The total sum of all currency lines on the indicators CCFp and CCp in each time unit is equal to zero, irrelative of the amount of currencies in a cluster. So the indicators described reflect not only the mutual fluctuation relative to each other, but also the fluctuation relative to zero. If a currency line is above the zero line, it is said to be "overbought", if it is below the zero line, it is said to be "oversold". When a currency is in the zero line area balance line , it does not experience tension, being in the equilibrium point.
The further movement from the balance line will depend on the fact, whether the currency will be sold or bought. On the other hand, when a currency line is in the overbought area above the zero line or in the oversold area below the zero line , the occurring tension forces the currency to return to its balance state - zero line.
While in practice we deal with currency pairs, we always have to analyze the dynamics of two pairs. Exactly the same way the zero line in these indicators will show, when the currency pair is in the balance state, and when it experiences this or that tension. Projection from the intersection of indicator lines with the balance line can point out the price, around which the currency is fluctuating, thus determining the periods of flat or trend.
At the picture Fig 4 blue vertical lines are drawn through the intersection points of the indicator lines. Thus, we can transfer the balance line onto a price chart purple line. But analyzing this indicator is outside the topic of this article. You can find more information about it on the site Onix.
The horizontal balance line on the price charts shows that the currency pair is in flat. If it is sloping, the pair is in trend. Thus, for example, the period between A and B is determined as a trend. The period BC is a strong trend, and CD is its fading. To tactical techniques we refer trade signals for short-term and medium-term trading, as well as determination of the nearest levels, which can be used for setting targets and stop signals. The initial position is the presence of points A and B, which show that the price is in trend, and two levels of price range on a chart - 1.
Two horizontal dotted lines are drawn from points A and B. In future they will give support to the uptrend. You can buy starting from these lines in the direction of the uptrend. We buy from the line A' until point C appears. After that we expect the price to return till the line B'.
While the point C proved the continuation of the trend, buying from the line B' is appropriate. But this returning did not happen, because the trend became stronger and the point D appeared much higher than we expected. The only trend support at this moment can be the continuation of ABC trend main line - line C''.
This support was used, but after the pair consolidation period DE in Fig 4 , still a trend continued due to this support. We see, that after the line E appeared, the balance line changed its slope - the trend diminishes and the failure of the support of D' is quite probable, what actually happened and the confirmation is the following: the next point E shows there is no trend any more.
The consolidation period will be over only after testing the line C'', from which a trend can be renewed or, in case of its failure, we expect the fall of the pair till C'. The history shows that the trend continued See picture Fig 5a. At the present moment of time we expect the formation of the next point. The functioning supports of the trend are C'', E', F' information at the moment of writing the article. If the pair trend changes downwards, the target may be the line C', from which the price could not move upwards.
First, general definitions See Fig 6. For determining a signal we need a clearly expressed Fractal - a sharp peak, which, as a rule, appears after strong movements. The second element is the presence of a subsidiary supporting peak. From a fractal through this peak a signal line a red line on the picture is drawn.
When the indicator line crosses a signal line, an aggressive signal appears. At that, if the fractal was above a zero line, and the intersection was below it, this is a signal to buy the pair analyzed. This aggressive signal will be confirmed, when the indicator line crosses a balance line.
Trading may be different: you may buy at an aggressive signal, and add or move the stop into lossless area. And sometimes you may act in a conservative way and process only confirmed signals. Besides signals differ in their strength. In Fig 6, variant A is a strong signal, the probability of its processing is very high.
Moreover its potential is much higher than that of other variants. Variant B occurs much oftener than variant A , but the signal itself is much weaker, because the subsidiary peak is in the balance line area. The third variant C is the weakest one. As a rule it is more likely to produce loss than profit.
The difference from the previous variants is the following: the intersection of the indicator line and the balance line happens earlier, than crossing the signal line. It happens so, that the indicator line after crossing the signal line goes down, causing divergence. Such signal is considered to be the strongest one, but it happens not very often. Let us view a practical example - the pair USDJPY is used to show not only successful entries, but unsuccessful signals as well.
Timeframe is H4. We analyze signals only for variants A and B, because variant C is very weak. Red signal lines are drawn from a fractal through a subsidiary peak till the intersection with the indicator line. Through the intersection points vertical lines are drawn; they help to see the entry points on the price chart.
