Programming in Algorithmic Language MQL4

Some Basic Concepts

Thus, the subject of our interest is a program written in MQL4. Before we start a detailed presentation of the rules of writing programs, it is necessary to describe the basic concepts that characterize a program and its interrelations with information environment. The MetaTrader 4 Client Terminal is known to work online. The situation on financial markets changes continuously, this affects symbol charts in the client terminal. Ticks provide the client terminal with information about price changes on the market.

The Notion of Tick

Tick is an event that is characterized by a new price of the symbol at some instant.

Ticks are delivered to every client terminal by a server installed in a dealing center. As appropriate to the current market situation, ticks may be received more or less frequently, but each of them brings a new quote - the cost of one currency expressed in terms of another currency.

An application operating with the client terminal may work within a long period of time, for example, several days or weeks. Each application is executed according to the rules set for programs of a certain type. For example, an Expert Advisor (EA) does not work continuously all the time. An Expert Advisor is usually launched at the moment when a new tick comes. For this reason, we don't characterize tick as just a new quote, but as an event to be processed by the client terminal.

The duration of Expert Advisor's operation depends on what program code is included in it. Normal EAs complete one information-processing cycle during some tenths or hundredths of a second. Within this time, the EA can have processed some parameters, make a trading decision, provide the trader with some useful information, etc. Having finished this part of its work, the EA goes to waiting mode until a new tick comes. This new tick launches the Expert Advisor again, the program makes its appropriate operations again and returns to the waiting mode. The detailed description of how the appearance of a new tick influences program operation follows below.



The Notion of Control


Speaking about the code execution flow in a program, as well as its interaction with the client terminal, we will use the term of 'control'.

Control is a process of carrying out of actions preset by the program algorithm and the client terminal features. Control can be transferred within the program from one code line to another one, as well as from the program to the client terminal.

Control is transferred in a way similar to that of giving someone the floor to speak at a meeting. Like speakers address a meeting and then give the floor to others, the client terminal and the program transfer control to each other. At that, the client terminal dominates. Its status is higher than that of the program, like the authority of the chairman of a meeting is larger than those of an ordinary speaker.

Before the program is launched, the control is under the supervision of the client terminal. When a new tick is received, the client terminal transfers the control to the program. The program code starts to be executed at this moment.

The client terminal, after it has transferred the control to the program, does not stop its operation. It continues working with maximum performance during the entire period of time it is launched on PC. The program can only start operating at the moment when the client terminal has transferred control to it (like the chairman of a meeting controls the meeting all the time it is going on, whereas the current speaker takes the word for only a limited period of time).

After it has completed its operation, the program returns control to the client terminal and cannot be launched by its own. However, when the control has already been transferred to the program, it returns control to the client terminal by itself. In other words, the client terminal cannot return control from the program by itself. Dynamic actions of the user (for example, forced termination of the program) are an exemption.

When discussing the matters of performance and internal structures of programs, we are mostly interested in the part of control that is transferred within a program. Let's refer to Fig. 2 that shows the general nature of transferring control to, from and within a program. Circles shown in the figure characterize some small, logically completed fragments of a program, whereas the arrows between the circles show how control is transferred from one fragment to another.


Fig. 2. Transferring control in a program



A program that has accepted control from the client terminal (the executing program) starts to make some actions according to its inherent algorithm. The program contains program lines; general order of program execution consists in sequential transfer of control from one line to another in the top-down direction. What and according to what rules can be written in these lines will be considered below in all details.

Here, it is only important to emphasize that every logically completed fragment is executed - for example, some mathematical calculations are made, a message is displayed on the screen, a trade order is formed, etc. Until the current fragment of the program is executed, it retains the control. After it has been fully completed, the control is transferred to another fragment. Thus, control within a program is transferred from one logically completed fragment to another as they are executed. As soon as the last fragment is executed, the program will transfer (return) control to the client terminal.



The Notion of Comment


A program consists in two types of records: those making the program itself and those being explanatory texts to the program code.

Comment is an optional and nonexecutable part of a program.

So, comment is an optional part of a program. It means that a ready program will work according to its code irrespective of whether there are comments in it or not. However, comments facilitate understanding of the program code very much. There are one-line and multi-line comments. A one-line comment is any sequence of characters following double slash (//). The sign of a one-line comment is ended by line feed. A multi-line comment starts with the characters of /* and is ended by */ (see Fig. 3).

