One of the most popular ways for individual Forex traders to analyze the Forex markets is by using Forex technical analysis. Technical analysts work on the concept that as the market digests economic news, world events, and other data the effects of that data becomes reflected in the price.
Technical analysts use combinations of price, time, and or volume in their trading research. This type of analysis has become increasingly popular, especially with the ready availability of Forex market data and the increased processing capabilities of personal computers.
Often times in technical analysis, Forex traders will start by looking at a Forex chart. Forex charts allow traders to see how past prices relate to one another. This “perspective” allows traders to visually identify price trends as well as price patterns. The objective of looking at these price trends and patterns is to find patterns in price data that are likely to repeat themselves in the future. If you can find price patterns with a good probability of repeating themselves, then you may have a good chance at developing a profitable Forex trading strategy based upon those patterns.
The use of charts in Forex technical analysis also allows for the use of technical indicators. Indicators are named as such because they “indicate” when a price has met a particular criteria. Technical indicators are shown on Forex charts right along with the price data. They can come in the form of dots, dashes, lines, etc. all in the variety of different colors.
Here's some examples of some indicators commonly used in Forex technical analysis:
Moving Average — A moving average is probably one of the most commonly used Forex technical indicators. Moving averages come in a variety of forms such as simple, weighted, and exponential. In its simplest form a moving average simply takes the last X number of prices, adds them together and then divides them by X. The average is called “moving” because it changes with time. If we are looking at a daily moving average as an example the average will change with each day. Here's a quick example of a simple 5 day moving average:
Day 1 = 1.41140
Day 2 = 1.40770
Day 3 = 1.40390
Day 4 = 1.39650
Day 5 = 1.38910
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Total = 7.00860
7.00860/Number of Periods (Days) 5 = Moving Average = 1.40172
As you can see from this example the prices from Day 1 to Day 5 show that we are moving in a downward direction. This means that the moving average line is also sloping downward. We can see from our example that the price on Day 5 is less than the moving average. The typical interpretation of this is that the market is currently in a downtrend based upon this moving average.
Stochastic Oscillator — While a moving average is typically used to measure the momentum of trends in the stochastic oscillator is typically used to indicate periods of trend exhaustion. The values of the stochastic oscillator are between zero and 100.
A Forex market is said to be in overbought territory when the stochastic oscillator is above 80. The Forex market is said to be an oversold territory when the stochastic is below 20.
With this basic introduction to Forex technical analysis you can instantly see how useful this can be in your own trading research. Our moving average and stochastic oscillator examples are just that, examples only. In your own trading research you will want to experiment with a variety of parameters for these and other technical trading indicators as well. It has been proven by successful traders the world over that technical analysis can be used to trade Forex very profitably. Learning the ins and outs of technical analysis can definitely put you on the path to successful Forex trading.
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