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Forex Technical Analysis
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The forex technical analysis refers to analyzing the forex market with the help of the technical tools. The tools used for technical analysis include daily advances and declines, trend indicators, daily new highs and lows, indices, volume, relative strength index, moving average, stochastic, tick and many more. For the forex trader it is very difficult to choose from among this long list.
None of the indicators can be said to be perfect. It is on the trader to choose a reliable technical analysis indicator and then follow it strictly. If the traders receive good results from an indicator it should not be changed are abandoned. The traders should have knowledge about different tools used for forex technical analysis.
The advance and decline indicators indicate the breadth of the market. All the market action is reflected through this indicator, if the indicator moves in that direction of the market it specifies that the trend will continue to move in the same direction else the direction of the trend will change. The calculation for this indicator is very simple. A large base number is picked up and then the difference between the advances and declines on a weekly or daily basis is calculated by adding the advances and subtracting the declines.
The advance decline ratio access the momentum indicator and is calculated by dividing the total number of advancing currencies by the total number of declining currencies and it can be calculated on a daily or weekly basis.
The high low indicators are calculated by subtracting the new lows from the new highs to get a difference and the swings are smoothened out by moving average. It results in successful signals when in divergence from the market action for a longer period of time.
Cycle analysis forms part of technical analysis as forex market seems to be moving in cyclical patterns due to fundamental and technical factors.
The forex technical analysis trend indicators have provided success to most of the forex traders as the market always moves in trends. The trend index is calculated by dividing the highs by the sum of highs and lows on the daily basis and swings are smoothened out by applying a ten week moving average. If the index is computed to be greater than 80% the bullish trend is depicted which indicates the buying period and when the index is less than 20% the bearish trend is indicated and the traders get a sell signal.
The relative strength index is used to measure the strength of the currency trend ranging from 0 to 100 and depicts the oversold or overbought conditions of the currency.
If the currency trend is on the rise it is indicative of an overbought condition and the falling currency trend is indicative of the oversold condition of the currency. The relative strength index is calculated as a percentage of the currency price fluctuations within a certain time frame. When the result of the relative strength index is less than 25% the oversold condition is depicted, but if the result is greater than 75%, it depicts the overbought condition. If the relative strength index ranges from 30% to 70% it is indicated of a neutral market. The relative strength index is calculated by dividing the sum of price rises divided by the sum of all the price fluctuations. Less fluctuation in the currency prices is witnessed if the timeframe for calculating relative strength increases.
The moving average is calculated by multiplying the closing price of the last day with the total number of days for which the weighted average is to be calculated and dividing it by the number of days for which it is being calculated. The latest currency prices are assigned more weight for the correct prediction of the currency prices and this is also quite dependable for the forex technical analysis and very similar to the currency trends. The moving average can be used as the trend or as an indicator. If the currency prices are on a speedy rise then the moving averages histogram becomes larger and then the currencies prices fall at a very fast rate than the moving average histogram becomes smaller. Occurrence of trading divergence is witnessed whenever the prices fall or rise suddenly and the indicator fails to depict the accurate situation. Two Different momentum lines are plotted depicting the difference between the two exponential moving averages and the signal to calculate the moving average. Whenever, the lines indicating signals and moving average cross each other, it gives an indication of the change in the currency prices.
The stochastic indicator comes into play then the closing prices of the currency are high and overall currency prices are on the rise and also in the situation then the closing prices become low or show a downward movement. It is indicated off the movement of the currency prices whether they are moving in the upward or the downward direction. The statistic indicators are is indicated of the current closing prices of the currencies then these are compared with all the previous currency prices in a certain time frame. It gives the overboard and oversold conditions of the currency on a scale which ranges from 0-100%. If any damages up cause between the prices of the currencies and the stochastic line a trading signal is given to the forex technical analysis. The stochastic indicator is calculated as %K and % D. %K compares the current closing currency prices to the previous currency price range and %D acts as a signal line. Whenever the stochastic line crosses above 80% an overbought signal is given and in case the stochastic line crosses below 20% it refers to the oversold signal. Thus the stochastic indicator gives the buying and selling signals to the forex traders.
Forex technical analysis does not only refer to the above mentioned tools but several other tools combined together and the forex technical analysis has to choose from among these tools to trade successfully in the forex market. While choosing from among the two spectators must keep in mind his personality and the type of trading he intends to perform in the forex market. Other Articles |
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