Full Guide mql4

Read full story

INTRODUCTION - Technical Analysis

Should I buy today? What will prices be tomorrow, next week, or next year? Wouldn't investing be easy if we knew the answers to these seemingly simple questions? Alas, if you are reading this book in the hope that technical analysis has the answers to these questions, I'm afraid I have to disappoint you early--it doesn't. However, if you are reading this book with the hope that technical analysis will improve your investing, I have good news--it will!

Some history

The term "technical analysis" is a complicated sounding name for a very basic approach to investing. Simply put, technical analysis is the study of prices, with charts being the primary tool.

The roots of modern-day technical analysis stem from the Dow Theory, developed around 1900 by Charles Dow. Stemming either directly or indirectly from the Dow Theory, these roots include such principles as the trending nature of prices, prices discounting all known information, confirmation and divergence, volume mirroring changes in price, and support/resistance. And of course, the widely followed Dow Jones Industrial Average is a direct offspring of the Dow Theory.

Charles Dow's contribution to modern-day technical analysis cannot be understated. His focus on the basics of security price movement gave rise to a completely new method of analyzing the markets.

The human element

The price of a security represents a consensus. It is the price at which one person agrees to buy and another agrees to sell. The price at which an investor is willing to buy or sell depends primarily on his expectations. If he expects the security's price to rise, he will buy it; if the investor expects the price to fall, he will sell it. These simple statements are the cause of a major challenge in forecasting security prices, because they refer to human expectations. As we all know firsthand, humans are not easily quantifiable nor predictable. This fact alone will keep any mechanical trading system from working consistently.

Because humans are involved, I am sure that much of the world's investment decisions are based on irrelevant criteria. Our relationships with our family, our neighbors, our employer, the traffic, our income, and our previous success and failures, all influence our confidence, expectations, and decisions.

Security prices are determined by money managers and home managers, students and strikers, doctors and dog catchers, lawyers and landscapers, and the wealthy and the wanting. This breadth of market participants guarantees an element of unpredictability and excitement.

Fundamental analysis

If we were all totally logical and could separate our emotions from our investment decisions, then, fundamental analysis the determination of price based on future earnings, would work magnificently. And since we would all have the same completely logical expectations, prices would only change when quarterly reports or relevant news was released. Investors would seek "overlooked" fundamental data in an effort to find undervalued securities.

The hotly debated "efficient market theory" states that security prices represent everything that is known about the security at a given moment. This theory concludes that it is impossible to forecast prices, since prices already reflect everything that is currently known about the security.

The future can be found in the past

If prices are based on investor expectations, then knowing what a security should sell for (i.e., fundamental analysis) becomes less important than knowing what other investors expect it to sell for. That's not to say that knowing what a security should sell for isn't important--it is. But there is usually a fairly strong consensus of a stock's future earnings that the average investor cannot disprove.

"I believe the future is only the past again, entered through another gate."
---Sir Arthur Wing Pinero, 1893

Technical analysis is the process of analyzing a security's historical prices in an effort to determine probable future prices. This is done by comparing current price action (i.e., current expectations) with comparable historical price action to predict a reasonable outcome. The devout technician might define this process as the fact that history repeats itself while others would suffice to say that we should learn from the past.

The roulette wheel

In my experience, only a minority of technicians can consistently and accurately determine future prices. However, even if you are unable to accurately forecast prices, technical analysis can be used to consistently reduce your risks and improve your profits.

The best analogy I can find on how technical analysis can improve your investing is a roulette wheel. I use this analogy with reservation, as gamblers have very little control when compared to investors (although considering the actions of many investors, gambling may be a very appropriate analogy).

"There are two times in a man's life when he should not speculate: when he can't afford it, and when he can."
---Mark Twain, 1897

A casino makes money on a roulette wheel, not by knowing what number will come up next, but by slightly improving their odds with the addition of a "0" and "00."

Similarly, when an investor purchases a security, he doesn't know that its price will rise. But if he buys a stock when it is in a rising trend, after a minor sell off, and when interest rates are falling, he will have improved his odds of making a profit. That's not gambling--it's intelligence. Yet many investors buy securities without attempting to control the odds.

