the daily chartist

Trading strategy using the DeMarker indicator

published 6 months ago
EUR/USD H4

What is the DeMarker Indicator?

The DeMarker indicator, also known as DeM, is a technical analysis tool that compares the most recent maximum and minimum prices to the previous period's equivalent price to measure the demand of the underlying asset. From this comparison, it aims to assess the directional bias of the market. It is a member of the oscillator family of technical indicators and based on principles promoted by technical analyst Thomas DeMark.

The DeMarker indicator helps traders determine when to enter a market, or when to buy or sell an asset, to capitalize on probable imminent price trends. It is considered a “leading” indicator because its signals forecast an imminent change in price trend. This indicator is often used in combination with other signals and is generally used to determine price exhaustion, identify market tops and bottoms and assess risk levels. Although the DeMarker indicator was originally created with daily price bars in mind, it can be applied to any time frame, since it is based on relative price data.

Unlike the Relative Strength Index (RSI), which is perhaps the best-known oscillator, the DeMarker indicator focuses on intra-period highs and lows rather than closing levels. One of its main benefits is that, like the RSI, it is less prone to distortions like those seen in indicators like the Rate of Change (ROC), in which erratic price movements at the start of the analysis window can cause sudden shifts in the momentum line, even if the current price has barely changed.

DeMarker Indicator Trading Strategy

The DeMarker indicator is composed of a single fluctuating curve and does not use smoothed data. The default time span for the calculation of the indicator is 14 periods, and as the number of periods increases, the indicator curve becomes smoother. Conversely, the curve becomes more responsive to smaller numbers of periods.

This oscillator is bounded between values of zero and one and has a base value of 0.5, although some variants of the indicator have a 100 to -100 scale. The indicator typically has lines drawn at both the 0.30 and 0.70 values as warning signals that a price turn is imminent. Values exceeding either boundary are considered riskier and more volatile, while values within are considered low risk. Generally, values above 0.60 are indicative of lower volatility and risk, while a reading below 0.40 is a sign that risk is increasing. Overbought and oversold conditions are likely to be imminent when the curve crosses beyond these boundary lines.

On the example here we have the EUR/USD pair on H4 chart. DeMarket is applied with the standard 14-period option. I know it looks like a mess, but I will try to explain. So first we have signal 1 which is a sell signal as we are following the DeMarker with no doubts. In this case, I am placing the stop between 30 and 40 pips as an appropriate level. As we have sold we can see that the price has pushed up in a choppy trade so our SL is hit for -47 pips. Then we have signals 2 and 3. We can catch them with two short positions down towards where we find signal 5 for a new buy one. We close the positions for rouglhy + 242 pips. We are buying, but the price moves down against us and our SL is hit against at -38 pips. We buy again on signal 6 with another SL hit on -31 pips. Signal 7 is a buy one again where we can close to the other signal for a profit of +137 pips. Signal 8 is a sell one, but our SL is hit at -31 pips. On point 9 we sell the pair and we close it at the next buying reversal for +97 pips. Signal 10 is an SL hit for -34 pips and the price goes down. Signal 11 is again an SL for -36 pips. Signal 12 a fresh buy signal where we can close the position on the next crossover for +77 pips. And we can open a sell one which is ongoing now for +42 pips and an SL 30 pips above.

Overall we have total SL for -217 pips and our profits are for 553 pips. Our net profit here is 336 pips which is not bad from the end of September until now with the live one on +42 pips profit at point 13. Depending on your leverage, money management and lot size, 336 pips can be a very, very good profit for a month and a half swing trading on the 4H chart.

The DeMarker is a good oscillator, but don't use it as standalone. I am encouraging you to try in different pairs, stocks, indexes and commodities as well, chart time frames and with different parameters as well and with combination with other indicators to filter out the fake ones and to search for confirmation. Try it!

 

Trading strategy using the Relative Strenght Index (RSI)

published 6 months ago
EUR/USD H1

The Relative Strength Index - RSI is a momentum indicator that measures the magnitude of recent price changes to analyze overbought or oversold conditions. It is primarily used to attempt to identify overbought or oversold conditions in the trading of an asset.

