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 an example:

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.

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