Contrary to popular belief, you do not need to know what a security's price will be in the future to make money. Your goal should simply be to improve the odds of making profitable trades. Even if your analysis is as simple as determining the long-, intermediate-, and short-term trends of the security, you will have gained an edge that you would not have without technical analysis.

Consider the chart of Merck in Figure 1 where the trend is obviously down and there is no sign of a reversal. While the company may have great earnings prospects and fundamentals, it just doesn't make sense to buy the security until there is some technical evidence in the price that this trend is changing.

Figure 1




Automated trading

If we accept the fact that human emotions and expectations play a role in security pricing, we should also admit that our emotions play a role in our decision making. Many investors try to remove their emotions from their investing by using computers to make decisions for them. The concept of a "HAL," the intelligent computer in the movie 2001, is appealing.

Mechanical trading systems can help us remove our emotions from our decisions. Computer testing is also useful to determine what has happened historically under various conditions and to help us optimize our trading techniques. Yet since we are analyzing a less than logical subject (human emotions and expectations), we must be careful that our mechanical systems don't mislead us into thinking that we are analyzing a logical entity.

That is not to say that computers aren't wonderful technical analysis tools--they are indispensable. In my totally biased opinion, technical analysis software has done more to level the playing field for the average investor than any other non-regulatory event. But as a provider of technical analysis tools, I caution you not to let the software lull you into believing markets are as logical and predictable as the computer you use to analyze them.

Read full story

Technical Analysis

Guide to Technical Analysis - by Incredible Charts
Technical Analysis from A to Z - by MarketScreen

Read full story

School of Pipsology

Forex education is crucial for beginners.
BabyPips.com’s School of Pipsology is designed to help you acquire the skills, knowledge, and abilities to become a successful trader in the foreign exchange market. Our definition of a successful trader is having the ability to do three things:
Make pips
Keep pips
Repeat
If you can repeatedly do these three things, then you're on your way! But it's no cakewalk.
Remember when you attended grade school? No? Well, according to our memories, here's how it worked.
You start schooling at the age of five and enter Kindergarten. The next year you enter 1st Grade. If you pass, the next year you enter 2nd Grade, and so on, all the way up to the 12th Grade. Depending on what grade you're in, you'd attend one of three schools:
Elementary school (Kindergarten - 5th grade)
Middle school (6th grade - 8th grade)
High school (9th grade - 12th grade)
This is how our lessons are broken apart, so you can relive the past and also be able to learn and study forex trading techniques at your own pace – but our high school goes beyond the 12th grade!
But there's more!
Learning doesn't end in high school!
If you've done well throughout grade school, you get a full scholarship to our college! All expenses paid and we won't even require you to fill out any applications or write essays. What a deal!
Our curriculum here at the School of Pipsology will make a bold attempt to cover all aspects of forex trading. You will learn how to identify trading opportunities, how to time the market (aka smart guessing), and when to take profits or close a trade.
But that's not all folks.
You will also learn how to predict the future and never have a losing trade.
Yeah right. In your dreams pal.
But there is plenty more to learn and you'll just have to see for yourself!


School of Pipsology Curriculum:
Pre-school
Forex Basics
ELEMENTARY SCHOOL
Kindergarten
Types of charts
1st Grade
Japanese Candlesticks
2nd Grade
Support and Resistance, Trend Lines, and Channels
3rd Grade
Fibonacci
4th Grade
Moving Averages
5th Grade
Common Chart IndicatorsBollinger Bands, MACD, Stochastics, RSI, and Parabolic SAR
MIDDLE SCHOOL
6th Grade
Oscillators and Momentum Indicators
7th Grade
Important Chart Patterns
8th Grade
Forex Pivot Points
HIGH SCHOOL
9th Grade
Multiple time frames
10th Grade
Elliott Wave Theory
11th Grade
Create Your Own Trading System
12th Grade
Market Hours - Know When to Trade
13th Grade
Money Management
14th Grade
Plan Your Trade and Trade Your Plan
COLLEGE

