GOLD

Gold is a unique asset based on few basic characteristics. First, it is primarily a monetary
asset, and partly a commodity. As much as two thirds of gold’s total accumulated holdings
relate to “store of value” considerations. Holdings in this category include the central bank
reserves, private investments, and high- cartages jewellery bought primarily in developing
countries as a vehicle for savings. Thus, gold is primarily a monetary asset. Less than
one third of gold’s total accumulated holdings can be considered a commodity, the
jewellery bought in Western markets for adornment, and gold used in industry.

The distinction between gold and commodities is important. Gold has maintained its value
in after-inflation terms over the long run, while commodities have declined. Some
analysts like to think of gold as a “currency without a country’. It is an internationally
recognized asset that is not dependent upon any government’s promise to pay. This is
an important feature when comparing gold to conventional diversifiers like T-bills or
bonds, which unlike gold, do have counter-party risk.

What makes gold special?

 Timeless and Very Timely Investment

 Gold is an effective diversifier
 Gold is the ideal gift
 Gold is highly liquid
 Gold responds when you need it most

Industry

• Gold solder is used for joining the components of gold jewelry by high-temperature
hard soldering or brazing. If the work is to be of hallmarking quality, gold solder
must match the carat weight of the work, and alloy formulas are manufactured in
most industry-standard carat weights to color match yellow and white gold. Gold
solder is usually made in at least three melting-point ranges referred to as Easy,
Medium and Hard. By using the hard, high-melting point solder first, followed by
 solders with progressively lower melting points, goldsmiths can assemble complex
items with several separate soldered joints.

• Gold can be made into thread and used in embroidery.

• Gold is ductile and malleable, meaning it can be drawn into very thin wire and can
be beaten into very thin sheets known as gold leaf.
• Gold produces a deep, intense red color when used as a coloring agent in
cranberry glass.
• In photography, gold toners are used to shift the color of silver bromide black and
white prints towards brown or blue tones, or to increase their stability. Used on
sepia-toned prints, gold toners produce red tones. Kodak published formulas for
several types of gold toners, which use gold as the chloride.
• As gold is a good reflector of electromagnetic radiation such as infrared and visible
light as well as radio waves, it is used for the protective coatings on many artificial
satellites, in infrared protective faceplates in thermal protection suits and
astronauts' helmets and in electronic warfare planes like the EA-6B Prowler.
• Gold is used as the reflective layer on some high-end CDs.
• Automobiles may use gold for heat dissipation. McLaren uses gold foil in the
engine compartment of its F1 model.
• Gold can be manufactured so thin that it appears transparent. It is used in some
aircraft cockpit windows for de-icing or anti-icing by passing electricity through it.
The heat produced by the resistance of the gold is enough to deter ice from
forming.
Resistance and Support

Gold's fall from 1432.5 could still continue with another decline with 1432.5 resistances
intact. But even in that case, strong support should be seen above 1329 and bring the
last rise to conclude recent uptrend. Above 1408.9 will flip intraday bias back to the
upside for 1432.5 and above.

In the bigger picture, rise from 1155.6 is treated as the fifth wave of the five wave
sequence from 1044.5, which should also be fifth wave of the rally from 681 (2008 low).
Note that gold is close to two important projection target, 161.8% projection of 931.3 to
1227.5 from 1044.5 at 1449.6 and 100% projection of 253 to 1033.9 from 681 at 1462.
Also, upside momentum is clearly diminishing with bearish divergence in daily MACD and
RSI. Reversal should be imminent. Break of 1315.8 support will signal that 1424.3 is an
important top and gold should have started a sizeable medium term correction that should
dip back into 1044.5/1227.5 support zone at least.
Moving Averages of Gold

Moving average looks at gold’s average daily price over a specific period of time,
anywhere from a few days to a few years. When gold moves below its 50- to 100-day
moving average, for example, gold traders may believe a decline is in progress. In
contrast, when gold exceeds its 50- to 100-day moving average, gold traders may believe
a rally is in progress.

