Friday, July 11, 2014

5 Technical Analysis Tools And How They Are Used In Forex

If you want to start trading in the currency market one lesson you can learn from professionals is how to do technical trading. The main goal of technical analysis is to predict profitable trends and cycles in the markets in time to take advantage of them. Technical analyses uses the same ideas whether it is in Forex or in Equities or any other financial market. If you are beginning your career as a trader learning technical trading is often the start. And although there are a wide range of techniques and chart methods the most popular ones are well known:

Trend lines

Trend lines are very common in financial charts they usually represent lines of support or resistance where the price action has historically reversed. Resistance and support lines help the technical trader to plan their price entry levels and stop losses.

Support and resistance lines example chart


Moving averages

The next level up in the toolbox are what is called moving averages. What these show is an averaged representation of the price history over a certain interval. The most common intervals are the 10, 20, 50, 100 and 200 period averages. The 20 period for example takes an average of the past 20 data points as its value so you can use this in a minute chart or an hour chart alike. Forex traders are interested in where these lines cross to suggest if the market is getting weaker or stronger.

Elliott waves

These were first suggested by Ralph Nelson Elliott and accountant who noticed that financial data series usually form a type of wave pattern. He showed that these more often appear in sets of five prime waves on the upward trend and three on the downtrend.

Fibonacci

Another method much used by Forex traders is the Fibonacci retracement. This method uses a mathematical formula to estimate pivot or reversal levels in a chart. These are from the idea that a reversal has a predictable pattern such as 50% retracement of the previous high.

MACD

Finally MACD is vital in the trader's toolbox, it is made up of two moving averages of different periods. Useful in range bound markets it tells traders when short term trends are likely to reverse. In the end most traders will rely on a few tried and tested tools and grow accustomed to them. The choice will depend to a great extent on the trading style adopted. For example a trader using a channel breakout system will use a different set of tools to a range trader. A momentum trader will use a different set of tools to a carry trader who holds positions for months at a time.

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