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Understanding Forex – #2 – Technical Analysis
This is a series of articles about The Foreign Exchange Market. You will learn here what Forex is , how it works and how profitable it can be. The whole series contain the following articles . . .
1.What is Forex
2.Technical analysis
3.Fundamental analysis
4.Money management
5.Compound interest
Technical Analysis.
Unless you are new to trading you probably know already that technical analysis is a method of forecasting future price movement of commodities, securities, etc (in this case currencies) based on chart analysis, pattern formations, technical indicators, etc. Forex can be traded technically and in my opinion it is quiet predictable.
No trading strategy will work 100% of the time. That’s why you need proper money management techniques. Anyway, technical analysis is important to determine where the price of the currencies is going, also when to enter and exit positions.
There are different technical analysis techniques that you can implement to your trading strategies. I show here how to use technical indicators which is a very common technique among most technical traders.
There are many technical indicators. Some of them are more common and useful than others. In my opinion you won’t need dozens of them to know when to enter or exit a trade. It is about quality, not quantity. I think though that it is better to relay on a few indicators than in only one.
If you trade based on the signals of only one indicator, you may miss some important information about the market that other technical indicators would reveal to you. By using a few technical indicators instead of only one, you can make more educated and accurate choices.
So, I will show you here some very common technical indicators and how they are used to forecast market prices. Remember that technical indicators are the basis of technical analysis systems.
You can implement three different aspects to your trading systems. One is technical analysis as I explain here. The other is fundamental analysis. The third one is money management as I explain in my other articles on this series.
Common technical indicators and their definitions:
1. Average Directional Index – ADX
An indicator used in technical analysis to determine the strength of a prevailing trend.
2.Exponential Moving Average – EMA
A type of moving average that is similar to a simple moving average, except that more weight is given to the latest data.
3.Moving Average Convergence Divergence – MACD
A trend-following momentum indicator that shows the relationship between two moving averages of prices.
4.Bollinger Band
A band plotted two standard deviations away from a simple moving average.
5.Fibonacci – There are many Fibonacci indicators like the following . . .
a.Fibonacci Time Zones
b.Fibonacci Fan
c.Fibonacci Channel
d.Fibonacci Arc
c.Fibonacci Clusters
d.Fibonacci NumbersLines
e.Fibonacci Retracement
f.Fibonacci Extensions
6.Relative Strength Index – RSI
A technical momentum indicator that compares the magnitude of recent gains to recent losses in an attempt to determine overbought and oversold conditions of an asset.
7.Stochastic Oscillator
A technical momentum indicator that compares a security’s closing price to its price range over a given time period.
8.Williams %R
In technical analysis, this is a momentum indicator measuring overbought and oversold levels, similar to a stochastic oscillator.
You can learn more about these technical indicators and how they are used if you visit www.investopedia.com. Most technical analysis systems combine at least a few technical indicators to forecast the market. I think that proper technical analysis skills are an important aspect of most successful trading systems.
You can learn more about Forex and trading systems from my other articles on this series. I covered here important aspects of technical analysis, but most successful trading systems need some fundamental analysis andor money management too.
EasyWebRiches.com 2006
Forex Technical Analysis: The Art of Predicting the Future by
Forex Technical Analysis: The Art of Predicting the Future by Studying the Past
Technical Analysis is the easiest and most precise way of trading the FOREX market known by the forex traders community. All available information on any particular currency, and its impact on traders, and the market, are already reflected in a currency’s price. The foreign exchange market is mostly composed of trends and is, therefore, a place where technical analysis can be used very effectively. Experience in trading has shown that history repeats itself – over time, certain chart patterns become consistent, predictable and very reliable. The problem is being able of spoting them. There’s always more than meets the eye at first glance.
Prices move in trends; and the traders who don’t know this fact obviously have no need to implement a trading methodology on technical analysis, they havent even realized yet. But, over 100 years of research has shown that those who trade “with the trend”, more often than not, greatly improve their chances of winning in the forex markets (i.e., making a profitable trade).
Many times finding the prevailing trend will help you become aware of the overall market direction and offer you better visibility–especially when shorter-term movements tend to clutter the picture. And many times following the trend will bail you out of an initially less than great entry point.
The main question you may be asking yourself by now is; how does technical analysis help you to determine what the trend of the market is and how does it help your efforts to trade with the trend and not against the trend?
It is important to mention that no one is claiming technical analysis as the magic bullet of trading . And if you ask, which indicators are better in Forex trading? The answer is none – technical indicators should simply be components of your overall customized personalized trading system and not systems in and of themselves. They are like tools in a tool kit, not the kit itself!)
As a Forex Technical Trader, your goals are:
#1) To figure out the price action of the currency pair. Price is the main concern. If the EURUSD is at 1.3226 and goes to 1.3219, 1.3112, 1.3008 – the market is in a down trend. Despite what every technical indicator might predict, if the trend is down, stay with the trend. Indicators showing where price will go next or what it should be doing are useless. A trader need only be concerned with what the market is doing, not what the market might do. The price tells you what the market is doing.
#2) To always remember that technical indicators are only giving you confirmations based on what the market is telling you. So listen and pay close attention to the market and let it dictate which method you will use and which tool you will pull out of your bag of strategies and techniques. For only by listening to the markets will you ever be able to conquer it successfully and become a profitable trader.
Forex And Daytrading
Online trading is great way for serious investors to make money, but inexperienced traders often wind up with big losses. A good set of instructions can minimize the risks and save months of expensive trial-and-error learning.
Day Trading
Day Trading had its heyday during the bull market of the 1990′s. All the amateurs have since dropped out, but day trading is still being practiced by professionals. There are fewer opportunities in the current market, but skilled investors can still find them if they know what to look for.
FOREX Trading
The Foreign Exchange Market (FOREX), the world’s largest financial exchange market, originated in 1973. It has a daily turnover of currency worth more than 1.2 trillion pounds.
Unlike many other securities, FOREX does not trade on a fixed exchange rate; instead, currencies are traded primarily between central banks, commercial banks, various non-banking international corporations, hedge funds, personal investors and not to forget, speculators. Previously, smaller investors were excluded from FOREX due to the huge amount of deposit involved. This was changed in 1995, and now smaller investors can trade alongside the multi-nationals. As a result, the number of traders within the FOREX market has grown rapidly, and many FOREX courses are appearing to help individual traders increase their skills.
As a matter of fact, it’s advisable to take FOREX training even before opening a trading account.
It is vital to know the market mechanics of FOREX, leveraging in FOREX, rollovers and the analysis of the FOREX market. Due to this fact, potential FOREX traders would do well to either enroll in a FOREX training courses or even purchase some books regarding FOREX trading.
There are pros and cons to enrolling into a FOREX course. For beginners a FOREX course is a rapid method of learning the basics of FOREX trading. Not much time is spent on history of the market or arcane economic theories. Often, on-line or phone support from a skilled FOREX trader is available to answer any questions. Also, the information is condensed and practical, often with graphs and charts.
The disadvantage is the price, as courses are more expensive than a paperback from the bookstore. Also,
the course may just teach the approach of the trader who wrote it, and individuals have different trading strategies. The student may grow accustomed to the logic and focus of the teacher without coming to realise that nothing is predictable in the FOREX market, and many different strategies will bring profits in varying market circumstances. Also, knowledge of practical applications may not be enough, as the FOREX is highly unpredictable and there are many external factors, such as political issues, affecting the flow of finances in the market.
The best advice would be to do some background research on the FOREX market first, and then enroll in a course.