Technical Analysis

Forex Technical Analysis

Technical analysis is the preferred short-term trading method. Technical traders base their study of the foreign currency market on historical pricing of currencies, using graphs and charts to plot real-time data. Integration of past prices, volume data, and exchange rates are taken and formed into trends that can be followed. Like fundamental analysis, there are several ways to go about using technical analysis to create a strategy for currency trading. It also takes into account the psychological trends of buyers and sellers, which are more apparent in short-term pricing. The driving force of greed and fear of instability are easy indicators of future pricing possibilities of currencies.

Time Horizons

Time horizons for technical trading can be broken down in charts, graphs and studies from as small as a single minute, to as long as a monthly basis. Like most other markets, forex trading places more weight on select types of technical analysis. Among the most popular indicators are Fibonacci Retracement Levels, Oscillators, Candlestick analysis, and Bollinger Bands. Retracement series are based on mathematical ratios, but more specifically, Fibonacci sets are created by summing the two preceding figures in a series of numbers. The interesting features lie within the ratios and means of these series that are constant, which are important since they describe how far a price has moved from its underlying trends. It will then help in hedging against risk for currency price pairs.

Oscillators

Oscillators are moving averages of prices, which are analyzed over a period of time. When using them, it is more useful to take shorter time periods as it will reflect a estimated price that is close to actual present values of currencies then when using long time spans. Oscillators are not utilized as the best way to predict changes in trends, but rather signal appropriate times to buy and sell. When a specific exchange rate moves above its moving average price this should be a trigger to buy, but when it falls below the average, it is a selling indicator. Within moving averages, two types can be identified: Simple moving averages that are basic mathematical calculations dividing closing prices by the number of time periods, and Exponentially Smoothed moving averages that are weighted by taking into account the average of the prior day.

Candlestick Chart

The third type of chart is a candlestick chart that maps the high, low, open and close prices of a currency pair in a single wick. The graph itself is a form of a bar graph, and contains a series of bars (wicks) that depict market fluctuations. The difference between the open and close bid is marked by a change in color, green for close above the open price, red for the opposite.

Bollinger Bands

Finally Bollinger Bands show the volatility of a currency using moving average envelopes in a statistical manner. Standard deviation levels are set and are generally movement in prices contained within 95% of two bands. Technical analysis, though accurate and scientific in nature, it requires an understanding of mathematical theories to best develop trade strategies