How to properly use Technical Analysis

This thread is more to jot down my ideas and put them in order, i do encourage open discussion on the matter. I have done a thread on the use of technical tools, however this one is a bit different, if anyone decides to pitch in, just know that any technical tool that you bring up, you need to know the PURPOSE behind the invention, what is really calculating and how is this helpful on the analysis of the market.

the power of the moving average:

first of all lets begin by stating what is an average, and why it is important to understand the mean of a statistical data. In my opinion the best moving average to use is the Simple Moving Average, as the other averages are created upon the intent of price prediction WMA, EMA, SMMA.... and so forth.

why do i say this? if you go on line the SMA is considered to be a lagging indicator, and its uses are regurgitated again and again, as dynamic support ad resistance, or moving average cross over price prediction in trending markets correct? they indicate to use a 50sma and a 200 sma as many traders use them and therefore you see the same thing. so the WMA,SMMA,EMAs were created to smooth or weight the average as to be affected by current price quicker and not be as slow as a SMA.

My personal opinion is that this train of thought is simply rubbish, the SMA is simply as statistical Average, and was intended to as a way to find the mathematical mean. might be common sense to many experienced traders, however i took looking at quotes move in order to grasp the idea, of charts and correct uses of technical tools. for every newbie before you look at your high tech gadget filled platform begin trading from simply the quotes and start brain storming on how to make sense of the seemingly random movement, this exercise will save you years in the learning curve.

back to my original thought: on sample pool we have many variable data, the dispersion may be concentrated on a central point or evenly distributed, but to get a sense of what is a fair value or an assumed normal point we try to find the average of the sample pool. i.e
lets say these are apples, and if you asked me how many apples are USUALLY on the table, at any given day (we have 10 numbers for 10 days)
1,1,6,8,5,5,2,2,3,7 i would tell you i dont know, anywhere from 1 to 8, but this is very brought and i'm giving you a range which is not useful if you are trying to arrive to an expected fair value.

so i say on average 4, (1+1+6+8+5+5+2+2+3+7= 40) 40/10 days = on average give and take we can expect 4 apples on a given day to be on the table, and therefore this is the fair value, if sometimes we get 1 or sometimes 8 we can assume we had LESS or MORE apples today in relationship to the mean.

what does this say as far as the market? well like all technical tools it is in no way predictive but is a way to understand what the fair market value is as to make a decision whether the currency is trading at a low or high price in relationship to the perceived mean.

same goes with the euro, if ask me what was the price of the euro this past month, i would say to you i dont know which day? which second? what do you consider month? the actual month or the trading days? do you mean open, high, low, or close prices? (you see i dont give you any useful information, maybe a very broad range= 1.3421 to 1.4246)

or i can say it was on average 1.3743 (add all closing prices and divide by 20 trading days in the month (granted is more like 21.5 trading days but mathematical exactitude is not imperative))

so give an take some pips on average it is safe to say that is fair market value, and the calculated mean.

so if you subscribe to the idea of volatility and mean reversion, or whatnot this is the first starting point in understanding whether the price today is cheap relative to the average or high viz a viz the fair market value.

however not everything is that simple, how do you know is normal volatility or its a shift in direction? that is where bollinger introduced the idea of mathematically calculate normal price variations through standard deviations from a perceived mean we call this Bollinger Bands. then there is the calculations of acceleration and momentum by speed of movement relative to a moving average.

since i mentioned standard deviations, a very useful tool is bollinger bands
as any other tool is not the be all to end all. but it mathematically measures possibilities as far as, expected volatility is concerned and it answer the questions of normal price variations or change in direction, as well as low or high price according to the average.

i go on record saying that most of the indicators that platforms offer are sometimes not correct mathematically and tend to try to accommodate current movement creating confusion as to the current indicator read value.
if SMA and standard deviations * 2 from a 20 period SMA are calculated by hand or on excel it indeed becomes a powerful tool.