Moving Averages used for Short term Analysis

MOVING AVERAGES FOR

SHORT-TERM ANALYSIS Diff.
SMA5 1393.1 1
SMA10 1394.8 1
SMA15 1390.5 1

Moving Averages used for Long term Analysis

MOVING AVERAGES
FOR LONG-TERM
ANALYSIS Diff.
SMA50 1381.8
SMA100 1338.1
SMA200 1268.8
A moving average crossover is simply the point on a chart—often generated by an online
gold-trading program—where the price of gold and gold’s moving average intersect.

Moving average crossovers help gold traders forecast future movements in gold prices so
they know when to buy or sell.

Moving average crossover is a popular gold trading tool because it is easy to generate in
most online gold trading programs and is easy to use.

Moving average crossover tends to work best in so-called “trending” markets, where gold
prices are tending to move in one direction, either up or down.

In fact, to determine the strength of a moving average crossover, many gold traders look
at trend lines. Trend lines are one of the simplest technical tools gold traders can use.
Gold traders (or their online gold-trading programs) simply draw a line under gold-price
highs or lows on a chart to show the prevailing direction of price. For example, a gold
trader may connect a series of lows on a gold-price chart to show where gold will
potentially rally. Or, a gold trader may connect a series of highs on a gold-price chart to
show where gold will potentially decline. Many gold traders wait until the low trend line
has been breached to execute a purchase trade, or the high trend line has been
breached to execute a sale trade.

Bollinger Bands

Bollinger bands are used to measure a market's volatility. Basically, this little tool tells us
whether the market is quiet or whether the market is LOUD! When the market is quiet, the
bands contract and when the market is LOUD, the bands expand. Notice on the chart
below that when price is quiet, the bands are close together. When price moves up, the
bands spread apart.
 Bollinger Band of
Gold as at Jan 06,
2011

Upper
Band 1417.8
Mid Band 1389.1
Lower
Band 1360.4

That's all there is to it. Yes, we could go on and bore you by going into the history of the
Bollinger band, how it is calculated, the mathematical formulas behind it, and so on and
so forth, but we really didn't feel like typing it all out.

In all honesty, you don't need to know any of that junk. We think it's more important that
we show you some ways you can apply the Bollinger bands to your trading.

The Bollinger Bounce

One thing you should know about Bollinger bands is that price tends to return to the
middle of the bands. That is the whole idea behind the Bollinger bounce. By looking at the
chart below, can you tell us where the price might go next?
If you said down, then you are correct! As you can see, the price settled back down
towards the middle area of the bands.
What you just saw was a classic Bollinger bounce. The reason these bounces occur is
because Bollinger bands act like dynamic support and resistance levels.

The longer the time frame you are in, the stronger these bands tend to be. Many traders
have developed systems that thrive on these bounces and this strategy is best used
when the market is ranging and there is no clear trend.

Fibonacci retracements
Fibonacci retracement is created by taking two extreme points (usually a major peak and
trough) on a stock chart and dividing the vertical distance by the key Fibonacci ratios of
23.6%, 38.2%, 50%, 61.8% and 100%.

Once these levels are identified, horizontal lines are drawn and used to identify possible
support and resistance levels.

Each term in this sequence is simply the sum of the two preceding terms and sequence
continues infinitely.
RSI of Gold

The Relative Strength Indicator or RSI as it is more commonly known is one of many
indicators used by analysts, researchers and investors in an attempt to time their market
entry and exit points. Timing is paramount to a good investment decision and there are
many combinations of indicators and factors that must be considered before making that
final decision to buy or sell. Fear and greed are generally regarded as the biggest movers
in the market place and they can push a stock or a commodity into the oversold or
overbought territory. This aberration can be detected by the RSI as gold swings in either
direction. In general terms if you can buy when the indicator touches or goes below ‘30′
you should be reasonably comfortable that you have bought at a low for gold. At the other
end of the scale if you can sell when the RSI touches or goes above the ‘70′ mark then
you can be reasonably comfortable that you are getting out pretty close to the top.

