Probably the most successful and most utilized means of making
decisions and analyzing forex and commodities markets is Technical
Analysis. The difference between forex technical and forex
fundamental analyses is that forex technical analysis ignores
fundamental factors and is applied only to the price action of the
market. In that fundamental data can often only provide a long-term
forecast of exchange rate movements, forex technical analysis has
become the primary tool to successfully analyze and trade shorter-term
price movements, as well as to set profit targets and stop loss. Forex
technical analysis primarily consists of a variety of forex technical
studies, each of which can be interpreted to predict market direction
or to generate buy and sell signals. For a detailed description of
these studies and their uses, please use our charting user guide for
technical studies.
What to Look For in Technicals? Find the Trend One
of the first things you'll ever hear in technical analysis is the
following motto: "the trend is your friend". 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. Weekly and monthly charts are most ideally
suited for identifying that longer-term trend. Once you have found the
overall trend, you could select the trend of the time horizon in which
you wish to trade. Thus, you could effectively buy on the dips during
rising trends, and sell the rallies during downward trends.
Support & Resistance Support
and resistance levels are points where a chart experiences recurring
upward or downward pressure. A support level is usually the low point
in any chart pattern (hourly, weekly or annually), whereas a resistance
level is the high or the peak point of the pattern. These points are
identified as support and resistance when they show a tendency to
reappear. It is best to buy/sell near support/resistance levels that
are unlikely to be broken. Once these levels are broken, they tend
to become the opposite obstacle. Thus, in a rising market, a resistance
level that is broken, could serve as a support for the upward trend,
whereas in a falling market; once a support level is broken, it could
turn into a resistance.
Lines & Channels Trend
lines are simple, yet helpful tools in confirming the direction of
market trends. An upward straight line is drawn by connecting at least
two successive lows. Naturally, the second point must be higher than
the first. The continuation of the line helps determine the path along
which the market will move. An upward trend is a concrete method to
identify support lines/levels. Conversely, downward lines are charted
by connecting two points or more. The validity of a trading line is
partly related to the number of connection points. Yet it's worth
mentioning that points must not be too close together. A channel
is defined as the price path drawn by two parallel trend lines. The
lines serve as an upward, downward or straight corridor for the price.
A familiar property of a channel for a connecting point of a trend line
is to lie between the two connecting point of its opposite line.
Averages If
you believe in the "trend-in-your-friend" tenet of technical analysis,
moving averages are very helpful. Moving averages tell the average
price in a given point of time over a defined period of time. They are
called moving because they reflect the latest average, while adhering
to the same time measure. A weakness of moving averages is that
they lag the market, so they do not necessarily signal a change in
trends. To address this issue, using a shorter period, such as 5 or 10
day moving average, would be more reflective of the recent price action
than the 40 or 200-day moving averages. Alternatively, moving
averages may be used by combining two averages of distinct time-
frames. Whether using 5 and 20-day MA, or 40 and 200-day MA, buy
signals are usually detected when the shorter-term average crosses
above the longer-term average. Conversely, sell signals are suggested
when the shorter average falls below the longer one. There are three
kind of mathematically distinct moving averages: Simple MA; Linearly
Weighted MA; and Exponentially Smoothed. The latter choice is the
preferred one because it assigns greater weight for the most recent
data, and considers data in the entire life of the instrument.
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