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Application of technical analysis in FOREX market has its own salient features. Under normal amount of deposits available for an average trader, trading is only possible on intraday time frames (intraday trading). Zanyt strategic position by buying currency at the beginning of a long uptrend, and then within a few weeks or even months to see how profits increase - is the dream of every currency speculator. But for intraday-tray-dera is the unattainable dream.

Simple analysis of the daily charts of major currencies shows that if you do not dream about a gift of fate, and rely on the actual behavior of markets, after opening the position must be prepared to survive safely roll back the size of two or three figures, if not more so. For daily schedules are natural scale moves. But for the majority of traders to prevent the possibility of potential losses of 2-3 figures is tantamount to not put protective orders (stop-loss) at all. And what ends trade without protective orders, is well known to anyone who tried to do it. The rest is better not to try.

Available to us the fate of a place in the foreign exchange market is on the hourly charts. It is quite possible to find reliable guidance for the open positions (support and resistance levels, trend lines), at which the market will show the protective order a reasonable size (50-60 points), it is appropriate acceptable for the average trader risk. But by itself the behavior of the time schedules do not facilitate the work of the ratio of the amplitudes within the time fluctuations in the price and size of moves trend is that most of the time the market spends in lateral movement. Turning points in the plots arise often, but not each of them is the beginning of a new trend, but by that time, when there is no doubt that the trend was generated, this trend is already approaching its turning point and attempt to catch the trend comes to an end stop-loss- om.

In the literature on technical analysis published so many different trading systems and many different approaches to their construction and analysis. But it is characteristic that almost all the authors demonstrate the effectiveness of their ideas on the material day (or larger scale) plots. Attempts to apply the same approach to the hourly charts of the FOREX market immediately lead to a loss of credibility in the results. Although the basic principles of technical analysis are the same for all markets in all time intervals, but the automatic transfer methods, reliably working on the daily charts, intraday trading does not work. Probably, their approaches are needed.

My experience of trade shows that try to capture a strategic position should not at the expense of planning for admissibility of a large rollback, but through the timely opening day inside position on the hourly chart. In intraday trading the price change in the 200-300 points - it is not rolled back, it's a very solid move that we should strive to take as profit, rather than endure a pullback. Any position should be opened in accordance with the scale in day trading, including the one position, the trader hopes to keep as strategic for several weeks, should be accompanied by protective orders is 50-60 points, but not the size of 2-3 figures.

The only trouble is that the advance will never know exactly what position has the chance to become strategic, and therefore, taking a small move, the trader is usually in a hurry to take profits. On the hourly chart is always enough of these guidelines, which suggest the trader, where you should stop. In most cases, then he becomes convinced that the right thing, but sometimes, closing the position, sadly watches as the market continues to move in the same direction, only now to join this course is much harder. Trying to just catch up with the market often results in disastrous results.

Can anything fill the gap between strategic trade on daily charts, and short-term positions within a day trading

Index, rather than light!

Attempts to use different oscillators and build their own hunt for the onset of the new trend gradually led to the idea that you and I want to propose in this article. The basic meaning of the proposed approach is that it is important not only to successfully pick up the indicator, but also to correctly use it in accordance with the purposes of trade. The current new understanding of the behavior of the indicators for title - The index of market sentiment.

When the schedule of the exchange rate is, say, a bull trend, and it shows the ups and downs, but every time it ends with a new rise above the previous high, and the new drop is not as deep as the previous one. This means that there is an upward trend. As with the entire cue-trend, it will sooner or later struck, and then it turns out that the breakthrough trend took place after one of these climbs, accompanied by a turn down. What exactly turn down the end break the upward trend, nobody knows. If the schedule after climbing turns down - it's just rolled back. And when the pullback led to a breakthrough trend and the market made a significant move down, we can only regret that time did not have time to open a short position.

Follow the same simple truth known to every trader - only open on a trend - in real life too, not so simple. When a new (in these arguments - bearish) trend is definitely confirmed that it is a trend, it is certainly ripe for a pullback. A good demand trends and good kickbacks. So, who discovered the trend, just as easy to get a loss, and opened as a counter-trend. It is also well known to every trader.

In this sense, on its own schedule of prices is a lagging indicator of trends. And on the intraday charts, it feels most keenly. It would be nice to have an indicator that would allow early rollback to say whether this rollback simply correcting the underlying trend, or is it the beginning of the fracture. Because miracles do not happen, then this indicator also should not exist. But trying to find an index that would have property reliably (statistically, of course, sense) show such start to reverse the trend - is quite a reasonable goal.

