Fibonacci part-2
I may continue with Fibonacci part -2 if time permits .. next with using moving averages ., trend lines and price action.
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moving averages
Types of Moving Averages
There are several types of moving averages available to meet differing market analysis needs. The most commonly used by traders include the following:
Simple Moving Average
Weighted Moving Average
Exponential Moving Average
SIMPLE MOVING AVERAGE (SMA)
A simple moving average is the most basic type of moving average. It is calculated by taking a series of prices (or reporting periods), adding these prices together and then dividing the total by the number of data points.
This formula determines the average of the prices and is calculated in a manner to adjust (or "move") in response to the most recent data used to calculate the average.
For example, if you include only the most recent 15 exchange rates in the average calculation, the oldest rate is automatically dropped each time a new price becomes available.
In effect, the average "moves" as each new price is included in the calculation and ensures that the average is based only on the last 15 prices.
With a little trial and error, you can determine a moving average that fits your trading strategy. A good starting point is a simple moving average based on the last 20 prices.
WEIGHTED MOVING AVERAGE (WMA)
A weighted moving average is calculated in the same manner as a simple moving average, but uses values that are linearly weighted to ensure that the most recent rates have a greater impact on the average.
This means that the oldest rate included in the calculation receives a weighting of 1; the next oldest value receives a weighting of 2; and the next oldest value receives a weighting of 3, all the way up to the most recent rate.
Some traders find this method more relevant for trend determination especially in a fast-moving market.
The downside to using a weighted moving average is that the resulting average line may be "choppier" than a simple moving average. This could make it more difficult to discern a market trend from a fluctuation. For this reason, some traders prefer to place both a simple moving average and a weighted moving average on the same price chart.
EXPONENTIAL MOVING AVERAGE (EMA)
An exponential moving average is similar to a simple moving average, but whereas a simple moving average removes the oldest prices as new prices become available, an exponential moving average calculates the average of all historical ranges, starting at the point you specify.
For instance, when you add a new exponential moving average overlay to a price chart, you assign the number of reporting periods to include in the calculation. Let's assume you specify for the last 10 prices to be included.
This first calculation will be exactly the same as a simple moving average also based on 10 reporting periods, but when the next price becomes available, the new calculation will retain the original 10 prices, plus the new price, to arrive at the average.
This means there are now 11 reporting periods in the exponential moving average calculation while the simple moving average will always be based on just the most recent 10 rates.
DECIDING ON WHICH MOVING AVERAGE TO USE
To determine which moving average is best for you, you must first understand your needs.If your main objective is to reduce the noise of consistently fluctuating prices in order to determine an overall market direction, then a simple moving average of the last 20 or so rates may provide the level of detail you require.If you want your moving average to place more emphasis on the latest rates, a weighted average is more appropriate.Keep in mind however, that because weighted moving averages are affected more by the latest prices, the shape of the average line could be distorted potentially resulting in the generation of false signals.When working with weighted moving averages, you must be prepared for a greater degree of volatility.
Moving averages – whether simple, weighted, or exponential – are all lagging indicators. This means that they are based on events that have already occurred in the market as opposed to predictive indicators used to form an opinion on future market direction.
While it is true that moving averages lag behind the spot rate, their real contribution is helping to determine the strength of the current market trend and to distinguish true market reversal points from typical exchange rate fluctuations.
Moving Average Crossover
The moving average crossover occurs when a faster or shorter moving average crosses over a slower or longer moving average. a moving average is an indicator used in technical analysis that shows the average value of a security’s price over a set period of time. This average tracks the trends of a security by smoothing out daily fluctuations or “noise” that can confuse interpretation of the financial markets.
When moving averages move through each other, or crossover each other, it provides trading signals that technical analysts call “moving average crossovers.” The fast moving average is the average formed by the shorter period, whereas the slow moving average is the average formed by the longer period. As the changes in price occur over time, the “fast” moving average moves upward or downward, reflecting the price, and it does this quicker than the “slow” moving average. As a result of these upward or downward movements, the moving averages crossover each other providing trading signals to the investor.
When the shorter-term moving average crosses “below” the longer-term moving average, this creates a “sell” signal (bearish signal). Conversely, when the shorter-term moving average crosses “above” the longer-term moving average, this creates a “buy” signal (bullish signal). Basically, a moving average crossover indicates a change in trend.
When looking at the speed of the systems when using the moving average crossover, the numbers of signals that are generated depend on the length of the moving averages. Typically, shorter moving average systems will be faster and will generate more signals for early entry into the markets. However, they also tend to generate more false signals than systems using longer moving averages. Due to this, and other reasons, it is very important that traders use this method in conjunction with other technical analysis tools and indicators.
Example:
Fibonacci retrachment – ma crossover trading:-
Take any MA crossover sma,ema,wma ., in following chart of nifty future I hv taken 5/21 ema .
…as posted on chart take recent low and high for Fibonacci prior to crossover.
Here high is 5990 11th march/low is 5805.05 14th march 2013.
Uptrend Levels / Downtrend Levels23.8 % / / 23.8 % /
38.2 % / / 38.2 % /
50 % / / 50 % /
61.8 % / / 61.8 % /
127 % / / 127 % /
162 % / / 162 % /
262 % / / 262 % /
362 % / / 362 % /
Looking at the fibo numbers we may take trade with sl at 15th march low 5880 ., since crossover took place after breaching 5880 .. and as per fibo numbers 61.8% at 5875.70 next downside target as per fibo around 127%( 5755) and importantly at 162% (5690.75) and 262% (5505.80) suppose you hv taken trade at 5855 and book profit at 5690 your tsl comes at 127% 5755 and you may wait for next target to achieve. But as per the method of trading with ma crossover and fibo …check for prior upside crossover which took place on 27-11.2012 at approximate price at 5650 so it is better to trade here with caution., in most of the cases price may try to touch again 61.8% at 5875 .if price moves higher keep sl at prior candle low of upside crossover…here 26.11.2012 candle low at 5629. as a example pls see nf chart 28.02.2013 reversal around prior crossover of 27.11.2012. this method can be used in any tf with whatever moving averages sma ema wma and or combination one uses to trade crossover.
Chart posted below for ready reference:-
EOD CHART OF NIFTY FUTURE 1-M
Video :-
Learn the SECRET to trading Fibonacci
http://www.youtube.com/watch?v=aAiJ7oGGdsU
Fibonacci trading –
http://www.youtube.com/watch?v=_1BApTGzo2A
Will continue with trend lines and its relation with Fibonacci…later.
nsinojia