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Technical Analysis

Without proper analysis, you cannot make sensible decisions in Forex trading. Fundamental analysis and Technical analysis are the two broad schools of analysis in the Forex market and they are mentioned below:

Fundamental Analysis

Fundamental analysis takes into account the economic fundamentals of a country that affect its exchange rate in the Forex trading. Different economic indicators act as fundamental forces to drive currency markets

  • Balance of trade: Balance of trade of a country is the record of its exports and imports. It plays an important role in determining the exchange rate of a country’s currency in the Forex market. The currency of a country with long-term trade surpluses gains higher value against the currencies of the countries with persistent trade deficits.
  • Relative inflation rates: After balance of trade, relative inflation rates are the highly significant factors to determine the exchange rate of a country’s currency. If a country has a higher rate of price inflation, its currency ought to weaken in comparison with currencies of other countries that have a lower rate of price inflation with purchasing power parity.
  • Interest rates: Interest rates play a highly significant role in determining economic indicators of the economy. Like stock markets, Forex markets are directly affected by the prevailing economic conditions, regionally and globally. The currencies with high real interest rates have high exchange rates in the Forex trading.
  • Expectations and speculation: Expectations and forecasts play a highly significant role to fluctuate the prices of currencies in the Forex market. The Forex markets anticipate events such as future rate of inflation etc. which moves the exchange rates up and down.

Technical Analysis

In technical analysis, future-prices of currencies are predicted by taking into account their price history and trade volumes. In other words, technical analysis is the expert forecasting of the direction of currencies after studying the market data such as price and volume.

Charts

Charts play an important role in the technical analysis of the Forex market. The three major charts are mentioned below:

  1. Line Chart: The line chart is the graphical illustration of exchange rates. The line is obtained by connecting up daily closing prices over a period of time.
  2. Bar chart: The bar chart is comprised of vertical bars that are drawn to show the performance of the currency pair. They represent four hooks; opening, closing, high and low of exchange rates. The opening and closing prices are taken on horizontal axis. The bar chart is updated every 30 minutes. It is highly recommended that each time an account holder trades currencies in the Forex market; they should use these bar chart patterns and indicators to make the right decisions.
  3. Candlestick chart: Being the modified form of the bar chart, this chart illustrates the opening, closing, high and low process as candlesticks. The candlestick is said to be solid when the opening rate is higher than the closing rate. At the same time, the candlestick is said to be hollow when the closing rate exceeds the opening rate.

Support, Resistance, Channels and Triangles

Support and resistance are two widely used concepts in Forex trading. The support and resistance points are determined by the upward and downward movements of the market. As a matter of fact, support and resistance levels are one of the common features of all tradable financial commodities including the stock market and the Forex market. In the currency market, these two concepts represent a fundamental change in market sentiment.

* Support

When the Forex market moves upward, reaches its highest point and pulls back to the lowest point, this lowest point is called a support. It is determined by connecting many under-points of the exchange rate cycle on a straight line
The support level represents a downward movement or reluctance in the market when currencies are sold below certain rates of exchange. It changes with the passage of time and indicates the reluctance of the market participants to sell a currency.

* Resistance

As mentioned above, when the market moves upward and reaches the highest point, it is called the resistance. It is detected by connecting several upper points in the exchange rate cycle with a single straight line. It represents the market’s reluctance to buy a currency above certain exchange rates.

* Triangles

Where resistance and support lines move towards each other and meet at a point, triangles are formed. Triangles may be upward, sideways or downward sloping. Generally, they form over a period of three days to three weeks. They help Forex traders to make right decisions such as when to buy and when to sell currencies to make money.
In Forex trading, breakout is a common term that indicates that there are good opportunities to earn profits. Breakouts are determined by the intersection of resistance and support. When the breakout seems to be trending upwards, it implies that the traders should buy the currencies and sell them when the prices are high.

Indicators

  • Moving Averages: Moving averages are the most widely used technical indicators obtained by the available market data. They are versatile and easy to construct. They help Forex traders to identify and understand a new trend or a sustained movement, either up or down, in currency trading. Here are the two concepts of moving averages
    • Simple Moving Average: With the simple moving average, the past and present data are given equal importance and are weighted equally.
    • Weighted Moving Average: In the weighted moving average, the current data is given more importance and weight over the past data.
  • The exchange rate cycle has peaks and troughs. Moving averages play an important role in smoothing out the peaks and troughs of the exchange rate cycle.

  • Stochastic Oscillators

    Stochastic oscillators are technical momentum indicators that compare the closing exchange rate of a currency to its price range over a given time period. These indicators help Forex traders make decisions such as when to buy or sell. Following is the formula to calculate stochastic oscillator:

    %K = 100[(C - L14)/(H14 - L14)]

    Where, C = the most recent closing price, L14 = the low of the 14 previous trading sessions and H14 = the highest price traded during the same 14-day period.

    When the oscillator touches 80, the currency is considered overbought. An oscillator below 20 is considered to indicate an oversold currency.