going back to the apples scenario where 4 is the average expected value, measuring standard deviations from this average (which is quite complicated but i will describe here how its done)

first off,
substract the average from each number used to arrive to that average

1-4=-3
1-4=-3
6-4=2
8-4=4
5-4=1
5-4=1
2-4=-2
2-4=-2
3-4=-1
7-4=3

now you square each result
(-3)(-3)=9
(-3)(-3)=9
(2)(2)=4
(4)(4)=16
(1)(1)=1
(1)(1)=1
(-2)(-2)=4
(-2)(-2)=4
(-1)(-1)=1
(3)(3)=9

add results = 58

now divide by the total sample minus one so here is 10-1=9
58/9=6.4444.....

now find the square root of this result sqrt(6.44444)=2.5385.....
for bollinger bands you will multiply this by 2 hence 2 standard deviations for statistical purposes

just add the result 2.5385 to the average 4 for the upper expected mathematical range=6.5385
substract from average for lower mathematical range =1.4614...

so i can mathematically tell you that on any given day over a period of 10 days you can expect on average to find 4 apples on the table but can vary from 1 to 6


as you can see, bollinger bands do not predict anything but help you mathematically ascertain whether the current price is with normal variations, as to make an inform decision whether price as it stands now, is trading at normal volatility range and how low or high viz a viz the average, this is infact helpful to spot changes in direction.

Hi the redlion

In regards to expected volatility...

Are your expectations based on volatility will remain similar to what it is currently/or was in the immediate past?

Or do you take into account when volatility (or ranges) have been low/small for a certain period of time, then expected volatility is higher?

eg. If there are consecutive days where daily high/lows have not been broken (we have been trading in a smaller and smaller range), would your expected volatility be high or low?

Okay, id like to share on how to read price action with support resistance, supply and demand, what they are and how it is a natural flow and harmonic in the forex market. it opened my eyes when i just watched price and try to make sense of it, when i watched it for 3 straight hours wiht no trading on it whatsoever.

So based on order flow buying when there are buyers and selling when there are sellers just isnt as completely as a whole enough, therefore you can use other technical tools at your disposal. for this mini-lesson i will use support and resistance and supply and demand levels in the market.

As retailers, our money does contribute into the multi-trillion dollar market, but does not give sufficient liquidity to move the market even for a pip. i do not know the formula to liquidity in the fx market, perhaps redlion does and will answer that to help underestand what im trying to say.

where do instituitons and big game hunters make money? from other people's losses, any one elses losses. even us. for the sake of it lets help others out and minimize the loss ratio of 95% traders fail. for someone to buy something, someone else needs to sell. be it another retailer, or a bank, or your bad broker, someone needs to do the opposite action in order for your order to be executed and filled.

that can be a stop loss order getting hit, a pending buy stop or sell stop (same as stop loss) or be it a market order.

they buy and sell and are able to move the market. they are at THAT advantage against us retailers. we need to see what THEY are UP TO, and what WE CAN DO to make what we all want: PROFIT.
we know their actions just by reading price, and they know not many can do that, and lose because they dont, but when u do, u will manipulate this very market and profit out of it by reading my romance and many others' romance:

PRICE ACTION

what is resistance and what is support?

Resistance is where buyers take profit and let go of their buys closing hteir orders doing the oppsoite therefore selling the instrument. and there is not enough sufficient buyers to close above a certain level.

Support is where sellers take profit and let go of their sells closing by buying back the instrument at that level. there are no more sellers at that time therfore price does not want to go higher at that time

its not enough to say buy at support sell at resistance.

why? thats where i hunt stops, and most importantly, where the pros and top guns hunt STOP LOSSES.

stop hutning dramatically increases ur profit because of the increase in ur side's momentum and does bring lot of excitement... if ure not the one hunted of course.

lets take an example on current eur usd levels yesterday. i had a nice stop hunt that i took on this one.

here it is explained

Why going against momentum you need to be very careful and requires a good understanding of price acction and flow of orders.

here is a chart to explain why it is simply DUMB i mean it DUMB to sell at resistance simply coz it was resistance before. that i believe is PPA past price action, and we need to trade PA which is price action. in current moves.

what are the fakes and traps that insitutions do to trap retailers and how can we use it to our advantage?

when momentum is clear and really obvious, dont even think to go against it. u get nervous on that pinbar at resistance, ur order window is open, and u sold but very nervous. u put ur stop loss at the high of the pin.

wrong move. play momentum.