Such an indicator, in terms of intraday-trader, must possess two properties: 1) time (without delay) to indicate their rotation when the market starts to go in the opposite direction, and 2) after this long to grow or remain in the high- (low) values ​​for the market to form an uptrend (respectively - to fall on a downtrend).

In fact, for this purpose and are all oscillators. Many are available in the technical analysis indicators of well-isolated point of reversal of the market, showing their own egress from overbought and oversold (overbought oversold). However, they are unable to distinguish the point of fracture trends from short-time and small-amplitude kickbacks. As during the existence of long-term trend in one direction, and horizontal corridor (in the absence of any direction of the market), this oscillator is the same boldly running from overbought to oversold and back. These properties are characteristic for the most common and widely used by traders indicators RSI and Stochastic, which have a local nature, that is computed from the values ​​of schedule is not very-long interval.

On the other hand, indicators that are intended to highlight the trend (MACD, MA and others), clearly shows a trend (if the indicator is growing, it indicates an upward trend of the market, if the indicator drops, it will signal a downward trend ), but they all give signals of changing trends with great delay, because they use an average over long time periods.

Many traders are trying to create new indices, by summing (averaging) a few standard indicators, but this results in poorer results than when working with these indicators in isolation, since such averaging smears helpful personality, and a general trend it identifies no better than one indicator by itself. I also once tried various options like (RSI + Stochastic) 2, as well as more complex structures, but did not find convincing. Even the success in developing a new indicator Force Index candles, taking into account all the basic levels of market movements (open, high, low, close of each candle), and therefore able to devote significant reversals in the graphs, the main problem still not solved.

Idea of ​​the approach came from an analogy with the macroeconomic approach to the description of business cycles, where extensive use of various indices that can predict the future course of economic development. Moreover, among these indices, there are those (or sentiment index of business activity), which are constructed solely on the basis of the survey participants felt that instead of measuring prices, production volumes, etc. It turns out these questionnaires sentiment index is very strongly correlated with the actual dynamics of the economy and can be used for its prediction.

But one of the basic philosophical principles of technical analysis lies in the fact that the price includes all. Hence, in the currency charts contain all information about market sentiment, it is only necessary to pull it out and correct use. Candle power index, which was built around the idea of ​​a numerical coding of candlestick chart, just ask to is his application, and after several attempts managed to pick up the indicator, it is suitable for use as an index of market sentiment. One of the examples presented at the hourly chart the British pound in Figure 1.

But the more I tried to time the various options for constructing the index, the more convinced that it is not even in a particular way of calculating the indicator. In fact Sentiment Index - is a new way to use technical indicators to measure the degree of confidence that a specific pivot point on the graph can become the beginning of an explicit and long-term trend.

Indicators that I use as an index of market sentiment, according to its mathematical structure are those or other oscillators, but their structure is chosen in a special way, and the parameters are set based on statistics of a particular market. In its behavior index is similar to conventional indicators of RSI, Stochastic, and others that without much delay (and sometimes ahead of) shows the emerging trend reversals, but differs from them, that tends to show relatively long passages from overbought to oversold conditions and in the opposite direction. It differs from the trend indicators is that the direction of market movement, he does not show its on-board on the right edge of the graphite-ka, but the very fact that the value of the indicator is in a certain range. While the indicator value is within this range, the market remains one and the same trend. In doing so, the indicator values ​​may rise and fall - it is important that they remain within this range.

It is because of this behavior indicator I call it not an oscillator, and the Index. Appointment of a different index than the index of the oscillator is not required to show specific points for open positions, instead he says for example, that previously formed the trend remains in force, despite the fact that the price chart now goes in the opposite direction. Index to a greater extent than oscillators, summarizes market information, giving a global assessment of the expected trends in Language.

Index is designed to get at him through strong recommendation of the plan if the market really started to go in the on-board, the move will be enough to make sense to open positions in that direction. Moreover, the index is able to predict the spread of the market in advance, for example, the market continues to move upward, and the index already shows the change in mood, and hence an early time-gate.

Statistics obtained on the basis of observing the behavior of the Sentiment Index, would show that, if he is within a few hours preserves a certain mood (bullish, bull or bear, bear), your best bet would be just the opening position in the hand, shows an index. Therefore, when a trader missed the best moment to open, say, a short position, but the index continues to maintain that mood down (bear) market persists, then you can safely roll back upstairs to wait and wait for the opportunity to open a short position. It is these properties of the Sentiment Index will facilitate early detection of the initial moments of a good trends, and latecomers to retain good chances to accede to begin down the path of the market.

