be near occurs when the MACD diverges
from the security. A positive divergence occurs when MACD begins to advance and the
security is still in a downtrend and makes a lower reaction low. MACD can either form as a
series of higher lows or a second low that is higher than the previous low. Positive
divergences are probably the least common of the three signals, but are usually the most
reliable and lead to the biggest moves. A negative divergence forms when the security
advances or moves sideways and MACD declines. The negative divergence in MACD can
take the form of either a lower high or a straight decline. Negative divergences are probably
the least common of the three signals, but are usually the most reliable and can warn of an
impending peak.
To Summarize
The MACD is a hybrid trend following and trend leading indicator.
The MACD consists of two lines; a fast line and a slow signal line.
A long position is indicated by a cross of the fast line from below to above the slow line.
A short position is indicated by a cross of the fast line from above to below the slow line.
MACD should be avoided in trading markets
The MACD is useful for determining the presence of divergences with the price data.
Parabolic SAR:
Parabolic SAR Forex trading strategy is a rather risky system that is based on direct
signals of the Parabolic SAR indicator, which shows stop and reverse levels.

Features
Simple to follow.
Only one standard indicator used.
Entry and exit conditions are given directly by the indicator.
Indicator lag.
Very risky.
Strategy Set-Up
1. Any currency pair and timeframe should work.
2. Add a Parabolic SAR indicator to the chart, set its step to 0.05 and maximum to 0.2.
Entry Conditions
Enter Long position when the current price touches the indicator from below and it changes
its direction. Enter Short position when the current price touches the indicator from above
and it changes its direction.
Exit Conditions
Set stop-loss directly at the indicator level above the price for Short positions and below
the price for Long positions. Adjust stop-loss with each new bar. Take-profit should be set to
the same value as stop-loss but you shouldn't adjust it.