Now if we examine the chart for gold covering the last twelve months we can see that
there have been three buying opportunities as the RSI hit the ‘30′ level. Each of these
trigger points were followed by rallies albeit of differing magnitudes. A fourth opportunity
appeared to be on the cards earlier this month however this did not materialize as gold
bounced off its 200 day moving average and headed back towards the $900/oz. area.
However there does appear to be a downward channel forming over the short term
consisting of lower lows and lower highs so gold could once again test the lower channel
line with a move down to the $850/oz. level.

Some would argue that the bottom is already in and its up, up and away from here and
they might well be correct. No-one knows for certain and our humble opinion is that we
will see gold move lower and hit or break through the ‘30′ level on the RSI. Should this
happen then we will become buyers once again of quality gold producing stocks. Being
patient and sitting on your hands is not always easy and picking the bottom of a cycle is
almost impossible, however, we believe that the RSI could guide us to an advantageous
entry point. The next few weeks could present us with such a buying opportunity or gold
could go her own way regardless of any chart analysis.
 Daily RSI

44.63

LUTFI MAGNET POINTS FOR GOLD

TIME FRAME HIGH LOW CLOSE M/Point
DAILY 1384.3 1363.2 1377.9 1373.8
WEEKLY 1423.5 1412.4 1377.9 1418.0
MONTHLY 1430.9 1360.8 1377.9 1395.9
3 MONTHS 1430.9 1314.5 1377.9 1372.7
6 MONTHS 1430.9 1156.3 1377.9 1293.6
YEARLY 1430.9 1043.7 1377.9 1237.3
Note: Data in this table is updated as at Jan 06, 2011
 FOREIGN EXCHANGE MARKET

The Forex market, established in 1971, was created when floating exchange rates
began to materialize. The Forex market is not centralized, like in currency futures or
stock markets. Trading occurs over computers and telephones at thousands of locations
worldwide.

The Foreign Exchange market, commonly referred as FOREX, is where banks,

investors and speculators exchange one currency to another. It is the largest financial
market in the world. In comparison, the US stock market may trade $10 billion in one day,
whereas the Forex market will trade up to $4 trillion in one single day. The Forex market
is an opened 24 hours a day market where the primary market for currencies is the 24-
hour inter-bank market. This market follows the sun around the world, moving from the
major banking centers of the United States to Australia and New Zealand to the Far East,
to Europe and finally back to the Unites States.

Until now, professional traders from major international commercial and investment banks
have dominated the FX market. Other market participants range from large multinational
corporations, global money managers, registered dealers, international money brokers,
and futures and options traders, to private speculators.

IMPORTANT DATES IN THE FOREX HISTORY

Early 20th Century: Only in the 20th century paper money start regular circulation. This
happened by force of legislation, the efforts of central banks to manage money supplies,
and government control of gold supplies. Within a country, this fiat money is as good as
any other form. Internationally, it is not. International trade has always demanded a
money standard accepted everywhere. Gold and silver provided such a standard for
centuries. An official Gold Standard regulated the value of money for about a century,
prior to the start of World War I in 1914.
1929: The dollar has been perceived as more of a has-been, due to the Stock
Market Crash and the subsequent Great Depression.

1930: The Bank for International Settlements (BIS) was established in Basel, Switzerland.
Its goals were to oversee the financial efforts of the newly independent countries, along
with providing monetary relief to countries with temporary balance of payments difficulties.

1931: The Great Depression, combined with the suspension of Gold Standard, created a
serious diminution in foreign exchange dealings.

World War Ii: Before World War II, currencies around the world were quoted against the
British Pound. World War II crashed the Pound. The only country unscarred by the war
was the US. The US dollar became the prominent currency of the entire world.

1944: The United Nations Monetary and Financial Conference at Bretton- Woods, New
Hampshire discussed the financial future of the post-war world. The major Western
Industrialized nations agreed to a «pegging» of the US Dollar, which in turn was pegged
at $35.00 to the troy ounce of gold. The future was designed to be stable, in part due to
the tight governmental controls on currency values. The US dollar became the world’s
reserve currency.