Economic analogy

For a more correct understanding of the nature of the Index and of its behavior is very appropriate analogy with the dynamics of the business cycle (business cycle). Ups and downs are typical for the economy and in the case when it is in the process of sustainable development. This development of the economy means that after a period of recession (recession) of its key indicators (GDP, industrial production, business activity, etc.) are beginning to improve (restore) and then go to the new, higher highs (growth or expansion) . After reaching these heights is inevitable slowdown occurs and a new recession, but for a normally developing economy, this decline does not go into crisis, and is replaced by the rise and new growth to a higher maximum. If each new low is not as deep as the previous one, and each new high above the previous one, then this is the upward trend of economic development.

Economists often distinguish stages of economic cycles, the so-called growth cycles, which constitute a large magnitude fluctuations of economic indicators on the stage of growth. Growth cycles do not occur in each period of the economic cycle, but are very frequent. The amplitude of the fluctuations of macroeconomic indicators can they have an amount comparable to the amplitude of the basic economic cycle. Nevertheless, the economy, showing such growth cycles, is clear and indisputable rise. Although, as stated in books on economic statistics, to distinguish at an early stage of growth cycle from the beginning of a new period of major economic cycle is impossible.

In economic statistics, invented many indicators, which are the main task was tracking and predicting the dynamics of business cycles. One of the common types of such indicators are the index of business optimism (business), which are not measures the volume of production, prices, etc., and are based on surveys of opinions of members of business, offer their assessments - have become a better business conditions, or worse. It turns out that these indexes have a very high correlation with GDP growth, industrial production, etc. (Read about the structure and methods of measurement of business cycles can in books on fundamental analysis, mentioned in the bibliography). If we compare the behavior of cyclic graphs and indicators proposed in this paper, examples of the index in market sentiment, then they can find a lot in common.

Expected Properties Index

After some research I managed to pick up the indicator, which in its behavior can serve as a Sentiment Index. He often demonstrates his "growth cycles": moving from the oversold to overbought, it may take several ups and downs. But at the same time, while the market remains upward trend, these ups and downs occur at values ​​of the Index in a limited area. When the market is preparing for the reversal, the index is at the top of the range. Those downward movement that the market performs in the Index in the upper region, with high probability is the beginning of the bear market reversal.

Clearly, not everyone is rolling back down, beginning with a high index value becomes a real turn. The high value of the index means that the market goes up, and while progress continues upward, the index remains at high values. But those setbacks down that start with the Index, located in the high range, turn into a trend fractures are much more likely than all other setbacks that occur at intermediate values ​​of the Index. Clearly, greater demand from any reasonable indicator and can not be.

Specific points to open the index position may not show, or more precisely, it provides timely signals about the possible spread of the market, but after taking a certain direction (bullish or bearish), it ignores a very long time, many opposing the motion. Consequently, these movements, in terms of the index, is to roll back the market, and they should be used for opening positions in the direction Specifies the index. But the criteria themselves for the opening of such positions may not be associated with this index, and even better if they would be based on other technical signals.

Ability Index to signal turning points of the market and indicate the direction of his mood is confirmed by statistical data obtained on the basis of observations of his behavior on the charts of major currencies. For example, one of the options index of average cycle time, ie time during which the index makes a transition from minimum to maximum and back, was about 44 hours. From this time index of less than 1 / 3 holds in areas of high and low values, and the remaining time (more than 2 / 3) moves from high values ​​to low or vice versa. Amplitude of movement of the market during the half cycle (ie the difference between the maximum and minimum values ​​of the market over time, while index goes from maximum to minimum or vice versa) varies greatly for different currencies and in different periods of the life market. Typical range of values ​​of the amplitude - 120-250 points. This means that over time, while index identifies the specific direction of the market, intra-day trader may well be time to open and close the position, and not even one.

When the index is in the extreme ranges, the direction of the market is small - the schedule at this time could have time to get up and down equally. If as a measure of market orientation to value ratio (the value of the up - down stroke) / (value of the up + down stroke), over the periods that index holds at low and high values, the focus will be on average about 11 %. And for the period until the index moves from one extreme to another range of values ​​(ie the index indicates the presence of prevailing sentiment in the market), the direction the market will be approximately 25%. This means that the best solution would be to hold positions in the Specify the index of direction, since, until Index indicates that the mood does not change, the market moves in the direction of this sentiment are typically about 150 points, and kickbacks - 90 points.

I note immediately that all of the above specific figures are conditional, they are derived based on limited statistical observations and are here only to illustrate the properties of the index. Real parameters of the behavior of the index upon which the trader would be trading decisions should be justified by its own statistics.

