Technical analysts and traders believe
that certain chart patterns and shapes provide signals
of profitable trading opportunities. Many professional and
amateur traders claim that they consistently make trading
profits by following such signals. In this section, we introduce
some types of chart patterns and the corresponding trading
strategies that, according to our extensive historical tests,
give the investor a strategic trading advantage.
Moving Average Crosses
On every time scale,
the evolution of exchange rates over time can be seen as a shorter-term, random oscillation, on top of
a longer-term trend. Most currency rates show a rather "rhythmic" short-term oscillation with a typical
cycle of about 14 to 20 periods, on top of a longer term trend typically with a circle of 30 to 50 periods.
If we believe that such a cycle does exist, we should bet that the rate will continue to go through the
moving average line after it is crossed, as seen in the following:
Figure 9. Crosses down through its 20-period Moving Average with a large momentum. A likely down pattern.
For a chart in an obvious long-term
trend, the 50-period moving average line usually damps out most
of the shorter-term oscillations; therefore, this can be used
as a reliable "moving support line." A good trading strategy
is to buy the stock if it is in an up trend and if the price
bounces back up after it touches or lightly penetrates the
50-period moving average. The following figure presents such
Figure 10(a). The 50-period Moving Average is often used as a moving support
line for chart in an up trend. Technical traders think
that it is a strong buy signal if the price
bounces back after reaching the support line.
The corresponding opposite trading strategy is to "sell"
the currency rate if it is in a down trend and if the rate drops
back down after it touches or lightly penetrates the 50-period moving average.
Foreign exchange traders
often consider it a bullish sign when the 21-period moving average crosses up
the 50-period moving average, and consider it a bearish sign if 21-period
moving average crosses below the 50-period moving average. Figure 10(b) and
Figure 10(c) are such examples.
Figure 10(b) 21-period moving average crosses up the 50-period moving average, a bullish signal.
Figure 10(c) 21-period moving average crosses below the 50-period moving average, a bullish signal.