Forex Trading Based on Technical Analysis
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Technical analysis is a method of evaluating forex, stocks or securities by analyzing the statistics generated by market activity, such as past prices and volume. Technical analysts do not attempt to measure a security's intrinsic value, but instead use charts and other tools to identify patterns that can suggest future activity.
Just as there are many investment styles on the fundamental side, there are also many different types of technical traders. Some rely on chart patterns, others use technical indicators and oscillators, and most use some combination of the two. In any case, technical analysts' exclusive use of historical price and volume data is what separates them from their fundamental counterparts. Unlike fundamental analysts, technical analysts don't care whether a stock is undervalued - the only thing that matters is a security's past trading data and what information this data can provide about where the security might move in the future.
Technical analysts identify non-random price patterns and trends in financial markets and attempt to exploit those patterns. While technicians use various methods and tools, the study of price charts is primary. Technical analysts especially search for archetypal patterns, such as the well-known head and shoulders reversal pattern, and also study such indicators as price, volume, and moving averages of the price. Many technical analysts also follow indicators of investor psychology (market sentiment).
Technical analysts seek to forecast price movements such that large gains from successful trades exceed more numerous but smaller losing trades, producing positive returns in the long run through proper risk control and money management.
There are several schools of technical analysis. Adherents of different schools (for example, Candlestick charting, Dow Theory, and Elliott wave theory) may ignore the other approaches, yet many traders combine elements from more than one school. Technical analysts use judgment gained from experience to decide which pattern a particular instrument reflects at a given time, and what the interpretation of that pattern should be. Technical analysts may disagree among themselves over the interpretation of a given chart.
Technical analysis is frequently contrasted with fundamental analysis, the study of economic factors that some analysts say can influence prices in financial markets. Pure technical analysis holds that prices already reflect all such influences before investors are aware of them, hence the study of price action alone. Some traders use technical or fundamental analysis exclusively, while others use both types to make trading decisions.
Widely-known technical analysis concepts include:
* Accumulation/distribution index—based on the close within the day's range
* Average true range - averaged daily trading range
* Bollinger bands - a range of price volatility
* Breakout - when a price passes through and stays above an area of support or resistance
* Commodity Channel Index - identifies cyclical trends
* Coppock - Edwin Coppock developed the Coppock Indicator with one sole purpose: to identify the commencement of bull markets
* Elliott wave principle and the golden ratio to calculate successive price movements and retracements
* Hikkake Pattern - pattern for identifying reversals and continuations
* MACD - moving average convergence/divergence
* Momentum - the rate of price change
* Money Flow - the amount of stock traded on days the price went up
* Moving average - lags behind the price action
* On-balance volume - the momentum of buying and selling stocks
* PAC charts - two-dimensional method for charting volume by price level
* Parabolic SAR - Wilder's trailing stop based on prices tending to stay within a parabolic curve during a strong trend
* Pivot point - derived by calculating the numerical average of a particular currency's or stock's high, low and closing prices
* Point and figure charts - charts based on price without time
* Profitability - measure to compare performances of different trading systems or different investments within one system
* Relative Strength Index (RSI) - oscillator showing price strength
* Resistance - an area that brings on increased selling
* Rahul Mohindar Oscillator - a trend indentifying indicator
* Stochastic Oscillator, close position within recent trading range
* Support - an area that brings on increased buying
* Trend line - a sloping line of support or resistance
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