The relative strength index (RSI) is calculated using the following formula:

RSI = 100 - 100 / (1 + RS)

Where RS = Average gain of up periods during the specified time frame / Average loss of down periods during the specified time frame. The RSI provides a relative evaluation of the strength of a security's recent price performance, thus making it a momentum indicator. RSI values range from 0 to 100. The default time frame for comparing up periods to down periods is 14, as in 14 trading days. Traditional interpretation and usage of the RSI is that RSI values of 70 or above indicate that a security is becoming overbought or overvalued, and therefore, may be primed for a trend reversal or corrective pullback in price. An RSI reading of 30 or below is commonly interpreted as indicating an oversold or undervalued condition that may signal a trend change or corrective price reversal to the upside.

Sudden large price movements can create false buy or sell signals in the RSI. It is, therefore, best used with refinements to its application or in conjunction with other, confirming technical indicators.

Some traders, in an attempt to avoid false signals from the RSI, use more extreme RSI values as buy or sell signals, such as RSI readings above 80 to indicate overbought conditions and RSI readings below 20 to indicate oversold conditions. The RSI is often used in conjunction with trendlines, as trendline support or resistance often coincides with support or resistance levels in the RSI reading.

In the example here we can observe the EUR/USD on the 1-hour time frame. 

The RSI indicator has been applied to the chart with the parameters of 11 as period, not 14 and with highlighted levels of the overbought 70 and oversold 30. I have marked the areas on the indicator where the security or the instrument is in the relevant situations. As well of that I have distinguished 6 situations capturing past moments and a recent one with a buying signal in the middle of Friday's market activity. 

As we can see in situation 1 we have a buying signal on the 09.10 with and we can take a long position in the pair until the next signal, which is a sell one on 10.10 (the next day). There we can close the position and open a short one with the next candle. That's 100 pips profit. In situation 2 we have the sell signal, but probably it will hit our stop loss as the price continues to move up. On situation 3 we have another sell signal where we will return our losses for sure and we can close nicely on situation 4 where we can buy because of the buy signal on 18.10, but unfortunately with another stop loss. 

Watching for a divergence between price and the RSI indicator is another means of refining its application. Divergence occurs when a security makes a new high or low in price but the RSI does not make a corresponding new high or low value. Bearish divergence, when price makes a new high but the RSI does not, is taken as a sell signal. Bullish divergence, which is interpreted as a buy signal, occurs when price makes a new low, but the RSI value does not.

In situation 5 we have a bearish divergence where with a sell signal from RSI as it comes above from level 70 gives us a second signal and a confirmation that the price indeed will fall down hard. On the next candle, we can sell with an appropriate stop loss. Situation 6 is from Friday. We have a buy signal and a bullish divergence as well. Buying on the next candle would have left us with +80 pips floating equity and if we are satisfied we can close it there on the opening on Monday or wait for a sell signal. 

RSI can be a profitable indicator, but it is not recommended to use it only alone. Try combining the indicator with moving averages, trend lines or other indicators to find more confirmations and to be more aware of the signal that is provided from RSI won't be a fake one, because the price is actually on the bottom or top lines of a trend or on a major support or resistance. And as always, test it on demo first before going live with it. 

 

My personal forecasting method

published 7 months ago
AUD/USD Daily

 In this article, I am going to show you whats my forecasting method, applied to all of the instruments in my watchlist. Before that, I am going to share with you what I have in my watchlist, at what time frame are my charts and what charting platform I am using. Of course don't take that as a permanent hint on how you can arrange your trading scheme, charting tools and forecasting method. This is my personal one as I am orientated to trend long-term trading and I look at the big picture. This is my trading style. You can take it as an orientating hint for your basic foundation on what and how you want to trade, but in the end, everything depends on you, your attitude and personal view which will shape out your own trading style and method, which you share as well. So first things first - the charting platform. 