But it is even weaker because, the fractal is not very high and the signal line is very close to the balance line. Here we need to make one note. The signal comes after the signal line crosses the balance line. That is why any system needs predetermined levels of stop signals. Their behaviour is almost identical on higher timeframes, but differs on small ones.
Strategical trading using cluster indicators consists of determining a potential of new trends formation, entering ling-term positions and their tracing. Not very often, but from time to time there are such moments in the cluster, when the generation of a new trend is expected. The advantage of these indicators is the following: if a currency starts falling it is likely to continue falling due to the inertial character of such indicators.
The same is with the pair indicator CFP. It is not seen on peaks in real trading. But in medium-term and long-term meaning it is not so important to catch the peak, because anyway we expect enough profit for not trying to catch a new trend from the pivot point. From the thick red line till the thin red line we see the formation of a new trend, the intersection of currencies on the upper indicator and crossing of the balance line on the lower one prove that the trend has changed.
Usually after an intersection point strong movements appear, i. As a rule, the trend movement causes the reverse tension of currencies - the potential changes its sign. The thick green line shows the appearance of a potential for the rise of this currency pair, and the thin green line in the intersection point hindered the trend change.
But while the potential was not very strong, the movements are not very impetuous. However such movements usually last longer. We have chosen this pair first because the potential is relevant at the time of writing the article. Second, here we see convergence on both - Pound and Yen. Quite a rear case, it is convenient, because it allows to strengthen the position, opened earlier.
When medium- and long-term positions are opened, it is necessary to take certain steps, considered to be position tracing. Monitoring of a general direction is controlled by trend-following indicators. A position is closed, when reverse potential appears. Before this you do not always need to close positions fully, because very often one currency changes its direction, while the other currency continues the main one.
In such periods currency pairs may be in flat or perform corrections. Accumulation of a position, i. It is convenient, because stop-signals in this case will be much higher than in intraday trading. The same way using impulse indicators we may fix profit, when signals opposite to the main movement come, or open opposite positions aiming at getting backout or correction without closing main positions.
In conclusion I would like to dwell on the question of indicator parameters. There are several indicators with very similar names, so we have added a link below to the exact indicator that we are looking at. The Cluster RSI indicator will buffer 2 lines for each currency that is attached to the chart. This is working well when we use multiple Time Frames and take the cross over in the overall Trend Direction.
There is a free version available, this will have some limitations to it, but at this time we do not know what the limitations of the free demo version are. At the time of writing, there are currently 4 different reviews available, each one giving the indicator a 5 out of 5 ratings. Thanks, Ahmed! Any chance you could optimize it for metals? It is working properly as described if you have enough history onboard MT4.
Support is very good and does solve your problems, if necessary. These days I realized, that you can use the indicator for signals from base currencies crossing the 50 line. In comparison with the normal RSI, you get earlier trend signals. But, still, you have to look at the currencies cross each other.
At this time, most traders are encouraged with the price rise and open longs. But, if the up-bar is followed with a wide spread bar down to then close below its low, it means that the bearish sentiment dominates. Therefore, either the further trend will transform into the sideways trend or a downtrend will start. The pattern is highlighted with an oval area in the chart. The last up-bar is accompanied by high volume, which could be wrongly taken as a sign of further growth. However, the next bar is down, has a wide spread and closes a little lower than the previous close.
Besides, it is also accompanied by high volume, which indicates bearish sentiment. Up-thrusts can be recognized as a wide spread up during the day or during any timeframe , accompanied by high volume, to then close on the low. Up-thrusts are usually seen after a price rise, at its top, where the market has now become overbought and there is a weakness in the background.
Up-thrusts are frequently followed by the trend reversal. Market-makers quite often generate up-thrusts, as this trick is a moneymaking maneuver. During a rapid rise, many weak holders are taken into buying. The highest price is held as long as possible to encourage other traders to enter longs. The further price reversal makes them catch stops or close their positions in a panic. It must be noted that when the market is known to have become weak, market-makers or specialists can mark the prices up quickly, often on good news.
On the four-hour chart, there is an up-thrust accompanied by low volume. The bar has a wide spread and closes around the low. This means that the specialists have closed their positions and are not willing to support further growth. There is a bearish trend in the next days. This time, the chart displays an up-thrust with high volume the bar is marked with an oval. A selling climax is indicated by ultra-wide spreads down, with exceptionally high volume, usually closing on or near the highs of the day.