1957: The European Economic Community was established.

1967: At the IMF meeting in Rio-de-Janeiro, the Special Drawing Rights (SDRs) were
created. SDRs are international reserve assets created and allocated by the IMF to
supplement the existing reserve assets.

1971: The Smithsonian Agreement, reached in Washington, D.C., had a transitional

role to the free floating markets. The ranges of currencies fluctuations relative to the US
dollar were increased from 1 percent to 4.5 percent band. The range of currencies
fluctuating against each other was increased up to 9 percent. As a parallel, the European
Economic Community tried to move away from the US dollar block toward the Deutsche
Mark block, by designing its own European Monetary System. In the summer of 1971,
President Nixon took the United States off the gold standard, and floating exchange rates
began to materialize.
1972: West Germany, France, Italy, the Netherlands, Belgium and Luxembourg
developed the European Joint Float. Member currencies were allowed to fluctuate within
2.25 percent band (the snake), against each other and 4.5 percent band (the tunnel)
against the USD.

1973: The Smithsonian Institution Agreement and the European Joint Float systems
collapsed under heavy market pressures. Following the second major devaluation in the
US dollar, the fixed-rate mechanism was totally discarded by the US Government and
replaced by The Floating Rate.

1978: The International Monetary Fund officially mandated free currency floating.

1979: The European Monetary System was established.

1999: January 1st, 1999, the Euro makes its official appearance within the countries
members of the European Union.

2002: January 1st, 2002, the Euro becomes the only currency and replaces all
other twelve national currencies within the European Union and Monetary Market:
Belgium, Germany, Greece, Spain, France, Ireland, Italy, Luxembourg, Netherlands,
Austria, Portugal and Finland.

Today: Today, supply and demand for a particular currency, or its relative value, is the
driving factors in determining exchange rates. Decreasing obstacles and increasing
opportunities, such as the fall of communism and the dramatic growth of the Asian and
Latin American economies, have created new opportunities for investors. Increasingly
vast amounts of foreign currencies began flowing into other countries banks.

BENEFITS OF TRADING FOREX

Trading the Forex market has several advantages over other financial markets. Amongst
the most important are: liquidity, it’s a 24hr market, leverage trading (margin), low
transaction costs, low minimum investment, specialized trading, you can trade from
anywhere and others.
 Liquidity: Forex market is by far the most liquid financial market in the world with nearly 4
trillion dollars traded every day according to the Bank of International Settlements.

Why is the liquidity so important to us? Because it helps us in several ways:

• The most important of all is that superior liquidity ensures price stability. With such a
big market, there will be always someone willing to buy or sell any currency at the quoted
price, making it easy to open and close trades or transactions at any time of the day.
However, there are periods of high volatility during which it might be not easy to get a
good fill.
• Because of the great amount of liquidity, most of the time we are able to get in and
out the market fast with consistent executions. But as any other market, during
periods of instability slippage is always a possibility.
• Higher liquidity also makes it hard to manipulate the market in an extended manner. If
some of its participants try to manipulate it, the participants would require enormous
amounts of money (tens of billions) making it practically impossible.

24hr Market : The Forex market is an around the clock market. This means that you
could open or close any position at any time from Sunday 5:00 pm EST (Eastern
Standard Time) when New Zealand begins operations to Friday 5:00 pm EST, when San
Francisco terminates operations. The main reason for this is that there is no physical
location where all transactions take place (OTC).

Leveraged Trading: Forex trading gives much more buying/selling power than many
other financial markets. This allows us to control greater transactions with a small margin
deposit. Some brokers offer up to 400:1 leverage, meaning that you can control for
instance a 100,000 US dollar transaction with just .25% or US$250.

Low Transaction Costs: The Forex market is considered one of the markets with the
lowest costs of trading. Most brokers collect their fees based on two schemes:
Spread: Brokers collect their fees by charging a different price for long and short
positions. The difference is what is collected by the broker.