 I've been using MetaTrader since day 1 of my trading adventures. I found it "the best" since then, but recently the technology was developed very well in regards to trading and charting platform and we are seeing more and more so-called web trading platforms. As much as I am fond to the MetaTrader I think it is lacking behind from the competitors in its charting tools and indicators list. For sure it is best in speed and reliability, but this strongly depends on the infrastructure of the Broker you are trading with. The platform is still broadly used from official institutions as well and the platform is usable since 1999. Also supports the MQL on basis of C language for creating trading bots. At the beginning of my blog, I have posted charts from MetaTrader 4 but from some time now I have transitioned to TradingView. The free basic profile supports what you would need in your common forecasting, but if you would like to go further you will need to subscribe to the different plans they offer. The charting platform gives an enormous list of indicator, charting tools, economic indicators, forecasting tools and all sorts of goodies to spam your chart with. Also, you can download the app on your Android or iPhone and all of your chartings is synced directly between the devices so you don't lose track of your forecasting or you want to brag about your amazing Head and Showders pattern you've discovered in EUR/USD to your friends. 

 My watchlist. It has been created for THE MOST used and watched instruments from me (that's why its a watchlist). The watchlist itself is in TradingView where you can add and remove any instrument you would like. Things that I am watching: BTCUSD, ETHUSD, USDJPY, USDCHF, USDCAD, EURUSD, GBPUSD, AUDUSD, NZDUSD, XAUUSD, SILVER, XCUUSD, PALLADIUM, PLATINUM, USOIL, UKOIL, NATGASUSD, DAX, SPX, DJI, HSI, NFLX, TWTR, FB, TSLA, AAPL, GOOGL, DXY, VIX, USDTRY, USDMXN, USDARS, USDBRL, USDRUB, EURBGN.

 What my forecast consists of. I am a long-term investor-style orientated trader and I look at the daily chart to spot the long-term trend and look out for a possible trend reversal. Also, I am looking at price action, patterns, Fibo levels, DeMarker (8), EMA50 and EMA200. In the example with AUD/USD on the daily chart, you can see my "drawings" for the Aussie. I am looking for any possible in-trend trading as well from any flags or wedges. Moving average crossovers as well.  Fundamentals are something I watch closely as well. I am taking in regards any news and economic data. I am filtering my economics calendar (you can use the TradingView or the ForexFactory) to only the events in yellow or red which has a significant impact on the markets. I am watching only fundamentals from Canada, EU zone overall and separately - Germany and the UK. I don't check anything South from Germany. Japan and the US economies. 

 This is the charting thingy I do. Brought down to something clean, easy to read and productive. If you found this useful, of course, please share it to whatever social media you are using and you can send me an email to what is your trading or charting method and if you have further questions ask as well. 

 Remember... Eveything is subjective in trading. Everything. 

Gann indicators as a trading strategy

published 11 months ago

Brief introduction

 Gann studies have been used by active traders for decades and, even though the futures and stock markets have changed considerably, they remain a popular method of analyzing an asset's direction. New trading areas, such as the foreign exchange market and the invention of exchange-traded funds(ETFs) have also made it necessary to revisit some of the construction rules and application concepts. Although the basic construction of Gann angles remains the same, this article will explain why the changes in price levels and volatility have deemed it necessary to adjust a few key components. 

Basic Elements of Gann Theory
 Gann angles are a popular analysis and trading tool that are used to measure key elements, such as pattern, price and time. The often-debated topic of discussion among technical analysts is that the past, the present and the future all exist at the same time on a Gann angle. When analyzing or trading the course of a particular market, the analyst or trader tries to get an idea of where the market has been, where it is in relation to that former bottom or top, and how to use the information to forecast future price action.

Gann Angles Versus Trendlines
 Of all of W.D. Gann's trading techniques available, drawing angles to trade and forecast is probably the most popular analysis tool used by traders. Many traders still draw them on charts manually and even more use computerized technical analysis packages to place them on screens. Because of the relative ease traders, today have at placing Gann angles on charts, many traders do not feel the need to actually explore when, how and why to use them. These angles are often compared to trendlines, but many people are unaware that they are not the same thing. 

