Understanding Forex - #2 - Technical Analysis
This is a series of articles on the foreign exchange market. You will learn here what Forex is, how it works and how profitable it can be. The entire series contains the following articles. . .
- What is Forex?
- Technical analysis
- Fundamental analysis
- Money management
- Compound interest
Technical analysis.
Unless you are new to trading, you probably already know that technical analysis is a method of predicting the future price movement of commodities, stocks, etc. (in this case currencies) based on graph analysis, modeling, technical indicators, etc. technically and in my opinion it is quite predictable.
No trading strategy will work 100% of the time. That's why you need proper money management techniques. Either way, technical analysis is important in determining where the price of currencies is going, including when to enter and exit positions.
There are several technical analysis techniques that you can implement in 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's about quality, not quantity. But I think it is better to rely on a few indicators than on just one.
If you trade on the signals of just one indicator, you may miss out on some important market information that other technical indicators would reveal to you. By using a few technical indicators instead of just one, you can make more informed and accurate choices.
So, I will show you here some very common technical indicators and how they are used to predict market prices. Remember that technical indicators are the foundation of technical analysis systems.
You can implement three different aspects in your trading systems. One is technical analysis as I explain here. The other is fundamental analysis. The third 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 similar to a simple moving average, except that more weight is given to the most recent data.
3. Divergence of the convergence of the moving average - MACD
A trend-following momentum indicator that shows the relationship between two price moving averages.
4. Bollinger band
One band plotted two standard deviations from a simple moving average.
5. Fibonacci - There are many Fibonacci indicators such as the following. . .
A. Fibonacci time zones
B. Fibonacci Fan
C. Fibonacci channel
D. Fibonacci arc
C. Fibonacci cluster
D. Numbers / Fibonacci Lines
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 an asset's overbought and oversold conditions.
7. Stochastic oscillator
A technical momentum indicator that compares a stock's closing price to its price range over a specified period of time.
8. Williams% R
In technical analysis, this is a momentum indicator that measures 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 some technical indicators to predict the market. I think adequate technical analysis skills are an important aspect of the most successful trading systems.
You can learn more about Forex and trading systems from my other articles on this series. I've covered important aspects of technical analysis here, but most successful trading systems also require fundamental analysis and / or money management.