How To Understand Technical Analysis and Some Indicators When Trading Forex.
It has been said before that all profitable traders use technical analysis, but again not all technical analysis traders are necessarily wealthy. It is also of value to note that basic fundamentals also play their part in indicating whether a stock price will either moving up or down. Technical analysis basically just gives you a distinct edge over other traders who don’t.
Technical Analysis is extremely handy because of a couple of reasons.
1) It comprises of numbers. So all information and its impact on the market is represented in a currency’s current price.
2) It also helps to predict future trends.
3) Various chart patterns are very consistent, extremely reliable and continually repeat themselves. T.A. helps us to locate them.
We all know that share prices move in trends.Past research has shown that those that trade ‘with the trend’ greatly increase their chances of making a more profitable trade.
These trends will assist you to become more aware of which direction the market is heading. So by you learning the ‘tools of the trade’ these technical indicators and their correct practical application will most definitely help you to understand what the market is actually doing and what its current behavior is .
So stay with the trend, and follow the price.
For instance: Find the price of a popular currency pair.We will use the EUR/USD as an example.
If the EUR/USD is 1.4224 and moves to 1.4180 then 1.4090 then the market is in a down trend.
You concern yourself only with what the market IS doing right now. Not what it might do. Do not try to second guess the market. Listen to what the markets are saying, and the indicators will backup what they are telling you.
These indicators will tell you the price at a given point of time over a defined period of intervals. They are called moving because they will give you the latest price while calculating the average based on the selected time measure.
They lag behind the market so to give you an indication of any change in trend, you can use a shorter average such as a 5 or 10 day moving average. By combining a shorter term and longer term M.A. you can easily 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 also use a 5 day versus a 20 day moving average or alternatively 40 day versus a 200 day moving average.You use what suits you best.
There are also simple moving averages and linearly weighted averages 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 highlights the importance of the most recent of the share price changes.
Also known as a Moving Average Convergence /Divergence.This popular technical analysis indicator was created by Gerald Appel.
These are 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 falling it could be a strong buy signal. The converse also works.
Prices tend to stay between the upper and lower bands. They widen and become more narrow 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 exactly opposite for a buy signal.
Some traders use it in conjunction with RSI, MACD, CCI and Rate of Change.
These describe cycles which are found scattered throughout nature and when they are applied to technical analysis,they can locate shifts in the market trends. After a climb occurs, prices will often retrace a large portion of the climb, sometimes all of the original move. Support and resistance levels often will occur near the Fibonacci retracement levels.
Relative Strength Index measures the market activity to see whether a stock has been overbought or oversold. This is a leading indicator so it will help to indicate exactly what the market is going to do in the future.
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. But what works for you best is usually found by using these indicators regularly and learning by experience.
Always remember that old maxim, “If in doubt, stay out!” . Also remember that technical analysis wont factor in political news, or fundamental supply and demand.This will be found by using Basic Fundamentals.
Technical Analysis will also help you to work out how much capital to risk on a trade.Plus how and when will be the most opportune time to enter the market and lastly how to exit the trade for maximum profit or to minimise your losses.
I wish you profitable trading.