This action signals the market strength and a soon start of a bull market. The above chart displays a wide spread down-bar that is circled in the chart. If its high volume resulted from professional selling, the bar would close around its low, as the supply and demand imbalance would accelerate the further price fall. In this case, the selling is successfully swamped by market-makers and the down-move is stopped later.
This action is also indicated on the chart by a wide spread down-bar often going down into recent or new low ground, and then closing at or near the highs, on high volume. A more reliable sign of the reverse up-thrust is a gap down, and the following day is gapped up; however, any down-bar on low volume following this event, especially if it closes on the high of the day, is a strong indication of market strength. The professionals absorb this selling supply by massive buying to stop the bear move and to accumulate assets before they can start a rally.
This is a clear signal of professional support that has absorbed all selling. After the bar marked with an oval area, there is a slight market reaction to the lack of supply in the form of an up-bar. After that, the price continues falling for some time on low volume. As I wrote above, this is an indication of the market strength that further manifests itself in a steady uptrend. They start acting in the direction that everybody else seems to be acting in, being sure that the bullish trend is strong.
Their judgment is clouded by all the euphoria around them, the news is good, everybody is bullish about the market. Uninformed traders are rushing into the market and buying in huge amounts. This rush of buying gives the traders that accumulated stocks at the lower prices, the opportunity to take profits without putting the price down against themselves. This stage is referred to as the distribution phase in the VSA model. It may be going on very fast, accompanied by a buying climax, or it can be a slower rounding over prices to encourage weak holders to buy.
In the latter case, the chart will look like a mushroom top over a longer time, it takes several weeks for this phase to complete. This slower selling is accompanied by frequent up-thrusts and the price jumps up and down on high volume. This activity can be easily explained. When the price goes down, strong holders sharply reduce the intensity of selling, and they increase it again when most traders are bullish again.
Besides, the volume on the up-moves can be either high or low. High volume shows that selling has swamped any demand. It tends to appear at the beginning of any distribution phase. Low volume shows that no demand is present and tends to appear at the end of a distribution phase. During the whole distribution phase, the price is not trending, as if somebody prevents first its excessive rise, and then falling too low.
Let us analyze the volume. You see that the amount of trades declines once the price starts going down. After the price reaches an acceptable level, trading activity increases again. Besides, at the beginning of the distribution phase, when the mass demand is easily swamped by professional selling, the volume is much higher than at the end of the phase. After the asset is distributed to the weak holders, the market feels the imbalance of demand and supply which starts the bearish trend.
This all about trend clusters in Forex and the VSA method. In the next article, I will deal in detail with the principles of starting a bear market. Did you like my article? Ask me questions and comment below. I'll be glad to answer your questions and give necessary explanations.
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Start Trading Cannot read us every day? Get the most popular posts to your email. Full name. Written by. Michael Hypov Investment analyst and independent trader. Pros and Cons of long-term and short-term forex trading strategies. This article is the final one in the series of lessons devoted to the Volume Spread Analysis designed by Tom Williams, a famous economist.
Thus one of the basic elements of cluster indicators is a zero line, or balance line. If a currency is below the balance line, it is said to be oversold as compared to other currencies. Accordingly, if a currency is above the zero line, it is said to be overbought. If a currency is overbought, sooner or later it will start to wind down against all other currencies, the currency line will go down and may reach the balance line or even enter the overselling zone.
The nearness of a currency to the balance line means that the currency is in the balance state towards other currencies. One more important element of cluster indicators is the point of intersection of lines, pointing to the trend change or giving a signal. Besides, based on indicators one can extract divergency and convergency, but we will discuss these elements in details in the next article "Practical application of cluster indicators in the FOREX market".
I would like to draw your attention to a fact, which is not evident during analysing cluster indicators. Usually indicators are build on the basis of the price of a definite currency pair. But cluster indicators are build on the basis of all currency pairs of the complex.
Watching the indicator you must understand that we observe the prices of all the twenty four currency pairs simultaneously, and not only the derivative from the price of a current currency pair, to which the indicator is attached. And when a trade signal comes, you must remember, that not a definite pair is traded, but the whole market, or a market cluster to be more precise. This fact is an advantage, but at the same time a disadvantage.
Signals on this indicators are more secure, because they are build on the basis of all currency pairs. But at the same time there is always a risk, that the chosen currency pair will stand out among the whole complex of currencies. For example, in the market it may happen so, that large amounts of pounds are sold for USD.
