Commodity Futures Trader

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Moving averages (MAs) are a very popular tool used by most of the forex traders. They are a lagging indicator of the price action. Using moving averages short and long term trends are easier to identify.

Most of the charting software freely provided by the broker can calculate the moving averages on the users specifications. MAs can be formatted to different style of trading and time frames. For example, in case you want to use a 120 time frame moving average, the prices of the last 120 times frames is added together and divided by 120.

A moving average can be calculated based on the high, low, opening or closing price within a time frame. Since the closing price is the most important price, most traders prefer to use the closing price in calculating MAs. There are three types of moving averages. First one is the Simple MA. The second is Weighted MA. The third is the exponential MA.

The simple moving average is calculated by dividing the price in each time frame by the number of time frames. A weighted moving average gives more weight to the current prices as compared to the last few time frames. In an exponentially smoothed moving average, the chart is calculated gradually with less emphasis on the prices in the latter time frames.

There are 100s of Exchange Traded Funds (ETFs) and HOLDRS covering key industry benchmarks such as the various Standard & Poor (S&P) Indexes, Russell Indexes or the Dow Jones Products. There are other ETFs that cover the other less well known narrow based sectors.

For example SPY tracks the Standard & Poors 500 Composite Index and is the largest of the ETFs. You should know the major indexes that are either key benchmarks or have ETFs tied to them.

Standard & Poor: Standard & Poor (S&P) is the financial services segment of the McGraw Hill companies and has been providing independent and objective financial information, analysis and research for nearly 140 years.

It is also the provider of equity indexes and these S&P indexes are also used as the basis for wide variety of financial instruments such as Index Funds, Futures, Options and ETFs. Investors around the globe use S&P Indexes for investment performance measurement.

S&P 500 Composite is one of the most popular indexes in the global financial markets. Hundreds of companies around the world have licenses with the Standards & Poors for their index products. The influence and name recognition of S&P 500 is unparalleled. It is also used as a key benchmark for money manager performance.

The S&P 500 is a capitalization weighted index that tracks the performance of 500 large capitalization issues. S&P 500 represents more than 75% of the capitalization of the entire US Stock Market. Each year thousands of money managers have the single minded goal of outperforming the S&P 500.

The power of pivot points is based on the fact that they work in all markets that have established ranges. Pivot points are leading indicators unlike most of the other indicators that are lagging.

Pivot points inform you about the price action in the future. They are calculated based on a simple mathematical formula. It determines the next time periods range based on the previous time periods data. The formula is very simple and includes the low, the high and the closing price for that trading session divided by three.

If you dont know what a range is, then a range is the high and low of a given trading session. Markets are just people like you and me buying and selling. The high for each trading session represent the buyers exuberant bullishness in that session. The low for each trading session represents the sellers pessimistic bearishness for that particular trading session.

A pivot point is that special line in sand where most traders turn from being bearish to bullish and vice versa. These points are used in the forex markets to tell if the sentiment has shifted from being positive or long to negative or short. If the price is trading above the point, you should go long. And if the price is trading below the pivot point, you should go short.

Support and resistance levels are used by investors to determine how far they believe a currency pair will move. This also tells them at what points the price action may turn around and start moving in the opposite direction.

But sometimes, the markets change direction due to a fundamental factor. The market change of direction is strong enough to cause a currency pair to break through a previously established support and resistance level. When a previous support and resistance level is broken by the markets, new levels are established. However, the broken levels may still have some influence on the market in the future.

Sometimes there are attempted breakouts, this is also known as False Breakouts. With experience, it will become clear to you that prices do not always stop at exactly the same points each time. So if you are going to use strict requirements for your support and resistance, those levels may not hold up every time. This way, you are going to fake yourself out of a lot of valid price movements.

Even when you take all the precautions with your level of support and resistance, you may become victim of a false breakout. Naturally, you will ask how I can tell when the price has truly broken through support and resistance.

There are primarily two methods that you can use to filter out a false breakout with a true breakout. These two methods are setting price-amplitude benchmarks and identifying role reversals.