What about running the stats on these statistical studies? Once you find certain sweet spots in the market you wait to see if the flow is there. Not hard really.

thats a good idea. would require research and lot of back testing past eventualities

You can figure out an awful lot with free .csv price data and an outdated version of excel. Us forex traders can glean a little clearer picture of whats going on in the market using futures data, but price and quotes are really all we have to go on. Things like moving averages can be useful data points to use in various statistical queries when we are looking for our sweet spots but are really no use when actively trading. They are simply part of the homework.

that question in itself requires a more complex explanation, you see volatility is made by price, so expected volatility would have to do with price oscillations.

now buma gave a pretty good picture on price movement and price action which are the core of trading, TA is the homework as the above poster said.

let me give you nutshell rundown on price movement itself.

for every buyer there is a seller correct? some one needs to provide the liquidity for the orders that are transacted. the bid/ask

bid being the sell (the price your dealer is willing to buy at) Ask is the quoted price your dealer is willing to sell at. or your buy.

if have 100 orders up for sale at 1.40 and the being electronically match by a counter party or multiple counter parties but their buy orders equals to 95 then there is 5 more orders that have not been consumed however offer comes in or there are offers to buy sitting at 1.39 then down goes price to 1.39, as this then triggers the action of other traders or limit orders in sell prevalence but each need to be matched, so we go to 1.38,1.37,1.36,1.35, at which point a frenzy of sell hits the market but no one is willing to buy at 1.35 however some orders are sitting at 1.30 so price goes down to 1.30 and consumes those orders at which point less selling orders are executed 1.29, some take profits so now back to 1.30, still sell orders come in but are being consumed now with out need for the market to look for liquidity as fast as before 1.30, 1.29,

this is where volatility contracts as the market is no longer so one sided looking to be filled. as some begin to close position and some begin to buy, 1.32 as there are 100 on the buy and 95 on the sell we go to 1.33 to consume those orders and so forth then the frenzy begins again

and this looks on our charts as, acceleration from a low volatility point to loss of momentum to correction,

in never ending wave pattern (here is where this is tricky, humans buy and sell humans consume the liquidity, the DECISIONS AND PREDICTIONS of humans on where price is going makes the markets move buy pressing buy or sell)

and this is precisely why we cannot predict price with accuracy because every single order changes the picture of the market but THE DIRECTION IS MADE BY THE PREVALENCE IN WHICH THIS ORDERS HIT, and this can change ANY TIME.

So to answer your question now directly

the theory is that low volatility will bring high volatility and high volatility regresses to low volatility.

using the Bollinger Bands on your platform is fine, but the problem with it is that it calculates the current close which has not closed yet, and has rounding errors or coding errors that give you illusions sometimes.

doing it by hand gives you numbers not just the bands engulfing the price, and i go off the last deviation calculated by the last close, remember its a continuous calculation from the 20 SMA periods so for each day you drop the first day to add the last.

if you substract the upper band from lower band you can actually get the bandwidth as oppose to just eyeballing it. however this is just analysis, that should not be the decision maker on whether you buy or sell, it is you and how you interpret the data.
which is exactly how TA was meant, to help you calculate probabilities for YOU TO INTERPRET and not predict price itself as it cannot be done accurately

it is also helpful to run some statistics on the euro as far as its behavior and usual distance it travels per day, expected exhaustion points, capacity and such..........................now we are getting into ATR


which i will explain my ideas and how to manually calculate it and how it can be used with pivot points to give you references and structure,

redlion and his technical analysis for you people

he is not even half or even a third done

now we go into 'magic levels' of the market and more harmonious nature of simple cycles on my side of technical analysis.

