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Technical Analysis introduction – Basic Technical Indicators
The global forex markets fluctuate on a daily basis, and the liquidity these markets provide allow traders that focus on both long and short-term changes to speculate in these markets. While it’s important to understand the fundamental back drop that drives the change in a currency pair, understanding how past price action foreshadows futures movements is imperative to successful trading. If you plan on generating a robust forex trading business, you will need to employ technical analysis.
Technical analysis is the study of past price action, and can be used in several ways to determine future price movements. With technical analysis you can determine the direction of a trend, evaluate momentum, and find entry and exit levels using support and resistance techniques.
Defining a Trend
The trend is your friend is a catch saying and generally this statement is true. Bucking the trend can be a tricky endeavor as opposed to moving in tandem with the crowd. A trend can be defined as the movement of the price of a currency pair in a specific direction that continues to perpetuate for a certain period. There are several ways to define a trend, and one of the simplest is to use moving averages. A moving average is the average of a specific number of data points that changes over time. For example, a 10-day moving average is the average of the past 10-days and on day 11, the first day is dropped from the calculation.
You can use moving averages to define a trend by evaluating when a short term moving average crosses above or below a longer term moving average. In this example, when the 10-day moving average crosses above the 50-day moving average a up trend is considered in place. When the 10-day moving average crosses below the 50-day moving average, a downtrend is considered in place.
In addition to evaluating a trend, you might consider analyzing momentum. Momentum is the rate of change that is occurring in the market. The faster the rate of change, the quicker the momentum. One of the best momentum indicators is the moving average convergence divergence) index. The MACD evaluate specific moving averages, and compares the rate of change of those moving averages, to a benchmark. The MACD produces both buy and sell signals and describes when positive momentum is accelerating as well as when negative momentum is accelerating. It also tells you when momentum is decelerating.
You can combine a moving average crossover strategy that describes a trend, with a momentum indicator that tells you when prices are accelerating or decelerating.
Support and Resistance
The combination of the trend and momentum, with provide you with a potential direction, but need a third technique to pinpoint when to enter and exit the market. Here is when support and resistance come in. Support is a level where prices are buoyed by trader buying. Resistance is a level where there is market supply and generally prices have a difficult time moving higher at these levels. Traders often use trend lines, as well as moving averages to determine support and resistance levels.
By combining trend following, momentum and support and resistance techniques, you can develop a technical analysis strategy that can help you successfully trade the forex markets.
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