This Article will outline the technical analysis and fundamental analysis used by professional forex traders to identfy Patterns in Forex, and to land huge profits in forex trading. This Article provides insight into the two major methods of analysis used to forecast the behavior of the forex market. This is also a follow up from Forex Patterns and Forecast Methods Used Today For Successful Forex Trading! Part 1, if you have not read part 1 please do so to bring yourself up to speed.
Technical analysis and fundamental analysis differ greatly, but both can be useful forecasting tools for the forex trader. They have the same goal - to predict a price or movement. The technician studies the effects, while the fundamentalist studies the cause of the forex market movements. Many successful traders combine a mixture of both approaches for superior results.
Note: If both fundamental analysis and technical analysis point to the same direction, your chances for profitable forex trading are much better.
Moving Averages – Are used to emphasize the direction of a trend and to smooth out price and volume fluctuations, or “noise”, that can confuse interpretation. There are seven different types of moving averages:
- Simple (arithmetic)
- Exponential
- Time series
- Weighed
- Triangular
- Variable
- Volume adjusted
The only significant difference between the various types of moving averages is the weight assigned to the most recent data. For example, a simple (arithmetic) moving average is calculated by adding the closing price of the instrument for a number of periods, then dividing this total by the number of times.
The most popular method of interpreting a moving average is to compare the relationship between a moving average of the instrument’s closing price, and the instrument’s closing price itself.
Sell signal: when the instrument’s price falls below its moving average
Buy signal: when the instrument’s price rises above its moving average
The other technique is called the double crossover, which uses short-term and long-term averages. Typically, upward momentum is confirmed when a short-term average (15 –day) crosses above a longer-term average (50-day). Downward momentum is confirmed when a short-term average crosses below a long-term average.
MACD – Moving Average Convergence/Divergence – A technical indicator, developed by Gerals Appel, used to detect swings in the price of financial instruments. The MACD is computed using two exponentially smoothed moving averages of the security’s historical price, and is usually shown over a period on forex charts. By then comparing the MACD to its own moving average (called the signal line), traders believe they can detect when will affect the RSI by creating false buy or sell signals. The RSI is best used as a valuable complement to other stock-picking tools.
Stochastic Oscillator – A technical momentum indicator that compares an instrument’s closing price to its price range over a given period. The oscillator’s sensitivity to forex market movements can be reduced by adjusting the time, or by taking a moving average of the result. This indicator is calculated with the following formula:
%K=100* [(C-L14) / (H14-L14)]
- C= the most recent closing price
- L14= the low of the 14 previous trading sessions
- H14= the highest price traded during the same 14 day period
The theory behind this indicator, based on George Lane’s observations, is that in an upward-trending market, prices tend to close near their high, and during a downward-trending market, prices tend to close near their low. Transaction signals occur when the %K crosses through a three-period moving average called “%D”.
Trend Line – A sloping line of support or resistance.
- Up trend line – straight line drawn upward to the right along successive reaction lows
- Down trend line – straight line drawn downward to the right along successive rally peaks
Two points are needed to draw the trend line, and a third point to make it valid trend line. Trend lines are used in many ways by forex traders. One way is that when price returns to an existing principal trend line, it may be an opportunity to open new positions in the direction of the trend in the belief that the trend will hold and the trend will continue further. A second way is that when a price action breaks through the principal trend line of an existing trend, it is evidence that the trend may be going to fail, and you (the trader) may consider trading in the opposite direction to the existing trend or exiting in the direction of the trend.
Note: Do not fall in love with your Forexposition, and never take revenge of your Forex position.
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