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 T.A. 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.
T.A. helps us to see them.
Here's one way of putting technical analsysis 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 then 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.
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 backup 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 M.A. 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 favourite
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 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 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 resitance levels often occur near
the Fibonacci retracement levels.
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!). Ahigher
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 conculsive 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.
I sincerely hope you find this article useful.
by Sorna Devadas
http://www.earnforex.com/articles/better_understand_technical_analysis_and_some_indicators.php
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