When trading forex, one must know how to predict the currency price changes. Generally, there are two ways for price analysis: techniqual and fundamental analysis. Here are given common techniques to analyze he chart techniqually.
In forex trading,
price trend is necessary to know. This will allow deciding whether to sell or buy. To know the trend, some common techniqual indicators must be followed. The most common techniqual indicators are as follow:
1. Moving averages: moving averages are a way to smooth the curve of the price from short term fluctuations. This will allow viewing clarified curve for the price. It works by taking the average of closing prices over a certain period of time. This period is determined by the user when analyzing the curve. The average of closing prices is done continuously over every period.
When trading with moving average, the trader can look at the moving average curve (which is drawn overlapped with the main currency price curve) and see if it is going high or low to determine the trend.
A more smart idea is to draw two moving average curves, one slow and one fast. The slow one will be averaged over a higher periods while the fast one will be averaged over fewer number of periods. When the fast curve crosses the slow curve, this will indicate a trend. If crossing from high to low, then the currency price is going down and vice versa.
2. Moving average crossover divergence (MACD) this works by obtaining the moving average at lower period (fast moving average) and also obtaining a slow one. The MACD indicator is calculated by subtracting the previous moving averages and obtaining the moving average of the result.
The MACD is the difference between the last calculated moving averages. When the MACD is zero, it indicates crossover and there is price trend. When the MACD is positive, it indicates the currency pair price is going up. When the MACD is negative, it indicates the currency pair is going down.
3. Pivot point analysis: pivot point analysis depends on identifying different support and resistance levels. The support level is identified as a line the price is fluctuating below it and cannot exceed it for a relatively long period of time. Similarly, a support level is a line that the price cannot go below it for a relatively high period of time.
The levels obtained from the pivot point calculations are named R1, R2, R3, S1, S2, S3 and the center line is called pivot line (primary line). The first three important are R1, S1 and the primary pivot line.
When trading with pivot points, two strategies can be followed: bounded trading and breakout trading. In bounded trading, the trader looks the current pivot level of the price. If it reaches a resistance level and then begin to reverse, then the trader can go short or to sell the currency. Similarly if the price is reached support level and then begin to reverse, then the trader can go long or to buy the pair. When the price reverse and reaches the nest level, the trader can exit the trade.
On the other hand, breakout trade depends on waiting until the price is reaching the highest support or resistance level and then goes below higher it. If this occurred then the price can sell or buy because the price is braked the highest level. When the price breaks the highest support or resistance level, it often goes below or rises very large depending on it reaches the support or resistance levels.
4. The stochastic and RSI: these indicators view how much the currency pair prices is changing in a certain period. RSI measure the changes for a certain period as the total changes in the uptrend direction to the changes in the downtrend direction. It is calculated as a percentage. When it goes above 50% it will indicate uptrend and when it goes below 50% it will indicate downtrend.
The stochastic is similar but it uses different calculations. It measures the current closing price relative to the largest change in a given period. This indicator defines the overbought and oversold areas in the price curve. When it is held above 80% for a large period, it is overbought and the price will go down largely. When the stochastic is held for 20% over a relatively high period, it will indicate oversold area and the price will go up largely.
An important note about the above indicators is that any one cannot be used alone. The trader must select a combination of the above to analyses and predict the price trend. Each person has its own strategy to do that.
