Technical Analysis Forex

• What is good about technical analysis?
Once a trader masters technical analysis, it is easy to apply it to any currency
or time frame, and thus allowing a relatively short time to figu figure out where
re trends are going. Because of the short time, technicians can fol follow numerous
low currencies at the same time, whereas fundamentalists usually foc focus on one or
us two pairs of currencies, because there is so much information in the market to
analyze.
Traders using fundamental analysis can run into trouble because there are so
many different ways to analyze market information. This causes c controversy ontroversy
and can lead to misdirection, misunderstanding and ultimately, l loss of money.
oss On the other hand, technical analysis can be much more straightf straightforward. orward.
Many traders even consider it to be a self self-fulfilling prophecy, meaning that it
works well because so many traders use it. This is an important aspect of
technical analysis because if many traders are basing their deci decisions on
sions technical indicators, then the indicators must be watched since they reflect the
sentiment of the market and the majority of the traders.
• Why is the foreign exchange market the best market for technical analysis?
The foundation behind using technical analysis is to find trends when they first
develop, which allows the trader to ride the trend until it ends ends. The foreign exchange
. market is typically composed of trends and is, therefore, a plac place where technical
e analysis can be effective. Traders are able to speculate on both up and down trends in
the foreign exchange market because it is possible to Ask a curr currency and Bid against
ency another currency. This aspect of currency trading works well wit with technical analysis,
h because technical analysis helps determine where the trends are and which way they
are going, thus giving the trader a chance of profiting from the market, regardless of its
direction.
In comparison to the equities and futures markets, technical ana analysis is much more
lysis common and popular within the foreign exchange markets, which ca causes the traders to
uses pay attention. The market partly moves because of all the techni technical analysis performed.
cal For example, according to technical analysis, if a currency pair decrease, then the
majority of traders will Bid the pair, causing it to drop furthe further.
• Support and Resistance
At the core of all technical analysis theory are two very simple concepts: support and
resistance. Support can be defined as a “floor floor” through which the currency pair has
trouble falling below. There is no scientific formula for calcul calculating support; it is
ating something that is typically “eyeballed eyeballed” by traders, and hence involves somewhat of a
subjective element.
Resistance, on the other hand, is simply the opposite: it is the upper boundary through
which a currency pair has trouble breaking. Similar to support, resistance levels are
somewhat subjective. Generally, if the market reaches a certain number of times and
cannot sustain a break above that level; it can be identified as resistance.
The reason why price has trouble breaking these levels is the pr presence of actual orders
esence around these levels. A support level is simply a price area wher where Ask orders tend to be,
e and so it takes more than normal Biding pressure to break that l level. Similarly, a
evel. resistance level is a price area where Bid orders tend to be, an and so it takes more than
d normal Asking pressure to break that level.
• Support & Resistance in Range - Trading Markets
rading One simple way to use support and resistance in trading
is to simply trade the range: in other words, traders can
simply Ask at support level, and Bid at resistance level.
A key advantage of this is that the FX market is range range-
bound a majority of the time, making it an attractive
strategy for many market conditions.
• The two disadvantages of range - trading:
Trad Trading in a ing range generally does not result in
substantial gains on a per per-trade basis.
When the market breaks out of the range,
generally it will make big moves. As a result,
traders trading with range strategies can suffer
big losses when the market breaks out of the
range.
The chart below illustrates the concept of range range-
bound trading.

• Oscillators
Oscillators are a class of mechanical trading tools that offer i indications of when a
ndications currency pair is overbought or oversold. A popular oscillator is the Relative Strength
Index.
• Relative Strength Index
The relative strength index (RSI) is a momentum indicator that m measures a currency
easures pair's strength relative to its won recent past performance. As the indicator is front front-
weighted (more importance is given to the most recent data), it typically provides a
better velocity reading than other oscillators. RSI is less affe affected by sharp movements,
cted and filters out a lot of "noise" in the Forex market. Many trade traders also use this indicator
rs as a substitute for volume confirmation, since the over over-the the-counter structure of the FX
market does not allow for real real-time volume reporting.
RSI's levels are between 0 and 100. Most traders use 30 as an ovRSI's oversold condition and
ersold 70 and as overbought condition, although some traders may use 20 and 80. When
choosing the settings for RSI, traders should typically use the default time period of
14, since that is what the market as whole tends to look at.
Generally RSI is used in five different ways:
Top and Bottoms - Overbought and Oversold conditions are usually signaled
at 30 and 70.
Divergences - When a pair makes new highs (lows) but RSI does not, this
usually indicates that a reversal in price is coming.
Support and Resistance - RSI may show levels of support and resistance,
sometimes more clearly than the price chart itself.
Chart Formations - Patterns such as double tops and head and shoulder may
be more visible on RSI rather than on the price charts.
Failure Swings - When RSI breaks out (surpasses previous high or low), this
may indicate that a breakout in price is coming.
RSI was useful in detecting this USD/JPY short after a crossover of the 70
"overbought" level materialized on the daily. Following the clea clear Bid signals,
r the pair moved down 450 pips over the next 30 days