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Technical Analysis for Currency Trading
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Technical Analysis Currency Trading
We have already looked at the difference between fundamental
and technical analysis of currency trading in “currency
trading success”, here we will concentrate more on the advantages
of technical analysis for currency trading and how to build
a successful system.
There are many different methods and tools utilized in technical
analysis, but they all rely on the same principles - that price
patterns and price trends exist in the market and that they
can be identified and turned into profit opportunities.
Technical Analysis in currency trading is based on three
core principles:
Markets Discount
The actual price is a reflection of everything known to
the market that could possibly have an affect on price movement
and includes supply and demand, political factors, and the market
sentiment.
The pure technical analyst is only concerned with price
movements, NOT the reasons behind the price movements.
Prices Move in Trends
Prices can move in three directions - they can move up,
down or sideways.
Once a trend in any of these directions is in effect it
usually, will persist and create a trend.
The market trend is simply defined as the direction of market
prices, a concept that is essential to the success of technical
analysis in currency trading.
Identifying trends in theory is simple; a price chart will
usually indicate the prevailing trend as characterized by a
series of waves with obvious peaks and troughs.
It is the direction of these peaks and troughs that constitutes
the market trend, if they move up, the trend is bullish, if
they move down the trend is bearish and of course if they move
sideways then the market is in a period of consolidation.
History Tends to Repeat Itself
To a technical analyst in currency trading, the trader psychology
that affects prices is extremely important, as human nature
is repetitive and this shows up in repetitive price patterns.
This allows anyone using technical analysis in currency
trading to predict where prices are likely to go next and traders
can then act upon this information for profit.
The market price reflects everything
Technical analysis in currency trading is primarily concerned
with price trends and everything that can possibly affect a
currency is reflected in price action.
Technical Indicators
The logic of technical analysis for currency trading is
universally accepted, and there are numerous ways to execute
technical trading systems, with the huge amount of available
indictors used either alone, or in combination.
We will look at the different indicators below and some
that have proved highly effective in the technical analysis
of currency trading. Any traders, who wish to profit from the
currency markets, should consider these indicators.
Trend Indicators
A trend is a term used to describe the persistence of price
movement in one direction over time. The easiest way to spot
trends is via trend lines, drawn below price lows or above price
highs.
While basic trend lines have gone out of fashion in recent
years in favor of more complicated indicators, they are still
one of the most effective ways to technically analyze currency
movements.
Support/Resistance Indicators
Support and resistance describes the price levels where
markets repeatedly rise or fall and then reverse. This phenomenon
reflects basic supply and demand and when prices break above
or below significant support or resistance, a big move can follow
very quickly.
Again, the best method for spotting and acting on these
breaks is the humble trend line.
We believe that trend lines should be the basis on which
ANY technical analysis of currencies should be based on - and
the indicators below are for confirmation:
Volatility Indicators
Volatility is a general term used to describe the magnitude,
or size, of day-to-day price fluctuations independent of their
direction. Generally, changes in volatility tend to lead changes
in prices.
One great indicator to use is the Bollinger band.
Any trader should look at Bollinger Bands, as they represent
one of the most effective indicators for the technical analysis
of currency markets.
Not only is it good for predicting trend movements, but
also it is useful for timing entry and exit levels, as well
as when to increase or decrease position size.
Cycle Indicators
A cycle is a term to indicate repeating patterns of market
movement, specific to recurrent events, such as elections, year-end
monetary repatriation etc.
Cycle indicators determine the timing of a particular market
patterns. A good example would be Elliott Wave theory. Cycle
indicators however in our view are of little or no use, in the
technical analysis of currencies.
Momentum Indicators
Momentum is a general term used to describe the speed at
which prices move over given time periods.
Momentum indicators determine the strength or weakness of
a trend as it progresses over time. Momentum is generally highest
at the start of a trend and lowest at market turning points.
Any divergence of directions in price and momentum is a
warning of weakness; if price extremes occur with weak momentum,
then an end of movement in the current direction could occur.
If however momentum is trending strongly and prices are
flat, it signals a potential change in price direction. Examples
of momentum indicators include Stochastics, MACD and RSI.
The most effective momentum indictor is the stochastic and
using stochastic crossovers to time entry and exit levels, can
be highly effective.
Sentiment Indicators
Many technical analysts in currency trading monitor surveys
of investor sentiment such as net trader’s positions and bullish
consensus.
These indicators attempt to gauge the general attitude of
the investment community, to determine whether investors are
bearish or bullish.
These indicators are only to be used when extremes of sentiment
are reached, either bullish or bearish.
If used in this way, they are one of the most powerful warning
signs of significant market turning points and can be used in
technical analysis of currency markets to huge effect.
Putting it all Together
Traders make money from the technical analysis of currency
markets in many different ways, however we believe that trend
lines backed up by just a few additional indicators (to help
time market entry exit and stop levels) can be very effective.
The ones we favor are: Bollinger bands, stochastics and
market sentiment indicators, as filters for traditional trend
lines.
The best way to succeed in technical analysis of currency
trading is to use a simple robust system based on trendlines
and just a few filter indicators such as the ones above and
you will soon find yourself catching the big trends that yield
the big profits.
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