Principles of Trade Index

Terms of use of such an index to trade follow from its above mentioned properties. On the chart the index has three field values: high, medium and low. The boundaries of these areas are established under special rules, based on the statistics of a particular market, and are updated periodically. For brevity, we denote the state of the market for index in areas of extreme values ​​(high and low), respectively, high and low. These conditions are consistent with the usual understanding of overbought and oversold (overbought / oversold). State of the market, located in the overbought / oversold, is unstable, because after a major stroke (which the market has done to get to one of these extreme regions) and a significant pullback is inevitable. So the market at low and high values ​​of the index does not have a definite mood in the sense that here he is ready to your mood at any time to change to the opposite.

The average range of the index, which is located between the high and low, is consistent with the state of the market when it is dominated by a particular mood. After the release of the Index from the high mood is bearish (bear), and remains so until the index does not enter into the lower area (low). Conversely, when the index goes from the lower region in the middle, the mood is bullish (bull) and remains so until the entrance to the upper area.

Overall picture of the behavior graph of the Index and the location of areas shown in Figure 1 (time schedule of the British Pound, March 23 - April 16, 1999), which shows that the index often does not reach the opposite field, and returned back to that extreme region from which the last time he went out. Say, the index of market sentiment, was in oversold condition, goes toward the bullish sentiment (bull), but not rising to the top of (high), then falls back to low. Then again he comes out low and, after a few ups and downs, close to high. Such returns and consistent growth cycle in the above macro-economic analogy.

While the index is in the high value (high), should be open long positions after each roll back down. We do not believe that the main movement of the market is the upstroke, as the market is overbought and, therefore, prepared to reverse the upward trend. Therefore, in the Index in the high we begin to look at the graphics benchmarks (levels of support and line uptrends), a breakthrough that could mean the beginning of fracture of the bullish trend and turn the market down. Preliminary signal of the beginning of a reversal for us is to move the index from high in the middle region, while the market takes the state bear.

When the index goes out of overbought, we should assume that the place or, at least, is preparing a bearish times-gate trends. Confirmation of the reversal will break down after a landmark on the price chart, but the index may indicate the willingness of the market to spread, even when the graph is still going up. Therefore, it trader - to decide a landmark breakthrough will mean to him turning, and index their work already done. Assessing the effect of a guideline, you should open a short position at the break this guide down when the index was released, or forwarded to the output from the high values. Since the properties of the index provide a high probability of continuation of the prices down after the index came from the upper region, this position has a good chance of profitability.

Moreover, all the normal rules of trade must, of course, be respected. In particular, it shall be provided reasonable largest stop-loss, coinciding with a suitable formed on a chart resistance level above the open position. The index does not promise to guarantee the success of the position, it only shows the times when the open positions are more likely to be successful.

Above definitions and notations are illustrated in figure 2 (time schedule of the Japanese yen, 5 - 23 November 1999), showing a fragment of the time schedule of the Japanese yen with a complete cycle Sentiment Index. Four horizontal lines indicate the border areas here for the values ​​of the index: from -63 to -44 region of low, from -44 to 33 range of moods and from 33 to 60 area high. The vertical arrows mark the extreme points of cycles Sentiment Index, and horizontal arrows indicate the boundaries of time intervals during which the market was in a mood (bull or bear); the figure is the full cycle of the Index (fall and recovery) and Bear of the next cycle. Full cycle, concluded between the two shown at the top of the falling arrows, consists of reducing the duration of the index 62 hours and raising over 160 hours. After leaving the upper region, the index has a value bear and kept it for 28 hours, then went into the lower area of ​​the (low), where the mood of the market is uncertain. After 27 hours of index came from the lower area, and the mood became a bull for 100 hours, during which the index has formed two cycles of growth. After entering the upper area of ​​the mood of the market again became uncertain; within 17 hours should be ready for opening positions in any direction.

After a maximum of

marked "?" (As noted earlier, it is unknown whether exit from the upper band starting the next cycle or simply a short-term setback), the index has a value bear, but after 25 hours went back to the upper region. During these 25 hours of index points the wrong direction: at the bearish mood of the market upwards. However, this does not necessarily mean obtaining damages, as the uptrend, at which during this time was the market has never been broken, with proper choice of reference for open positions, no short position would not have been opened here. The next entry index in the upper region led to the formation of the peak indicated by the arrow incident, which marked the beginning of the next cycle. At this point can be clearly seen that the index showed the beginning of the future market fall ahead. Judge for yourself: with the continued de-ho prices upward, his exit from the upper area index had already shown that the mood was bearish (bear), therefore, focusing on those indications of the Index, it was possible to successfully open a short position at the top of the circle (on the level of approximately 106.20).