 A Gann angle is a diagonal line that moves at a uniform rate of speed. A trendline is created by connecting bottoms to bottoms in the case of an uptrend and tops to tops in the case of a downtrend. The benefit of drawing a Gann angle compared to a trendline is that it moves at a uniform rate of speed. This allows the analyst to forecast where the price is going to be on a particular date in the future. This is not to say that a Gann angle always predicts where the market will be, but the analyst will know where the Gann angle will be, which will help gauge the strength and direction of the trend. A trendline, on the other hand, does have some predictive value, but because of the constant adjustments that usually take place, it's unreliable for making long-term forecasts.

Past, Present and Future
 As mentioned earlier, the key concept to grasp when working with Gann angles is that the past, the present and the future all exist at the same time on the angles. This being said, the Gann angle can be used to forecast support and resistance, the strength of direction and the timing of tops and bottoms.

Using a Gann angle to forecast support and resistance is probably the most popular way they are used. Once the analyst determines the time period he or she is going to trade (monthly, weekly, daily) and properly scales the chart, the trader simply draws the three main Gann angles: the 1X2, 1X1 and 2X1 from main tops and bottoms. This technique frames the market, allowing the analyst to read the movement of the market inside this framework.

Uptrending angles provide the support and downtrending angles provide the resistance. Because the analyst knows where the angle is on the chart, he or she is able to determine whether to buy on support or sell at the resistance.

Traders should also note how the market rotates from angle to angle. This is known as the "rule of all angles". This rule states that when the market breaks one angle, it will move toward the next one.

Another way to determine the support and resistance is to combine angles and horizontal lines. For example, often a downtrending Gann angle will cross a 50% retracement level. This combination will then set up a key resistance point. The same can be said for uptrending angles crossing a 50% level. This area becomes a key support point. If you have a long-term chart, you will sometimes see many angles clustering at or near the same price. These are called price clusters. The more angles clustering in a zone, the more important the support or resistance.

The primary Gann angles are the 1X2, the 1X1 and the 2X1. The 1X2 means the angle is moving one unit of price for every two units of time. The 1X1 is moving one unit of price with one unit of time. Finally, the 2X1 moves two units of price with one unit of time. Using the same formula, angles can also be 1X8, 1X4, 4X1 and 8X1.

A proper chart scale is important to this type of analysis. Gann wanted the markets to have a square relationship so proper chart paper, as well as a proper chart scale, was important to his forecasting technique. Since his charts were "square", the 1X1 angle is often referred to as the 45-degree angle. But using degrees to draw the angle will only work if the chart is properly scaled.

Not only do the angles show support and resistance, but they also give the analyst a clue as to the strength of the market. Trading on or slightly above an uptrending 1X1 angle means that the market is balanced. When the market is trading on or slightly above an uptrending 2X1 angle, the market is in a strong uptrend. Trading at or near the 1X2 means the trend is not as strong. The strength of the market is reversed when looking at the market from the top down. Anything under the 1X1 is in a weak position. 

In this example, we observe the EUR/USD Weekly chart. As seen here, the Gann lines are applied on the downtrend. As we can see here on the top angles we see the price apply as resistance and support with opportunities to sell and buy the Euro. 

 Finally, Gann angles are also used to forecast important tops, bottoms, and changes in trend. This is a mathematical technique known as squaring, which is used to determine time zones and when the market is likely to change direction. The basic concept is to expect a change in direction when the market has reached an equal unit of time and price up or down. This timing indicator works better on longer-term charts, such as monthly or weekly charts; this is because the daily charts often have too many tops, bottoms, and ranges to analyze. Like price action, these timing tools tend to work better when "clustered" with other time indicators.

Conclusion
Gann angles can be a valuable tool to the analyst or trader if used properly. Having an open mind and grasping the key concept that the past, present, and future all exist at the same time on a Gann angle can help you analyze and trade a market with more accuracy. Learning the characteristics of the different markets in regard to volatility, price scale and how markets move within the Gann angle framework will help improve your analytical skills.