Multiple Trading Personality Disorder

Trading News

Market Sentiment

U.S. Dollar Index

Carry Trade

The Lazy Forex Trader's Way to Riches

Be a Forex Trader, Not a Forex Sucker

The Number One Cause of Death for Forex Traders

Commodity Currencies

Currency Crosses

Divergence Trading

Read full story

How to Use Elliott Wave Analysis to Boost Your Forex Trading

Read full story

Tips From a Pro: How To Trade Forex With Elliott Wave

A FREE Report and FREE Video Lesson from EWI’s Chief Currency Strategist
Not since the U.S. Dollar Index (a measure of the dollar's strength against a basket of six other currencies) was created in 1973 has the greenback been as weak as it was back in April and July of 2008. That's when the euro-dollar exchange rate hit the $1.60 mark.
At that time, it seemed that the days of the dollar as the world's reserve currency were numbered. But – to the surprise of many forex traders – since then, the USD has enjoyed a truly remarkable recovery. On October 21, the EURUSD hit a fresh low of near $1.30, clinching a staggering 30-cent gain by the dollar in a matter of just three months.
Once again, the dollar has proved its role as a "safe haven" currency, and once again it's the center of the global financial community's attention. It will likely stay in the spotlight for a while. And that could be good for the forex market.
Currency trading is already the largest and most liquid market on the planet, with the daily volume being 10 times larger than the combined daily turnover on all of the world's stock exchanges. You may have heard that Elliott wave analysis is something many forex traders use. It's true; wave analysis is not a crystal ball, but it helps you accomplish three crucial goals: identify the trend, stay with it, and know when the trend is likely over.
We at Elliott Wave International have many resources that can help you to learn Elliott – but nothing helps you learn faster than watching a good teacher. Check out these two FREE resources:
FREE Video Lesson: How To Trade Forex With Elliott WaveIn early November 2007, EWI's Senior Currency Strategist Jim Martens taught a live 3-hour course on trading with Elliott in Denver, CO. What you are about to see is a condensed, 20-plus-minute version of Jim's course, the highlights of his best insights. Here's what you'll learn:
At its core, Elliott wave analysis is simple. Watch Jim explain why.
What Elliott waves are best for trading forex?
How do I identify trade setups?
At what point in a wave pattern do I enter a trade?
Your FREE Report: Discovering How To Use the Elliott Wave Principle Dig in and learn with this informative beginners piece on the basics of the Elliott Wave Principle. It will introduce you to the basic Elliott wave pattern and how to identify key trends and turns in the markets, plus much more.

Read full story

Forex Tutorial

Forex Tutorial - by RealTime Forex

Read full story

Identifying Trending & Range-Bound Currencies

The overall forex market generally trends more than the overall stock market. Why? The equity market, which is really a market of many individual stocks, is governed by the micro dynamics of particular companies. The forex market, on the other hand, is driven by macroeconomic trends that can sometimes take years to play out. These trends best manifest themselves through the major pairs and the commodity block currencies. Here we take a look at these trends, examining where and why they occur. Then we also look at what types of pairs offer the best opportunities for range-bound trading.

The Majors

There are only four major currency pairs in forex, which makes it a quite easy to follow the market. They are:

EUR/USD - euro / U.S. dollar
USD/JPY - U.S. dollar / Japanese yen
GBP/USD - British pound / U.S. dollar
USD/CHF - U.S. dollar / Swiss franc
It is understandable why the United States, the European Union and Japan would have the most active and liquid currencies in the world, but why the United Kingdom? After all, as of 2005, India has a larger GDP ($3.3 trillion vs. $1.7 trillion for the U.K.), while Russia's GDP ($1.4 trillion) and Brazil's GDP ($1.5 trillion) almost match U.K.'s total economic production. The explanation, which applies to much of the forex market, is tradition. The U.K. was the first economy in the world to develop sophisticated capital markets and at one time it was the British pound, not the U.S. dollar, that served as the world's reserve currency. Because of this legacy and because of London's primacy as the center of global forex dealing, the pound is still considered one of the major currencies of the world.

The Swiss franc, on the other hand, takes its place amongst the four majors because of Switzerland's famed neutrality and fiscal prudence. At one time the Swiss franc was 40% backed by gold, but to many traders in the forex market it is still known as "liquid gold". In times of turmoil or economic stagflation, traders turn to the Swiss franc as a safe-haven currency.

