6. Technical Analysis.
Technical analysis is a method of predicting the price of a financial instrument based on mathematic (not economic) calculations. Another words, unlike in fundamental analysis, economic factors are not taken into the account in technical analysis. At first glance it may look absurd to try and predict the prices without taking into account interest rates, unemployment data, GDP levels, trade balances and so on. But those traders who rely on technical analysis only when buying or selling think that the price itself reflects the economy. They analyse the price movements in the past using various methods and predict what would be the price in the future. The results of such prognosis are usually correct. There are a vast number of theories and methods to analyse them. We use here one example only to illustrate that. Let’s look at the intraday chart of EURUSD for 2007. There are two lines on the chart that indicate sliding medium prices of the pair: blue – 100 days and red – 50 days period. The strategy would be to buy when the price is approaching the red line from below (blue arrows on the chart) and to sell when the price returns to red line from above. As you can see, this very simple indicator may help to make a profit on the rising trend. Of course the same indicator is used on the down trend also when the red line is below the blue one. Many traders end up loosing money because they simply do not learn how to use technical analysis indicators. It is not enough just to call up a chart on your screen, it is important to know how to read it. There are plenty of indicators available in your MT4 terminal. If you still do not have one, you can download a free demo here. It is important to know that you do not need to learn all the indicators. It is recommended to choose a few and to learn them inside and out. Once you have a deep understanding of an indicator you should be able to anticipate what it will look like when you apply it to the chart. You would be surprised if you new that some major traders use a very simply and straight forward techniques for their analysis. These are the most commonly used indicators:
Moving averages
Parabolic SAR
Directional movement index (DMI)
Relative strength index (RSI)
Slow stochastics
MACD
Another extremely important tool is Bollinger Bands. It is used to detect periods of low volatility in the market, reflected by drawing together bands. Low periods are usually followed by sharp breakouts and sudden increase in volatility, which is an excellent opportunity of the trader to enter the market that offers potential significant profits with well defined risks. It is also recommended to have at least a basic understanding of Elliot Wave. The applications of the technical analysis in the forex market would be to determine the overall currency trend as well as for short term timing of trades. It is a good idea to set up your screen layouts in such a way that you see intraday charts of 4-6 major pairs at the same time. This is possible to do in your MT4 trading terminal. For intraday trading you may want to use 30 minute charts although other periods are also available. You will notice that sometimes currency pairs move in unison and may be tempted to trade a few pairs at the same time. If you are a beginning trader you should avoid doing that and try to trade one pair at a time. Stick to tried and trusted simple techniques available on the market. Do not try to invent the bicycle. It will save
you time and money and will help you to trade successfully.
7. Trading strategies.
Like in the case with technical analysis, there are hundreds of trading methods and techniques. We will just mention the most well known and easy understood ones.
These are:
Pivot Points
Forward Rolls
Forward Points
Carry Trades
Some traders would also name options as a separate trading strategy, which of course it is. But to discuss options and futures we would need a separate study course.
Pivot points have been used by foreign exchange traders for many years. They use yesterday’s high low and close prices to project five levels of potential intraday support and/or resistance for the current trading day’s activity. To calculate a pivot point you need to add the yesterday’s high, low and close prices (H+L+C) and divide it by 3.
First resistance level = (2 x Pivot point) – L
First Support level = (2 x Pivot point) - H
Second Resistance = Pivot point + (H - L)
Second support = Pivot point – (H – L)
Each level can be put on the intraday chart as a horizontal line. 30 minute chart may be used for that. It is likely that the trade will initially start between first support and first resistance levels. Of course on some days when the market is moving quickly and away from yesterday’s levels these points will not help you. However, on most days the market will appear as it is influenced by projected pivot points levels and it may show you for example when buying a particular currency pair should be delayed. We would not go through other strategies here as there are
hundreds of books and a lot of free material available on the Internet which discusses all the strategies in details. Like with technical analysis, we recommend concentrating on 1 or 2 strategies and perfecting your trading using them. Only with knowledge and experience you can achieve substantial results.