Trading strategy using Fibonacci retracements

published 11 months ago

Brief introduction 

Leonardo Pisano, nicknamed Fibonacci, was an Italian mathematician born in Pisa in the year 1170. His father Guglielmo Bonaccio worked at a trading post in Bugia, now called Béjaïa, a Mediterranean port in northeastern Algeria. The young Leonardo studied mathematics in Bugia, and during extensive travels, he learned about the advantages of the Hindu-Arabic numeral system.

 In 1202, after returning to Italy, Fibonacci documented what he had learned in the "Liber Abaci" ("Book of Abacus"). In doing so, he popularized the use of Hindu-Arabic numerals in Europe.

The Fibonacci number sequence

 In the "Liber Abaci," Fibonacci described the numerical series now named after him. In the Fibonacci sequence of numbers, after 0 and 1, each number is the sum of the two prior numbers. Hence, the sequence is as follows: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, 610 and so on, extending to infinity. Each number is approximately 1.618 times greater than the preceding number.

The Golden Ratio

 This figure – 1.618 – is called Phi or the Golden Ratio. The inverse of 1.618 is 0.618. The Golden Ratio mysteriously appears frequently in the natural world, architecture, fine art and biology. For example, the ratio has been observed in the Parthenon, Leonardo da Vinci's Mona Lisa, sunflowers, rose petals, mollusk shells, tree branches, human faces, ancient Greek vases and even the spiral galaxies of outer space. 

 Fibonacci levels used in the Financial Markets

The levels used in Fibonacci retracements in the context of trading are not numbers in the sequence; rather they are derived from mathematical relationships between numbers in the sequence. The basis of the "golden" Fibonacci ratio of 61.8% comes from dividing a number in the Fibonacci series by the number that follows it.

 For example, 89/144 = 0.6180. The 38.2% ratio is derived from dividing a number in the Fibonacci series by the number two places to the right. For example: 89/233 = 0.3819. The 23.6% ratio is derived from dividing a number in the Fibonacci series by the number three places to the right. For example: 89/377 = 0.2360.

 Fibonacci retracement levels are depicted by taking high and low points on a chart and marking the key Fibonacci ratios of 23.6%, 38.2% and 61.8% horizontally to produce a grid. These horizontal lines are used to identify possible price reversal points.

 The 50% retracement level is normally included in the grid of Fibonacci levels that can be drawn using charting software. While the 50% retracement level is not based on a Fibonacci number, it is widely viewed as an important potential reversal level, notably recognized in Dow Theory and also in the work of W.D. Gann.

Fibonacci Retracement levels as part of a Trading Strategy

 Fibonacci retracements are often used as part of a trend-trading strategy. In this scenario, traders observe a retracement taking place within a trend and try to make low-risk entries in the direction of the initial trend using Fibonacci levels. Simply put, traders using this strategy anticipate that a price has a high probability of bouncing from the Fibonacci levels back in the direction of the initial trend.

 

 In this example, we are observing the EUR/USD on the 4H chart. We see that the trend is in a down direction, depicting the Euro's weakness. The red curve is the 200 exponential movement average, applied to the chart and it shows that the price is deeply under the curve in a Bearish bias. We apply the Fibonacci Retracement on the Meta Trader platform from the beginning of the trend (the top) to the lowest point of the trend (yellow horizontal lines). As you can see they are marked with the percentage values of the ratios. We can see here that 23.6, 38.2 and 50 levels are key levels here as the price couple of times tested the zones. The last tests before the price to breach the level and to move up is 23.6 as we can see that the pair has tried many times to go pass it. In the end, the Bulls won and now it seems the price will try to make a move on 38.2. 

The bottom line

 Fibonacci retracement levels often mark reversal points with an uncanny accuracy. However, they are harder to trade than they look in retrospect. The levels are best used as a tool within a broader strategy that looks for the confluence of a number of indicators to identify potential reversal areas offering low-risk, high-potential-reward trade entries.