A better understanding of technical analysis and related indicators

Education

We’re focusing on technical analysis in this article with a description of some of the important indicators

We
could say, all wealthy traders use technical analysis but not all technical
analysis traders are wealthy although technical analysis (TA) is the most precise way
of trading

the Forex market.

It’s
also useful note that fundamentals play their part in indicating whether a
price will move up or down. It gives you the edge over other traders.

Technical
Analysis is so powerful because of a few reasons:

1)
It represents numbers. All information and its impact on the market and traders
is represented in a currency’s price.

2)
It helps to predict trends and the foreign exchange market is very ‘trendy’.

3)
Certain chart patterns are consistent, reliable and repeat themselves. TA helps
us to see them.

Here’s
one way of putting technical analyses into perspective (wish I had a dollar
each time I said ‘technical analysis’). We all know that prices move in trends.

Research
has shown that those that trade ‘with the trend’ greatly improve their chances
of making a profitable trade.

Trends
help you become aware of the overall market direction and often rescue us from
less than profitable entry points. I attended a 2-day course costing me over
$2500 AUD and the biggest thing I learned from it was the need for discipline
and emotional control.

The content was so
basic that within the next 3 or 4 articles, I would have covered all of it. So,
learning the ‘tools of the trade’ the technical indicators and their
applications will help you to diagnose what the market is doing but even then,
you need to expect ups and down and trade with emotional control.
ForexLive

Stay with the trend, follow the price

Find the price of the currency pair. If EUR/USD
is 1.4224 and moves to 1.4180 then 1.4090 then the market is in a down trend.
Concern yourself only with what the market IS doing not what it might do.
Listen to the markets and the indicators will back up what they are telling
you.

Moving averages

Tell
you the price at a given point of time over a defined period of intervals. They
are called moving because they give you the latest price while calculating the
average based on the selected time measure.

They
lag the market so to give you an indication of a change in trend, use a shorter
average such as a 5- or 10-day moving average. By combining a shorter term and longer-term
MA you can detect a buy signal when the shorter term crosses the longer-term
moving average in the upward direction.

Or
a sell signal if it crosses in a downward direction. For example, you could use
a 5 day versus a 20-day moving average or a 40 day versus a 200 day moving
average.

There are simple
moving averages, linearly weighted which gives more importance to the recent
prices or exponentially weighted. The latter is a favorite because it considers
all prices in a time period but emphasizes the importance of the most recent
price changes.

MACD

Based on moving averages, a MACD plots the
difference between a 26 exponential moving average and a 12-day exponential
moving average, with a 9 day used as a trigger line. If a MACD turns positive
when the market is still plummeting it could be a strong buy signal. The
converse also works.

Bollinger bands (sounds like an elastic band)

Prices
tend to stay between the upper and lower bands. They widen and become narrower
depending on the volatility of the market at the time.

A sell signal would
be when the moving average is above the Bollinger bands and vice versa for a
buy signal. Some traders use it in conjunction with RSI, MACD, CCI and Rate of
Change.

Fibonacci retracement

Describe
cycles found throughout nature and when applied to technical analysis can find
shifts in the market trends. After a climb prices often retrace a large portion
sometimes all of the original move. Support and resistance levels often occur
near the Fibonacci retracement level.

RSI

Relative
Strength Index measures the market activity to see whether it’s overbought or
oversold. This is a leading indicator so helps to indicate what the market is
going to do (awesome!). A higher RSI number indicates overbought (so expect a
bearish shift) and a lower number indicates oversold.

Successful
traders will generally use 3 or 4 signals to provide a more conclusive signal
before entering a trade.

Always
remember, “If in doubt, stay out!”. Technical analysis doesn’t factor in
political news, a country’s economic profile or fundamental supply and demand.

Technical
Analysis helps us figure out how much money to risk on a trade. How and when to
enter the market and how to exit the trade for profit or to minimize loss.

This article was written by LegacyFX.

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