Technical Analysis And Forex Trading

Technical Analysis In The Forex Market

Technical Analysis is the study of price movement. You can use price charts to track the history of price movement and attempt to anticipate which way prices will go in the future.

Online forex brokers provide you with many different tools that are used in technical analysis. Some of the most common are listed below.

Bollinger Bands

Bollinger Bands are used to measure market volatility. They consist of three lines:

1. A simple moving average in the middle.

2. An upper band which indicates the simple moving
average plus 2 standard deviations.

2. A lower band which indicates the simple moving
average minus 2 standard deviations.

When market volatility is high, the bands spread apart. When volatility is low, they come together.

The Bollinger Bounce.

Most of the time, the middle band stay in between the outer bands. Think of the outer bands as the border patrol. When the middle brand approaches one of the border guards, it gets bounced away and back towards the middle. Hence the name Bollinger Bounce.

This is useful to know because if you see the middle band approaching an outer band, there's a good chance it will bounce off.

This strategy works best when prices are fluctuating and there are no clear trends.

The Bollinger Squeeze

A good way to spot a trend early is the Bollinger Squeeze. When the bands squeeze close together, it often means that a breakout is about to occur. If the middle band breaks through either the top or lower band, the forex trend will usually continue to go in that direction.

Parabolic SAR (Stop And Reversal)

The Parabolic SAR indicator is used to spot forex trend reversals. It is perhaps the easiest indicator to read, Dots are placed on the chart in positions either above or below the candles (the formula that calculates where the dots go is too complicated to get into).

Dots above the candles are a signal to sell.

Dots below the candles are a signal to buy.

Parabolic SAR works best when there are clear upward or downward trends. It does not work well when price movement is small.

Stochastics

Stochastics is an indicator that is used to measure overbought and oversold conditions in the market. It consists of a scale from 0-100. As the stochastics lines are above 80 it means that the market is overbought and a downward trend could be forming. When the lines fall below 20 it means the market is oversold and an upward trend may be forming.

Stochastics are useful in determining when to lock in profits and when to issue buy or sell orders. But you should never rely on only one indicator. Combine several and adjust them to your forex trading strategy.

For more information on Technical Analysis see here.