Technical Analysis Of Trading

Fundamentals Of Technical Analysis

Forex trading tips about, learn to trade with technical analysis of trading from forex friend loan.  While more and more of traders are diving into technical analysis it could be recommended checking fundamentals of the analysis. Simple knowledge of the main principles of market movements may provide an advanced understanding of technical indicators and how they could be used.

Technical analysis has become one of the most popular science of trading. Even it is defined as not exact since that cannot guarantee future price trend, many traders are looking at it as it is a "trail to the gold".

Now, when the computerization is developing to the higher levels, many technical analysts are forgetting about basic principles of analysis. Majority of retail and even professional traders and investors are jumping into the world of technical indicators in an attempt to find or to develop a trading system or strategy which would make them rich "overnight" or allowed them to do nothing and receive stable income flow. With hundreds of technical indicators, many traders get lost in testing. It is difficult to call as analysis a process of selecting technical indicators and trying different indicators setting with a purpose of finding a combination that works. Yet, the main part of traders is focused exactly on that by considering themselves as professional analysts and by forgetting that this is not analysis but a simple testing.

The 1930s through 1940s when the computers were not used in the stock market analysis, traders and technical analysts were more focused on the analysis of the stock market itself. They did not look for magic indicators that would tell when to buy and when to sell. They tried to understand underlying processes behind price movements. They dig through years of historical data in order to find out what was the moving force of price before and used this knowledge to define what moves price now and where it possibly could go in the future.

Technical analysis based on the testing various indicators setting still can deliver nice profit. However, without understanding the meaning of technical indicators and translating indicator's movements into actions of traders, any trading system or strategy is doomed to failure. Already a hundred years ago, investors understood that price does not go down because Stochastics run over 80 and price does not go up because Stochastics dropped below 20. Price is moved by supply and demand which is created by the investors' sentiment or by a desire of mass to sell or buy.

Overall, there could be one advice only. Before going into a search for technical indicators, it would be correct to refer to the fundamentals of technical analysis. I particular, basic knowledge of Elliot Wave Theories could provide a novice trader with basic knowledge of cycles in the any of market as well as some understanding of trader's psychology and how price movement could be explained by investors' sentiment.

How To Use Stochastic Oscillator In Currency Trading?

Forex is the largest currency trading market and is widely traded by Banks, Government, and large financial company. The major currencies are United State Dollar, Europe Euro, Great Britain Pound and Swiss Franc. There is basically 2 type of trading, fundamental and technical trading. For technical trading, commonly using indicator using Moving average, High and Lows and Stochastic Oscillator.

Stochastic Oscillator is widely used in stock trading also. Similar to Forex trading, this indicator comes with two relative factor, %K and %D. This indicator shows momentum over a number of periods with closeness relative with current Close price with a High and Low difference, which is also the support and resistance level.

%K

This is the duration of the number of periods to calculate to gauge the momentum of the price movement. The default setting is 14 periods. And the formula is to take current close minus lowest low throughout the 14 periods, divide by highest high difference lowest low and multiply by 100. This in a way uses the highest resistance and lowest support, using current close price to gauge the level of momentum in a percentage of the larges difference between the resistance and support.

%D

This is the simple moving average line that is plotted alongside %K and act as a signal trigger line. This is default 3 days, which show the fast movement of the price signal within the last 3 periods. This in turn complete with the slow %K which show momentum over longer 14 periods.

Over Brought or Oversold

The stochastic oscillator as express in 100 has 2 level of an indicator at 20 and 80 which show significant over brought and oversold situation. At levels more then 80, the currency is showing a trend of price near the resistance level and with %D changing or cross the %K line and went downwards, show a sign of currency moving from over brought to trending down. This crossing act as a trigger to enter a Sell trade on a prediction that the currency to go downwards. Similar to a level below 20, the situation is oversold, witch %D crossing %K, the prediction is the currency to go upwards thus triggering a Buy trade.

Midway 50 Level

The 50 level also marks the trending halfway point or beginning of a currency trend. If the direction of %D and %K points in the same direction and both cross the 50 level markings, prediction are set for the currency to continue the trend, thus triggering a Buy/Sell trade respectively. This is particularly useful when the currency has been overbought or oversold for a relative period of time and it shows sign of weakening trend or strong momentum against opposite flow.

Slope of %D and %K

The slope of %D and %K can be visually or calculated using gradient. The slope of %D against $K at convergent indicates the trend is growing strong. The slope at parallel means the trend is steady. And the slope of %D and %K at divergent indicate trend is weakening. Many traders did not realize this, but if you observe the changing slope of this 2, you can find highly reliable triggers to buy or sell trades when trending or currency is going sideways.

In addition, you can use stochastic with visual support and resistance indicator at the larger timeframe. If you using 15 minutes chart, try visually check the 1hour chart and you may find some trend following or reversal at support and resistance level. This will increase your success in Forex Trading significantly.

Why Technical Analysis?

Using Technical Analysis is the best way to invest in the market. There are many reasons why technical analysis works great.

Technical Analysis is the best way to invest in the market.  It allows you the ability to cut your losses short and let your winners ride. There are many other reasons why technical analysis works great.

1. It allows you to go after short-term gains.  Because of the effect of compound interest short-term gains have gain popularity. If you can gain an average of 3% a month you can do better than someone who makes 40% annually and their money.

This makes short-term gains the fastest way to grow your money.   

2. It can allow you to make longer-term gains if you wish. Not everyone likes to go after the short-term market movements. Some people want to buy a market and hold it for many months to even a few years. Technical analysis can be used to find test buy and sell signals for multiple time frames.

3. It allows you to cut your losses short and let your winners ride. Because technical Analysis uses to support and resistance lines it easily allows you to find good spots to place targets as well as lets you figure out when it is just time to exit the trade for a small loss.

4. It allows you to play on people’s emotions. People are what really drive the market up and down.  When someone buys a stock they are aiding in pushing it up.  That is evident to anyone who actively trades the market.

5. It allows you to test and improve your strategy in a shorter time frame.  If you are a longer-term trader you might not know whether your strategy for finding long-term forex market works until decades go by.  Whereas short-term trading allows you to find out at a relatively fast rate how you can improve your strategy.

All these reasons make technical analysis a great way to make money in the forex market.

Technical Analysis Of Trading