The largest major pair - in fact the single most liquid financial instrument in the world - is the EUR/USD. This pair trades almost $1 trillion per day of notional value from Tokyo to London to New York 24 hours a day, five days a week. The two currencies represent the two largest economic entities in the world: the U.S. with an annual GDP of $11 trillion and the Eurozone with a GDP of about $10.5 trillion.

Although U.S. economic growth has been far better than that of the Eurozone (3.1% vs.1.6%), the Eurozone economy generates net trade surpluses while the U.S. runs chronic trade deficits. The superior balance-sheet position of the Eurozone and the sheer size of the Eurozone economy has made the euro an attractive alternative reserve currency to the dollar. As such, many central banks including Russia, Brazil and South Korea have diversified some of their reserves into euro. Clearly this diversification process has taken time as do many of the events or shifts that affect the forex market. That is why one of the key attributes of successful trend trading in forex is a longer-term outlook.

Observing the Significance of the Long Term
To see the importance of this longer-term outlook, take a look at Figure 1 and Figure 2, which both use a three-simple-moving-average (three-SMA) filter.

Figure 1 - Charts the EUR/USD exchange rate from Mar 1 to May 15, 2005. Note recent price action suggests choppiness and a possible start of a downtrend as all three simple moving averages line up under one another.

Figure 2 - Charts the EUR/USD exchange rate from Aug 2002 to Jun 2005. Every bar corresponds to one week rather than one day (as in Figure 1). And in this longer-term chart, a completely different view emerges - the uptrend remains intact with every down move doing nothing more than providing the starting point for new highs.

The three-SMA filter is a good way to gauge the strength of trend. The basic premise of this filter is that if the short-term trend (seven-day SMA) and the intermediate-term trend (20-day SMA) and the long-term trend (65-day SMA) are all aligned in one direction, then the trend is strong.

Some traders may wonder why we use the 65 SMA. The truthful answer is that we picked up this idea from John Carter, a futures trader and educator, as these were the values he used. But the importance of the three-SMA filter not does lie in the specific SMA values, but rather in the interplay of the short-, intermediate- and long-term price trends provided by the SMAs. As long you use reasonable proxies for each of these trends, the three-SMA filter will provide valuable analysis.

Looking at the EUR/USD from two time perspectives, we can see how different the trend signals can be. Figure 1 displays the daily price action for the months of March, April and May 2005, which shows choppy movement with a clear bearish bias. Figure 2, however, charts the weekly data for all of 2003, 2004 and 2005, and paints a very different picture. According to Figure 2, EUR/USD remains in a clear uptrend despite some very sharp corrections along the way.

Warren Buffett, the famous investor who is well known for making long-term trend trades, has been heavily criticized for holding onto his massive long EUR/USD position which has suffered some losses along the way. By looking at the formation on Figure 2, however, it becomes much clearer why Buffet may have the last laugh.

Commodity Block Currencies
The three most liquid commodity currencies in forex markets are USD/CAD, AUD/USD and NZD/USD. The Canadian dollar is affectionately known as the "loonie", the Australian dollar as the "Aussie" and the New Zealand Dollar as the "kiwi". These three nations are tremendous exporters of commodities and often trend very strongly in concert with the demand for each their primary export commodity.

For instance, take a look at Figure 3, which shows the relationship between the Canadian dollar and prices of crude oil. Canada is the largest exporter of oil to U.S. and almost 10% of Canada's GDP comprises the energy exploration sector. The USD/CAD trades inversely, so Canadian dollar strength creates a downtrend in the pair.

Figure 3 - This chart displays the relationship between the loonie and price of crude oil. The Canadian economy is a very rich source of oil reserves. The chart shows that as the price of oil increases, it becomes less expensive for a person holding the Canadian dollar to purchase U.S.dollars.

Although Australia does not have many oil reserves, the country is a very rich source of precious metals and is the second-largest exporter of gold in the world. In Figure 4 we can see the relationship between the Australian dollar and gold.

