Technical analysis is the act of predicting future price changes based on the interpretation of past performance.
Technical analysis traders will use price charts to determine patterns in the performance of a chosen market that aim to predict what the next price movement will be. Trades are placed as a result of these determined price movements or ‘signals’.
Technical analysts believe that price movements are not random by nature and follow trends that can be tracked using pattern matching tools known has “technical indicators”. There are many technical indicators and which one will suit you as a trader is entirely your choice. Many traders use a combination of indicators to signal a bull or bear market movement. Signals are used to both enter and exit trade positions.
Whilst Technical analysts don’t fully ignore fundamental data (see fundamental analysis) but they assume that the price chart has these factors built into it. This type of trading also helps to remove the emotion from your trading strategy as decisions are based on mathematical formula rather than how you feel about a trade.
Summary of Technical indicators
Support and Resistance Levels.
The price movement of a market can often appear not to drop (or rise) above a particular price. Sometimes the chart will ‘bounce’ several times off the same price before re-tracing. A consistent bounce off a lower price is known as a support level and a bounce off higher price is known as a resistance level.
Moving averages indicate a price trend by removing small fluctuations in price movement allowing you to see the big picture or “average” movement. Moving average indicators can be adjusted to show average price movements over defined periods. Each trader can determine their own preferred period for the indicator which may vary dependent on the market price you are viewing. The 3DMarket trading tools will allow you to adjust the period of the moving average to suit your preference. Note that traders may often look at both long term and short term moving averages before trading to indicate both ongoing trends and immediate change signals.
Stochastic are probability theories that measure momentum of a price on a scale from 0-100. Stochastics is measured with a K line and a D line. The K line is the fastest (more sensitive) mover and the D line is the slower of the two lines. As the lines move over the 80 mark this indicates that the market is over bought and may suggest a sell signal. Conversely as the line drops below the 20 mark this indicates the market is oversold and may suggest a buy signal.
Stochastics is a widely used technical indicator among traders and its easy of use can make entry and exit points easy to determine.
Bollinger Bands measure the high and low “bands” around a moving average and therefore indicate the volatility of a price chart. As with moving averages the period can be specified by the trader to measure short term or longer term averages. When the band tightens around the moving average, this could be used as an indication that volatility may increase. Also, if a price moves close to the upper band this may indicate an overbought market and the closer the price moves towards the lower band the more over sold a market maybe.
Fibonacci retracement is a technical indicator based on the mathematician Fibonacci’s series of numbers. These numbers represent characteristics that are found in nature but when used in technical analysis can also indicate possible support or resistance levels. Fibonnacci retracement points are calculated by taking an extreme low and extreme high point on a price chart and dividing the distance between the two into levels at 23.6%, 38.2%, 50% or 61.8% . These levels can represent retracement levels of the price where new support or resistance levels could be found.
Traders do not tend to use a single technical indicator as a signal for a trading event but more a combination of indicators that are tuned to the market being traded. Because Forex trading is considered to be a pure market it lends itself well to the use of technical analysis. If you are not sure about the use of technical indicators then try our demo account where you can become familiar with their use without the risk of live trading.
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