Spread And Commissions: Most brokers under this scheme charge a commission but
usually the spread is tighter and transaction costs can even fall below brokers under the
spread “only” scheme.

Low Minimum Investment: The Forex market requires less capital to start trading than
any other markets. Some brokers allow traders to open trading accounts with an
investment that could go as low as US$1 (yes, you read that right, that is one US dollar.)
On average however, brokers allow traders to open accounts with around US$250.

Specialized Trading: The liquidity of the market allows us to focus on just a few
instruments (or currency pairs) as our main investments (85% of all trading transactions
are made on the previously mentioned seven major currencies). This allows us to keep
track of, monitor and get to know each instrument better.

Trading From Anywhere: Not having a physical location where all transactions take
place (OTC), allows us to trade from anywhere in the world. We only need either a phone
line (where you can have direct access to the brokers dealing desk) or an internet
connection (through an online platform).

MAIN FOREX PARTICIPANTS

The main participants in the Forex market are:

Banks: Banks are the greatest participant of the Forex market. Large transactions are
conducted by these banks (billions on a daily basis), both on their customer’s behalf and
on their own. Speculative transactions made by banks accounts for around 70% of the
volume generated by banks.

Central Banks: Central banks are mayor players in the Forex market, although the main
reason they get in the market is not for speculative reasons. The main goal of central
banks is to control the money supply of a nation, so an economy can achieve its
economic goals.
A central bank could intervene in the Forex market for the following reasons:

• To regain price stability of an exchange rate

• To protect certain levels of price in an exchange rate

• When economic goals need to be achieved (inflation, growth, etc.)

Some central banks are less conservative than others, some of them intervene regularly
(like the Japanese Central Bank*) and some of them not very often (Federal Reserve) - at
least visually.

THE MOST IMPORTANT CENTRAL BANKS ARE:

• The Federal Reserve (US central bank)

• The Bank of Japan
• The Bank of England
• The Bank of Canada
• The Swiss National Bank
• The European Central Bank

Commercial Companies:
These are corporations that participate in the Forex market trading goods and services
abroad. Most companies like to be paid in their home currencies or US dollars, so in order
to complete the transactions they need to acquire foreign currency through commercial
banks. Other reason a commercial company may participate in the Forex market is to
hedge their exposure.
Investment Funds:
These are companies represented by pension and mutual funds, international
investments and arbitrage funds that invest in other countries securities.
Today, more and more funds are participating in the Forex market to speculate and
hedge themselves.

Brokers:
Broker companies’ main objective is to bring together buyers and sellers of foreign
currency. Most Forex brokers charge no commissions. Brokers get their fee from the
spread.

There are two types of brokers:

Money Maker
(with dealing desk): The broker is the counterpart of every transaction made by the trader.
When a trader opens a transaction the broker opens the same transaction in the opposite
direction, if the trader longs one currency pair, the broker shorts the same currency pair.
This is the way for Money Makers to hedge themselves.
Non Dealing Desk:
The broker only connects the trader to banks through an ECN (Electronic Communication
Network). No trade is taken by the broker. These are the type of brokers that usually
charge a commission plus the spread, but as we said before, transaction costs can fall
below what Money Makers charge just for the spread.

Individuals Including Traders: Individuals that conduct transactions for a wide variety of
reasons including: speculating, a tourist wanting foreign currency, etc.
 FUNDAMENTAL ANALYSIS

The basic premise of fundamental analysis is that the value of a currency is determined
by the comparative strength and weakness of a country’s economy in relation to those of
its trading partners. The stronger a country’s economy-measured in higher GDP growth,
lower inflation, higher interest rates, greater productivity, more political stability, etc. the
stronger a country’s currency. Over time, these fundamental factors produce the long
lasting price trends typical of the currency markets.