Figure 4 - This chart looks at the relationship between the Aussie and gold prices (in U.S. dollars). Note how a rally in gold from Dec 2002 to Nov 2004 coincided with a very strong uptrend in the Australian dollar.
Crosses Are Best for Range

In contrast to the majors and commodity block currencies, both of which offer traders the strongest and longest trending opportunities, currency crosses present the best range-bound trades. In forex, crosses are defined as currency pairs that do not have the USD as part of the pairing. The EUR/CHF is one such cross, and it has been known to be perhaps the best range-bound pair to trade. One of the reasons is of course that there is very little difference between the growth rates of Switzerland and the European Union. Both regions run current-account surpluses and adhere to fiscally conservative policies.



One strategy for range traders is to determine the parameters of the range for the pair, divide these parameters by a median line and simply buy below the median and sell above it. The parameters of the range is determined by the high and low between which the prices fluctuate over a give period. For example in EUR/CHF, range traders could, for the period between May 2004 to Apr 2005, establish 1.5550 as the top and 1.5050 as the bottom of the range with 1.5300 median line demarcating the buy and sell zones. (See Figure 5 below).

Figure 5 - This charts the EUR/CHF (from May 2004 to Apr 2005), with 1.5550 as the top and 1.5050 as the bottom of the range, and 1.5300 as the median line. One range-trading strategy involves selling above the median and buying below the median.

Remember range traders are agnostic about direction. They simply want to sell relatively overbought conditions and buy relatively oversold conditions.

Cross currencies are so attractive for the range-bound strategy because they represent currency pairs from culturally and economically similar countries; imbalances between these currencies therefore often return to equilibrium. It is hard to fathom, for instance, that Switzerland would go into a depression while the rest of Europe merrily expands. The same sort of tendency toward equilibrium, however, cannot be said for stocks of similar nature. It is quite easy to imagine how, say, General Motors could file for bankruptcy even while Ford and Chrysler continue to do business. Because currencies represent macroeconomic forces they are not as susceptible to risks that occur on the micro level - as individual company stocks are. Currencies are therefore much safer to range trade.

Nevertheless, risk is present in all speculation, and traders should never range trade any pair without a stop loss. A reasonable strategy is to employ a stop at half the amplitude of the total range. In the case of the EUR/CHF range we defined in Figure 5, the stop would be at 250 pips above the high and 250 below the low. In other words if this pair reached 1.5800 or 1.4800, the trader should stop him- or herself out of the trade because the range would most likely have been broken.

Interest Rates - the Final Piece of the Puzzle
While EUR/CHF has a relatively tight range of 500 pips over the year shown in Figure 5, a pair like GBP/JPY has a far larger range at 1800 pips, which is shown in Figure 6. Interest rates are the reason there's a difference.

The interest rate differential between two countries affects the trading range of their currency pairs. For the period represented in Figure 5, Switzerland has an interest rate of 75 basis points (bps) and Eurozone rates are 200 bps, creating a differential of only 125 bps. However, for the period represented in Figure 6, however, the interest rates in the U.K are at 475 bps while in Japan - which is gripped by deflation - rates are 0 bps, making a whopping 475 bps differential between the two countries. The rule of thumb in forex is the larger the interest rate differential, the more volatile the pair.


Figure 6 - This charts the GBP/JPY (from Dec 2003 to Nov 2004). Notice the range in this pair is almost 1800 pips!

To further demonstrate the relationship between trading ranges and interest rates, the following is a table of various crosses, their interest rate differentials and the maximum pip movement from high to low over the period from May 2004 to May 2005.

Currency Pair Central Bank Rates (in basis points) Interest Rate Spread (in basis points) 12-Month TradingRange (in pips)
AUD/JPY AUD - 550 / JPY - 0 550 1000
GBP/JPY GBP - 475 / JPY - 0 475 1600
GBP/CHF GBP - 475 / CHF - 75 400 1950
EUR/GBP EUR - 200 / GBP - 475 275 550
EUR/JPY EUR - 200 / JPY - 0 200 1150
EUR/CHF EUR - 200 / CHF - 75 125 603
CHF/JPY CHF - 75 / JPY - 0 75 650

While the relationship is not perfect, it is certainly substantial. Note how pairs with wider interest rate spreads typically trade in larger ranges. Therefore, when contemplating range trading strategies in forex, traders must be keenly aware of rate differentials and adjust for volatility accordingly. Failure to take interest rate differential into account could turn potentially profitable range ideas into losing propositions.

The forex market is incredibly flexible, accommodating both trend and range traders, but as with success in any enterprise, proper knowledge is key.