Technical analysis is a method of predicting the price of a financial instrument based on mathematic (not economic) calculations. Another words, unlike in fundamental analysis, economic factors are not taken into the account in technical analysis. At first glance it may look absurd to try and predict the prices without taking into account interest rates, unemployment data, GDP levels, trade balances and so on. But those traders who rely on technical analysis only when buying or selling think that the price itself reflects the economy. They analyse the price movements in the past using various methods and predict what would be the price in the future. The results of such prognosis are usually correct. There are a vast number of theories and methods to analyse them. We use here one example only to illustrate that. Let’s look at the intraday chart of EURUSD for 2007. There are two lines on the chart that indicate sliding medium prices of the pair: blue – 100 days and red – 50 days period. The strategy would be to buy when the price is approaching the red line from below (blue arrows on the chart) and to sell when the price returns to red line from above. As you can see, this very simple indicator may help to make a profit on the rising trend. Of course the same indicator is used on the down trend also when the red line is below the blue one. Many traders end up loosing money because they simply do not learn how to use technical analysis indicators. It is not enough just to call up a chart on your screen, it is important to know how to read it. There are plenty of indicators available in your MT4 terminal. If you still do not have one, you can download a free demo here. It is important to know that you do not need to learn all the indicators. It is recommended to choose a few and to learn them inside and out. Once you have a deep understanding of an indicator you should be able to anticipate what it will look like when you apply it to the chart. You would be surprised if you new that some major traders use a very simply and straight forward techniques for their analysis. These are the most commonly used indicators:
Moving averages
Parabolic SAR
Directional movement index (DMI)
Relative strength index (RSI)
Slow stochastics
MACD
Another extremely important tool is Bollinger Bands. It is used to detect periods of low volatility in the market, reflected by drawing together bands. Low periods are usually followed by sharp breakouts and sudden increase in volatility, which is an excellent opportunity of the trader to enter the market that offers potential significant profits with well defined risks. It is also recommended to have at least a basic understanding of Elliot Wave. The applications of the technical analysis in the forex market would be to determine the overall currency trend as well as for short term timing of trades. It is a good idea to set up your screen layouts in such a way that you see intraday charts of 4-6 major pairs at the same time. This is possible to do in your MT4 trading terminal. For intraday trading you may want to use 30 minute charts although other periods are also available. You will notice that sometimes currency pairs move in unison and may be tempted to trade a few pairs at the same time. If you are a beginning trader you should avoid doing that and try to trade one pair at a time. Stick to tried and trusted simple techniques available on the market. Do not try to invent the bicycle. It will save
you time and money and will help you to trade successfully.
7. Trading strategies.
Like in the case with technical analysis, there are hundreds of trading methods and techniques. We will just mention the most well known and easy understood ones.
These are:
Pivot Points
Forward Rolls
Forward Points
Carry Trades
Some traders would also name options as a separate trading strategy, which of course it is. But to discuss options and futures we would need a separate study course.
Pivot points have been used by foreign exchange traders for many years. They use yesterday’s high low and close prices to project five levels of potential intraday support and/or resistance for the current trading day’s activity. To calculate a pivot point you need to add the yesterday’s high, low and close prices (H+L+C) and divide it by 3.
First resistance level = (2 x Pivot point) – L
First Support level = (2 x Pivot point) - H
Second Resistance = Pivot point + (H - L)
Second support = Pivot point – (H – L)
Each level can be put on the intraday chart as a horizontal line. 30 minute chart may be used for that. It is likely that the trade will initially start between first support and first resistance levels. Of course on some days when the market is moving quickly and away from yesterday’s levels these points will not help you. However, on most days the market will appear as it is influenced by projected pivot points levels and it may show you for example when buying a particular currency pair should be delayed. We would not go through other strategies here as there are
hundreds of books and a lot of free material available on the Internet which discusses all the strategies in details. Like with technical analysis, we recommend concentrating on 1 or 2 strategies and perfecting your trading using them. Only with knowledge and experience you can achieve substantial results.
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