Many factors pertaining to a national economy are monitored, assessed and judged for
the effect they have on economic growth and development. These trends are often large
and complicated, and can be enacted over a long period of time. Another factor which
affects a country’s condition status is its political system – the balance between social
welfare and individual competition, or the openness of an economy to foreign trade and
capital. Other areas include the social and cultural makeup of a nation, such as the
productivity, labor mobility, and entrepreneurship. Natural resources also lay a part, such
as oil or mineral deposits.

Fundamental analysis views an economy and its currency through economic statistics.
These statistics often depict a particular sector of an economy rather than the economy
as a whole. Because of this, different statistics may point in opposite directions, one area
of an economy may be growing while another falters, or the importance of one industry
declines as another rises. Most statistics are also retrograde, telling you what has already
happened, but not necessarily what is to come.

In our interconnected and volatile world, political, military, human and even natural events
can have rapid, vast and long lasting repercussions. A fundamental analyst must take into
consideration all this information to create an overall picture of any economy – its
strength, weakness, vulnerabilities and most importantly, its future potential and the likely
future course of its currency. Personal judgment and experience come into play to
complete the fundamental currency analysis.

ECONOMIC INDICATORS

An economic indicator is information amassed and published by a government or private

entity recording the activity in a particular sector, either in a specific industry or in an
entire economy. Most indicators are statistical, but they can be anecdotal or subjective as
well. Indicators are recorded and published on a regular basis by many organizations and
are used by traders to assess the strength or weakness of an economy, to predict future
activity, to judge central bank policy, and to provide insight into the many economic
variables that make up a modern industrial economy.Economy-wide indicators are the
broadest measures of productive activity and record the result for an entire economy.
Usually collected by government, they are among the most authoritative statistics.

Examples are:

• Gross Domestic Product (GDP)

• Consumer Price Index (CPI)
• Producer Price Index (PPI)
• Unemployment Rate

Industry and sector based statistics normally pertain to a particular industry, such as
housing or a particular economic activity, such as retail sales. Collected by both
government agencies and private sector groups, the activity they track is more limited,
and can have a close correlation to the broader indices, generating considerable trading
interest.

Examples Are:

• Durable Goods Orders

• Housing Starts
• Building Permits
• New Homes Sales
• Retail Sales
• Purchasing Managers Index
• Institute for Supply Management (ISM) Survey

The final group is sentiment indicators, which gauge business and consumer opinions on
current economic conditions and their expectations and intentions for the future.
 TECHNICAL ANALYSIS

LUTFI MAGNET THEORY

After the deep study of financial market & years of practical experience Mr. Nazish Lutfi
who is currently CEO of Institute of Securities, Management & Research has prepared
“Lutfi Magnet Theory” for analyzing and trading purpose. This theory is especially
prepared for Karachi Stock Exchange (Low Volume Market). It is very helpful trading tool
for those who are not use to sit in front of charts and not aware with the technical
analysis. This is the combination of different technical analysis tools.By this theory one
can calculate the trend of the market in a very simple way. It is very useful to calculate the
entry and exit point so it is very useful in trading.

One can analyze the market in short term, medium term & long term as well by putting
high and low point for 3 month, 6 month & 12 month respectively in the magnet calculator.
(See below)

HIGH
100%

Magnet Resistant 3 85%

Magnet Resistant 2 75%

Magnet Resistant 1 55%

MAGNET POINT 55%

60%
Magnet Support 1

Magnet Support 2
75%
85%
Magnet Support 3
100%
LOW
Magnet Point is actually the midpoint of the market trend ({high + low}/2), if the market
play above the magnet point it shows bullish trend (buy) while if market play below the
magnet point it show bearish trend (sell).

At magnet point there is 50-50% chances of the market to move up or down. As the
market arrives at MR1 (Magnet Resistance 1) the chances of the market to move up will
be 60% and if the market reaches to the point MS1 (Magnet Support 1) probability of the
market to move down will be 60% and so on. As the market moves away from the magnet
point on the upper side the probability of the bullish movement will be increase and vice
versa.