Read full story

Pivot Point Trading

You are going to love this lesson. Using pivot points as a trading strategy has been around for a long time and was originally used by floor traders. This was a nice simple way for floor traders to have some idea of where the market was heading during the course of the day with only a few simple calculations.

The pivot point is the level at which the market direction changes for the day. Using some simple arithmetic and the previous days high, low and close, a series of points are derived. These points can be critical support and resistance levels. The pivot level, support and resistance levels calculated from that are collectively known as pivot levels.

Every day the market you are following has an open, high, low and a close for the day (some markets like forex are 24 hours but generally use 5pm EST as the open and close). This information basically contains all the data you need to use pivot points.

The reason pivot points are so popular is that they are predictive as opposed to lagging. You use the information of the previous day to calculate potential turning points for the day you are about to trade (present day).

Because so many traders follow pivot points you will often find that the market reacts at these levels. This gives you an opportunity to trade.

If you would rather work the pivot points out by yourself, the formula I use is below:


Resistance 3 = High + 2*(Pivot - Low)
Resistance 2 = Pivot + (R1 - S1)
Resistance 1 = 2 * Pivot - Low
Pivot Point = ( High + Close + Low )/3
Support 1 = 2 * Pivot - High
Support 2 = Pivot - (R1 - S1)
Support 3 = Low - 2*(High - Pivot) As you can see from the above formula, just by having the previous days high, low and close you eventually finish up with 7 points, 3 resistance levels, 3 support levels and the actual pivot point.

If the market opens above the pivot point then the bias for the day is long trades. If the market opens below the pivot point then the bias for the day is for short trades.

The three most important pivot points are R1, S1 and the actual pivot point.

The general idea behind trading pivot points are to look for a reversal or break of R1 or S1. By the time the market reaches R2,R3 or S2,S3 the market will already be overbought or oversold and these levels should be used for exits rather than entries.

A perfect set would be for the market to open above the pivot level and then stall slightly at R1 then go on to R2. You would enter on a break of R1 with a target of R2 and if the market was really strong close half at R2 and target R3 with the remainder of your position.

Unfortunately life is not that simple and we have to deal with each trading day the best way we can. I have picked a day at random from last week and what follows are some ideas on how you could have traded that day using pivot points.

On the 12th August 04 the Euro/Dollar (EUR/USD) had the following:
High - 1.2297
Low - 1.2213
Close - 1.2249


This gave us:

Resistance 3 = 1.2377
Resistance 2 = 1.2337
Resistance 1 = 1.2293
Pivot Point = 1.2253
Support 1 = 1.2209
Support 2 = 1.2169
Support 3 = 1.2125

Have a look at the 5 minute chart below



The green line is the pivot point. The blue lines are resistance levels R1,R2 and R3. The red lines are support levels S1,S2 and S3.

There are loads of ways to trade this day using pivot points but I shall walk you through a few of them and discuss why some are good in certain situations and why some are bad.

The Breakout Trade

At the beginning of the day we were below the pivot point, so our bias is for short trades. A channel formed so you would be looking for a break out of the channel, preferably to the downside. In this type of trade you would have your sell entry order just below the lower channel line with a stop order just above the upper channel line and a target of S1. The problem on this day was that, S1 was very close to the breakout level and there was just not enough meat in the trade (13 pips). This is a good entry technique for you. Just because it was not suitable this day, does not mean it will not be suitable the next day.



The Pullback Trade

This is one of my favorite set ups. The market passes through S1 and then pulls back. An entry order is placed below support, which in this case was the most recent low before the pullback. A stop is then placed above the pullback (the most recent high - peak) and a target set for S2. The problem again, on this day was that the target of S2 was to close, and the market never took out the previous support, which tells us that, the market sentiment is beginning to change.



Breakout of Resistance

As the day progressed, the market started heading back up to S1 and formed a channel (congestion area). This is another good set up for a trade. An entry order is placed just above the upper channel line, with a stop just below the lower channel line and the first target would be the pivot line. If you where trading more than one position, then you would close out half your position as the market approaches the pivot line, tighten your stop and then watch market action at that level. As it happened, the market never stopped and your second target then became R1. This was also easily achieved and I would have closed out the rest of the position at that level.