In this case the indicators are most valuable as informational, not trading. Though trading systems are created based on the indicators. Terminal MetaTrader 4 makes some restrictions, which do not allow to use cluster indicators for all financial instruments. The maximal number of lines on the indicator is eight. That is why the largest cluster can contain only eight currencies. The necessity of the quotes on the indicated pairs until recently was limiting the number of brokerage companies, on whose platforms the indicators could operate.
Nowadays in the last indicator modifications the requirements became lower, now you need to have all crosses that include USD. As the author knows, all brokerage companies working on MetaTrader 4 platform provide quotes for the mentioned currency pairs. But it must be remembered that old versions of indicators, which still can be met in the Internet, request the complete set, i. It should be noted, that cluster indicators, especially those of earlier versions, were very demanding to the computer capacity and the capacity of the Internet Channel.
Now the requirements are lower, however cluster indicators remain more resource-intensive than the majority of other indicators and oscillators. Besides, experience shows that primary installation of the indicators generally reveals the deficiency of quotes on some currency pairs, which suggests their forced downloading.
During the development of the complex of cluster indicators, a large number of ideas was realized in separate indicators. However now the author suggests dwelling on three main types. The first one is indicator CCFp, it is shown at the picture Fig 1. Its predecessor CCF estimated the divergency of currencies in points, while CCFp works with specific values, which allows to avoid distortions, resulting from the " heaviness " of separate currencies.
As a result - points for each currency have different value. So the decision was made to count the percentage. It is an impulse, or signal indicator. It is very sensitive and quickly reacts on the price movements. The indicator is shown at the picture Fig 2. Two windows below contain the same indicator.
The upper window shows all the currencies, lines of USD and euro are semi-bold. The lower window contains the same indicator, but all other currencies are concealed; it shows currencies only of the corresponding pair. You can see this indicator at the picture Fig 3. But it was too resource-intensive. Later development found another way of building the same indicator, but using a fast algorithm, which allowed to extract the same information, but now from the price chart of one currency only.
Forum of the site Onix , developer - arzuma, link to a message. The idea of dividing a complete cluster of currency pairs into separate pairs is simple. As in Forex it is impossible to determine a common denominator, which could be a model stable in time, when separating currencies, they are not normalized and all the changes are counted in relative units. Until recently a point was accepted as such unit. But as the point value is changeable in time and is different for different currencies, in last modifications of cluster indicators the price change was calculated in percentage.
Besides, experience showed that contemporary quote servers do now allow a significant difference of currency crosses. That is why to reduce the traffic of pumping quotes and to increase the operation speed of the indicators, calculations of all currency pairs are conducted on the basis of dollar crosses only. So the general algorithm of the indicators looks like this:.
The following inputs available for setup are determined in the last version of the indicators. The inputs are divided into several groups. The parameter 3 is set on default Price - used price, can accept one of the following values:. The parameter 6 is set on default. Fast - a period of fast average, on default - 3. Slow - a period of slow average, on default - 5. Each parameter includes this or that currency into a cluster or disables it:. The third group of inputs manages the external view of the indicators It should be noted, that line thickness and color should be better set through this inputs, and not through a common tab, present in any indicator.
When a line is set up in an invisible color background color , the lines will not be displayed on the indicator, but currencies will be calculated. A currency can be excluded from the cluster only through the second group of inputs, described earlier. At the same time the indicators can be set up so, that other currencies will not be visible at all; only necessary currencies will be viewed.
The example of such setting is at the picture Fig 3. The fourth group of inputs includes only one parameter, but now there is an idea to include additional parameters into this group. If this parameter is equal to 0 it is so on default , all available history is calculated. But, as mentioned earlier, the indicators are resource intensive, that is why its use on low-performance computers is problematic.
This parameter allows to unburden the machine by limiting the analysed history of quotes. It is noted, that at values and the operation speed of indicators is significantly higher. The advantage of cluster indicators is in their ability to show in one window dynamics of relative currency fluctuation, which allows to discover promising currency pairs, which are likely to experience trend movements.
Cluster indicators allow to track trends inception and can give signals to open or close positions. You can find more information about the operation of indicators from the article "Practical use of cluster indicators in FOREX market".
A cluster is a part of a graph in the trading terminal in which we can see several typical events coinciding. There are two types of clusters: price and. In Forex trading, the Cluster Zone is a zone where the price slowly approaches the support (oversold) or resistance (overbought) level and makes. Agglomerative clustering is a bottom-up algorithm that starts by taking each object as its own cluster. It then merges the two nearest clusters.