While index comes from the overbought area in oversold region (state bear), it indicates that the bearish market sentiment. In this case, the schedule can make a fairly large kickbacks up, sometimes a half or two figures. Methods of limiting damages and in fixing upon a time should be applied here as well, as always. But the index, until he went into the lower range of values, each upstroke views as a rollback, after which it is necessary to open a short position. And in most cases the index is right. This is confirmed by statistics that have been tracked on charts of currencies. If the index is not reaching the bottom of the returns to high, then the state bear repealed: for index in extreme areas, we believe that the market is not certain mood. The index is designed so that it usually falls into the high, when the market is clearly moving upward, but at least a substantial rise of the market is becoming overbought, therefore, recovery should be replaced by the recession. At what point did this change happen, nobody knows, but just in case, again we must be ready to open positions in any direction: up for the continuation of the course and down to break the trend. So actually in the market and there is no specific mood, because here he at any time ready to change it to reverse. After the release of the index from high to mid range market again takes the state bear, and from that moment we open only short positions. Every move is to roll back up, which in turn should sell.

In addition, we should not forget the basic properties inherent in the index of sentiment, and many other technical indicators: positive values ​​correspond to its market growth, and negative - decrease. But the focus when opening a position directly at the displayed index direction (up or down) should be very carefully and only after the collection of relevant statistics. Designation Index still nothing: his task is not so much to generate the specific signals of buy / sell, how to talk about the most probable direction of future development of the market on a scale typical moves hourly rate schedules. Therefore, it should be used as a filter for the selection signals supplied to some given trading system.

Trade should only be systematically

In conclusion, it should be noted that all the arguments about the designs, such Sentiment Index, have meaning only if a systematic approach to trading. By itself, the question of what specific targets will choose a trader to open positions, is not an index of mood. Application of the Index may in combination with any systematic approach to trade with both automated computer trading systems, and with reasonable human strategies. It is important that present trading system. If a trader opens a position for emotional reasons, not exactly and uniquely fixed rules, the application of the index is meaningless.

Possible after all and did not find universal indices and not follow the strict rules of trade, and just keep the screen a set of standard, reliable and understandable indicators (RSI, Stochastic, Bollinger, MACD, DMI, Momentum, etc.), plus a couple of new designs - their own or found in the journal Stocks & Commodities. So do many traders. Looks like all this, of course, very nice, and for some luck can sometimes even lead to some good results. But the diversity of emerging combinations of signals at the same time is that say a system to trade at all unrealistic. Each position is opened it becomes an independent investigation, no trade situation is different, and to bring the statistics for an objective analysis of trade can never be.

Index of market sentiment is not intended to signal generating buy / sell, it shows the prevailing mood in the market movements. But the mood does not always coincide with the real possibilities. The market can long enough and strongly against the move and mood (as often happens in life, and not only in speculative business). However, financial market movement is primarily determined mood, however, if the index accurately reflects the mood, it will sooner or later will win and lead the market in its own direction. But the moves against the mood can be quite significant.

Therefore well-chosen index of sentiment may improve statistics on specific trading system. Unsuccessful Index it will not improve. But if there is no well-defined trading system, you have no statistics, then there is nothing better. The effect of the use of the Index in sporadic trading nothing to measure, but the value of losses that would not necessarily be on the conscience of the index.

Proposed the basic rules of interpretation and use of the index in market sentiment in the trade:

1. The main property of the index is that its positive values ​​indicate an upward trend (bull market), and negative - on a downward trend (bear market). The following rules allow to consider more subtle properties of the dynamics of indices and apply them in trade rules.

2. If the market has a mood that you enter an index value (bull or bear), then the positions are opened only in the direction of that mood.

3. If the index is at the top (high) area, the position can be opened in either direction, although the preferred direction is upward. For a short position in this case required a substantial break down the level of support, either through an uptrend on a chart.

4. If the index is at the bottom (low) field, the position can be opened in either direction, although the preferred direction is down. To open a long position in this case required a substantial break up the resistance level of a downtrend line on a chart.

5. Output Index beyond the extreme limits (above the upper limit of high or below the lower boundary of low) means strong overbought or oversold market and can predict a particularly strong move in the opposite direction. However, this event is unlikely, since the index rarely reaches beyond these boundaries.

Each trader can supplement these general rules for the use of the Index by their own rules, starting from the under-stroke, which he uses to trade, and then checking whether the index provides useful supplementary information to its trading system to decide whether to apply index in practice. Currently, some specific options for constructing the index are statistical study. Results will be published.