Advanced

As I mentioned earlier, there are lots of ways to trade with pivot points. A more advanced method is to use the cross of two moving averages as a confirmation of a breakout. You can even use combinations of indicators to help you make a decision. It might be the cross of two averages and also MACD must be in buy mode. Mess around with a few of your favorite indicators but remember the signal is a break of a level and the indicators are just confirmation.



We haven't even got into patterns around pivot levels or failures but that is not the point of this lesson. I just want to introduce another possible way for you to trade.

Read full story

The Elliott Wave Principle

In the 1930s, Ralph Nelson Elliott, a corporate accountant by profession, studied price movements in the financial markets and observed that certain patterns repeat themselves. He offered proof of his discovery by making astonishingly accurate stock market forecasts. What appears random and unrelated, Elliott said, will actually trace out a recognizable pattern once you learn what to look for. Elliott called his discovery "The Elliott Wave Principle," and its implications were huge. He had identified the common link that drives the trends in human affairs, from financial markets to fashion, from politics to popular culture.

Robert Prechter, Jr., president of Elliott Wave International, resurrected the Wave Principle from near obscurity in 1976 when he discovered the complete body of R.N. Elliott's work in the New York Library. Robert Prechter, Jr. and A.J. Frost published Elliott Wave Principle in 1978. The book received enthusiastic reviews and became a Wall Street bestseller. In Elliott Wave Principle, Prechter and Frost's forecast called for a roaring bull market in the 1980s, to be followed by a record bear market. Needless to say, knowledge of the Wave Principle among private and professional investors grew dramatically in the 1980s.

When investors and traders first discover the Elliott Wave Principle, there are several reactions:

Disbelief – that markets are patterned and largely predictable by technical analysis alone
Joyous “irrational exuberance” – at having found a “crystal ball” to foretell the future
And finally the correct, and useful response – “Wow, here is a valuable new tool I should learn to use.”
Just like any system or structure found in nature, the closer you look at wave patterns, the more structured complexity you see. It is structured, because nature’s patterns build on themselves, creating similar forms at progressively larger sizes. You can see these fractal patterns in botany, geography, physiology, and the things humans create, like roads, residential subdivisions… and – as recent discoveries have confirmed – in market prices.

Natural systems, including Elliott wave patterns in market charts, “grow” through time, and their forms are defined by interruptions to that growth.

Here's what is meant by that. When your hands formed in the womb, they first looked like round paddles growing equally in all directions. Then, in the places between your fingers, cells ceased growing or died, and growth was directed to the five digits. This structured progress and regress is essential to all forms of growth. That this “punctuated growth” appears in market data is only natural – as Robert Prechter, Jr., the world's foremost Elliott wave expert and president of Elliott Wave International, says, “Everything that thrives must have setbacks.”

The first step in Elliott wave analysis is identifying patterns in market prices. At their core, wave patterns are simple; there are only two of them: “impulse waves,” and “corrective waves.”

Impulse waves are composed of five sub-waves and move in the same direction as the trend of the next larger size (labeled as 1, 2, 3, 4, 5). Impulse waves are called so because they powerfully impel the market.

A corrective wave follows, composed of three sub-waves, and it moves against the trend of the next larger size (labeled as a, b, c). Corrective waves accomplish only a partial retracement, or "correction," of the progress achieved by any preceding impulse wave.

As the figure to the right shows, one complete Elliott wave consists of eight waves and two phases: five-wave impulse phase, whose sub-waves are denoted by numbers, and the three-wave corrective phase, whose sub-waves are denoted by letters.

What R.N. Elliott set out to describe using the Elliott Wave Principle was how the market actually behaves. There are a number of specific variations on the underlying theme, which Elliott meticulously described and illustrated. He also noted the important fact that each pattern has identifiable requirements as well as tendencies. From these observations, he was able to formulate numerous rules and guidelines for proper wave identification. A thorough knowledge of such details is necessary to understand what the markets can do, and at least as important, what it does not do.

You have only just begun to learn the power and complexity of the Elliott Wave Principle. So, don't let your Elliott wave education end here. Join Elliott Wave International's free Club EWI and access the Basic Tutorial: 10 lessons on The Elliott Wave Principle and learn how to use this valuable tool in your own trading and investing.

Read full story