Looking forward to your ideas on this subject since that is what I started using in my trading, Pivot Point, S/R, OHLC.

Thanks for the detailed response.

I think the prediction of volatility is more important than the prediction of whether price will move up/down and have been using some similar concepts that you have mentioned here (and in other threads). Looking forward to your posts.

numbers such as 12, 45, 30, and their squares and multiplications are important or in a way a natural harmonic to price and swing points. 12 has been mentioned in the bible as the 12 disciples, there are 12 months in Caesar's calendar, there are 12 planetary houses in astrology. 45 is an eighth of a circle and this one is harder to explain, but the market has a way of geometric movement. and all of those numbers eventually lead up to a whole circle 360. 360, why geometric? 360 degrees complete a full circle and the calendar again, has 365 days. a little over a complete circle. therefore we can predict that financial markets also move in a cycle. theoretically speaking.

here are some sample equations

360/12 = 30 a twelfth of the whole cycle. 30 is the lunar synodic period around earth, and the numebr of days in one earth month. interesting numerology here huh?

360/30 = 12also in astrology there are 12 houses and 12 respective signs in which planets pass through them in a clockwise manner.

360/4=90 representing a quarter.

and so on.


their derivaties end up to the same numbers again, and their squares are important too. square of 12 = 144, square of 30 is 900 (2 and a half circles) etc etc.

lets take an example on GBP/JPY a wild instrument with lots and lots of swings.

lets try and say that we put a 45 degrees cycle at a major swing.i believe cycle work is personal and is subjective in positioning.

from what i tried and do, i can tell that 180 and 360 are important. the middle of a cycle and the end of one. take a look.

i tend to use fibonacci in which is another mysterious tool wiht cycles to predict places in which price and time meet. there are differnet ways to use them. sometimes price runs up at the time predictions or makes a high or low then and then reacts after.

another way i find to draw fibonacci retracements are to do it the other way around from high to low in uptrend.


it never fails to amaze me the harmony of price and such mysterious divine cycle.

why does it work? theoretecillay many and i do so too believe again, market has a cycle. even life has a cycle. human emotions have a cycle.


next i will show you guys the formula of price/time with the price and time vector calculations with hand or caluclator

here is a pic from google images about price and time vector based on Bradley Cowan


Square of twelve is 144 correct? and i have mentioned the importance of 12 in many different aspects.


i find commodities easier to caluclate and therefore lets try crude oil.

for this ill try use a5 min chart on crude and use bars as time periods instead of 5 minutes.

the formula that i find easiest is to substract the high from the low and see its similarity in accordance to 144 multiplied by whatever times.

as u can see if u multiply 144 by 1.25 (assuming a circle and an eighth) = 180.

this way we can predict swing points in the market.

again i took another swing where price and time met excellently with this tool. the distance was a 123 cent move (hehe nice number) and 144 x 0.90 is 129.6. close enough and i chose 0.90 due to it being a quarter of a circle.

just tested it on aussie perfect perfect setup.

square of twelve test

price range was 36 pips equal to the quarter of 144 = 36.

look at my short. i did it blindlessly.

good for 8 pips with a 3 pip spread.

took profits at 50 % retrace

8 pips made in a matter of seconds. i wouldnt mind at all.





no need to use indicators for this one and the cycle analysis, its enough to use calculators

from this 5 second experiment or 10 second i can conclude that my hypothesis is effective theory as of now and is not proved but it is so far.


so try this with DEMO accounts, i was actually smart enogh to try it LIve.

144 x any whole number and or eights, quarters, thirds etc.

144 x 0.25 = 36.

144 x 1 = 144

144 x 2 = 288.

enjoy