Friday, March 13, 2009

EASY WAY TO TECHNICAL TRADING

What we do in technical analysis is simply using the past and present price actions to forecast the future price action. We study the charts which can be a line chart, a bar chart or a candlestick chart to enable us understand market movements and performances.

The most recommended chart for technical traders is candlestick chart because it shows the opening price, closing price, highest and the lowest price unlike the line chart that shows only the closing price.


There are indicators which you need to learn in order to apply them very well as a technical tool to your trading. They are Bollinger bands, stochastic oscillator, relative strength index, MACD, moving averages, Ichimoku, parabolic SAR, momentum, etc. these indicators are part of your Forex broker's platform so all you need to do is to apply them to your chart.


Bollinger bands

This is made up of three bands: the upper Bollinger band, the lower Bollinger band and the middle Bollinger band. Bollinger band is used to measure the volatility of the market. Hence when the market is loud, the upper and lower bands spread wide apart but when the market is quiet, the bands squeeze together.









Sometimes, chart do bounce around the upper and lower bands giving a technical trader the chance to analyze the next movement of the chart. As seen below, from lower band it hit the upper band at point A, move down to lower band at point B and then back to upper Bollinger band at C.











Relative strength index or RSI

This indicator is used to measure the overbought and oversold areas. An overbought area is an area where buyers are getting weak while sellers are expected to take over the market while an oversold area are area where sellers are getting weaker and market is expected to turn to the direction of the buyers (up). When RSI reads 30 or below, it shows an oversold area. When it reads 70 or above it shows overbought area.









From the picture above showing RSI, when the tip/end of the blue line reads a value 30 or below, you should buy. But when the value is 70 or above, then you need to sell because the market is in the overbought area.

RSI can also be used to confirm trend formation. When you think an uptrend is forming your RSI should be above 50. at a downtrend, RSI should read below 50.


Stochastic oscillator

It works the same way as RSI. Reading of 20 or below shows an oversold area while a reading of 80 or above shows an overbought area. This indicator is mostly used when the market is trading in ranges and is very good in confirming indicators.










Parabolic SAR

This is one of the easiest indicators represented in dots ..... used to detect trend formation. When the dots are placed above the chart, it is a sell signal but when the dots are placed below it is a buy signal.


MACD

This fully means a moving average convergence divergence. The indicator is comprised of two lines of moving averages (fast and slower moving averages) and a histogram. Looking at this indicator, you will notice that as the moving average lines separate from each other the histogram gets bigger (called divergence) but when they come together the histogram gets smaller (called con

vergence).You can trade MACD crossover by generating a buy signal when a slow moving average crosses over the fast one from above and a sell signal when the slow moving average crosses over the fast from below.









CONCLUSION

A technical trader makes use of two or more combination of these indicators to generate buy and sell signals. This is because no indicator can give you 100% buy or sell signal so, you need to add other indicators to confirm your signals before embarking on a any trade. You need to study these indicators to select the ones that fit your personal trading style.





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