Forex Trading – Technical Analysis
Technical analysis is one the method in forex trading. Another method is fundamental analysis, which anticipates forex market movement by gathering information on the economic and political performance of a nation.
Technical analysis, as suggested by the term itself means the trading strategies are generated based on the methodical part of the forex market i.e. the price movement of a currency pair versus time. The price movement is displayed in the form of a chart. Each major currency pair has its own chart. These charts are available in all trading software.
Studying the price movement in a chart enable a trader to determine the patterns and trends that in turn enable a trader to anticipate the market direction and pinpoint the opportunity to enter and exit a trade. Every chart can be viewed at certain time frame such as 15 minutes, 1 hour, 4 hour and daily. As the saying goes “Trend is your friend” is true enough if you know how to interpret the chart.
There are three types of chart available:
• Line chart – the simplest form of a trading chart that connects one closing price to the next closing price.
• Bar chart – shows opening price, closing price, as well as the high and low of the price movement of the selected time frame. The high and the low is represented by the top and bottom of the vertical line respectively while the opening is horizontal line on the left and the closing is the horizontal line on the right.
• Candlestick chart – present the same information as the bar chart but it is more commonly used in trading as the graphic representation of the opening price, closing price and the high and low makes the chart easier to interpret.
Chart alone provides the visual aid. Coupled with several well chosen technical indicators, it serves as the technical analysis of forex trading. Some of the more commonly used indicators are:
• Relative Strength Index (RSI) and Stochastic Oscillator – both are used to indicate oversold and overbought condition
• Moving Average Convergence/Divergence (MACD) – the MACD lines signify the direction of the market.
• Fibonacci numbers and Gann numbers – these two indicators are used to determine the support and resistance levels in a chart. Fibonacci can also be used to determine the exit point for profit taking.
• Bollinger Band – it indicates the activity of the forex market. A tight band denotes less activity in the market while a broader band indicates high volatility in the price movement.