Perhaps the most utilized means of making decisions and analyzing the Forex market is
technical analysis. The difference between technical analysis and fundamental analysis is
that technical analysis ignores fundamental factors like news and economic conditions,
and is applied only to the price action of the market. Forex technical analysis primarily
consists of a variety of Forex technical studies, each of which can be interpreted to help
predict market direction or to generate buy and sell signals.

• The Trend
• Support and Resistance
• Trend Lines and Channels
• Moving Averages
• Indicators and Oscillators
• Drawing Tools
THE TREND

One of the first things heard in technical analysis is "the trend is your friend." Finding the
prevailing trend helps traders to become aware of the general market direction. Daily,
weekly, and monthly charts are most ideally suited to identifying the longer-term trend.
Once the overall trend is identified, technical traders will usually begin identifying the
trend of their chosen trading timeframes.
SUPPORT AND RESISTANCE

Support and resistance levels are points where a chart experiences recurring upward or
downward pressure. Support levels exist at lows while resistance levels exist at highs.
Once these levels are broken, they tend to become the opposite. For example, if a
support level is broken to the downside, that level often becomes a new resistance level.
In a rising market, a resistance level that is broken could serve as support for the upward
trend, while a broken support level in a falling market could serve as a new resistance
level for the downward trend.
TREND LINES AND CHANNELS

Trend lines are simple, yet helpful tools in confirming the direction of market trends. An
upward straight line is drawn by connecting at least two successive lows, but preferably
more. Each successive point must necessarily be higher then the previous one. The
continuation of the line helps determine the path along which the market will move. An
upward trend is a concrete method to identify support lines/levels. Conversely, downward
lines are also charted by connecting two points or more. The validity of a trend line is
partially related to the number of connection points.

MOVING AVERAGES

Moving averages can be very helpful in identifying the overall trend. Moving averages
reveal the average price of a currency at a given point of time over a defined period of
time. They are called "moving" because they reflect the latest average while adhering to
the same time measure.

A weakness of moving averages is that they lag the market, so they do not necessarily
signal a change in trends at the most advantageous time. To help address this issue, it's
advantageous to use a shorter period, which would be more reflective of recent price
action than a longer period. At the same time, however, shorter period moving averages
are subject to more false trend-change signals. Alternatively, moving averages may be
used by combining two averages of different periods. Buy signals are usually etected
when the shorter-term average crosses above the longer-term average. Conversely, sell
signals are suggested when the shorter average falls below the longer one.

There are three main types of mathematically distinct moving averages - the simple
moving average (SMA), the exponential moving average (EMA), and the weighted moving
average (WMA). EMAs and WMAs assign greater weight to the most recent price data,
while SMAs assign equal weight to all of the data in the period. For this reason, many
traders prefer to use EMAs and WMAs to help combat the lagging nature of moving
average signals.

INDICATORS AND OSCILLATORS

Indicators and oscillators vary immensely in their usage and derivation. The indicators
that reside right on the price bars or candles include moving averages, Bollinger Bands,
Parabolic SAR, and a host of others. These are usually lagging indicators providing a
historical view of price action. They can often provide clues and confirmation as to the
direction of past trends and present momentum.

The oscillators that usually appear as a separate entity above or below the price bars are
also lagging. In contrast to the price indicators, though, oscillators excel at identifying
overbought and oversold conditions. As such, they are of most use to traders who wish to
identify ranging, rather than trending, circumstances. These oscillators include Stochastic,
MACD, RSI, and many others.

DRAWING TOOLS

Like analysis tools, technical drawing tools, aside from the aforementioned trend lines
and channels, are both popular and varied. With several different incarnations of
Fibonacci formations, as well as the Gann Fan, Andrew's Pitchfork, and many others,
chart drawing tools have a huge number of adherents. Most of these drawing analyses
are meant to identify areas of importance, including support and resistance levels. Trend
lines, whether diagonal or horizontal, are the most basic drawing tools. From there, they
become increasingly complex, and often originate from complicated mathematical
foundations.