Forex Technical Analysis

First off, I don’t claim to be a “guru” on fibonacci levels. Like any other trading technique, a new trader needs to do their own homework and see exactly how the market reacts to various fibonacci levels (from this point forward, I am going to abbreviate the fibonacci word by “fib” because to type fibonacci out every time would lengthen this article by half again).

I am not going to look at any other indicators (like moving averages, or other technical indicators). In my full trading plan, those indicators play an important part of deciding if I take a trade or not. In another words, just because you have reached some of the fib levels I am going to talk about in this article, DO NOT take a trade unless other criteria have been met. Fib levels, while important, are not a be all, end all, stand alone strategy.

The 61.8% Fib Level

When I first started trading, many of the trading books and manuals that I studied recommended using the 38.20% (38%) fib level, and the 50% fib level to analyze support/resistance areas. While I have found those to be somewhat useful, there are other levels that I have found to really give a trader a better edge in making decisions on where support/resistance areas are. The first of these levels is the 61.8% (61%) fib level. Most charting platforms have a fib tool built in. In Tradestation, the fib tool is very easy to use. Let’s assume that the market opened (point 1), moved down and bounced off of a certain level (point 2) and then began to rally back up to point 1. The price stops there and begins a pullback. Using your fib tool, click on point 1 and then on point 2 and release. Your fib levels will then be marked. It is important to see how the price reacts to the 40%, 50% and ultimately the 61% fib level. The market can turn and go in the other direction at any of these levels. My research has shown that the larger the pullback (specifically the 61% fib level), the better chance that the market will turn around and go in the other direction. I have seen many times that the market will pause at the 61% fib level, almost as if it is trying to make up it’s mind if its going to stop there, or head on in the original direction it was headed. I urge you to start watching the 61% fib level and see how many times that level holds the price in.

The 127% Fib Level

If the 61% fib level described above is broken, then the next two fib levels come into play. The second fib level that my testing shows is worthy of mention is the 127% external fib level. Usually (but not always), once the 61% fib level is crossed, the market will travel to the 127% external fib area. An interesting point is that many traders don’t acknowledge or use the external fibs to determine possible stopping areas. I am amazed at how many times the market turns on a dime at this level.

The 161% Fib Level

Another level that I think needs to be addressed is the 161% external fib level. If the 127% fib level doesn’t hold the price in, the next stopping point is the 161% fib level. This level also seems to stop a trend in its tracks.

How To Use Fib Levels

In my opinion, there are two ways to use fib levels. If I am looking to enter a trade and the 61% fib level is right above/below my entry, I will pass on the trade and wait for a set-up without that area to compete with. Secondly, if the 61% fib level has been broken, I know that there is a reasonable chance for the price to go to the 127% or 161% fib extension area.

Conclusion

As you began to work with fibs, understand that these areas are just that, areas. That means that when the price approaches a fib level, it can go past that level by a few ticks or more and still be a valid fib level. I hope that if you are serious about learning how to day trade, you put fibs in your tackle-box as a tool to help evaluate strong support and resistance levels. Charts describing the above set-ups and more free commentary are available on my blog. I hope that Fib levels help you be able to: Catch a whopper!!

Regards,

Ron Lewis

By: Ron Lewis

This is also a follow up from Forex Patterns and Forecast Methods Used Today For Successful Forex Trading! Part 1, if you have not read part 1 please do so to bring yourself up to speed.

Technical analysis and fundamental analysis differ greatly, but both can be useful forecasting tools for the forex trader. They have the same goal – to predict a price or movement.

The technician studies the effects, while the fundamentalist studies the cause of the forex market movements. You should combine a mixture of both approaches to get the best results.

Note: If both fundamental analysis and technical analysis point to the same direction, your chances for profitable trading are much better.

So let’s pick up where we left off with the technical analysis from part 1:

Moving Averages – Are used to emphasize the direction of a trend and to even out price and volume fluctuations, or “noise”, that can confuse interpretation. There are seven different types of moving averages:

- Simple (arithmetic)
- Exponential
- Time series
- Weighed
- Triangular
- Variable
- Volume adjusted

The only significant difference between the various types of moving averages is the weight assigned to the most recent data. For example, a simple (arithmetic) moving average is calculated by adding the closing price of the instrument for a number of periods, then dividing this total by the number of times.

The most popular method of interpreting a moving average is to compare the relationship between a moving average of the instrument’s closing price, and the instrument’s closing price itself.

Sell signal: when the instrument’s price falls below its moving average Buy signal: when the instrument’s price rises above its moving average The other technique is called the double crossover, which uses short-term and long-term averages.

Typically, upward momentum is confirmed when a short-term average (15 ‘day) crosses above a longer-term average (50-day). Downward momentum is confirmed when a short-term average crosses below a long-term average.

MACD – Moving Average Convergence/Divergence – A technical indicator, developed by Gerals Appel, used to detect swings in the price of financial instruments. The MACD is computed using two exponentially smoothed moving averages of the security’s historical price, and is usually shown over a period on charts.

By then comparing the MACD to its own moving average (the signal line), experiensed traders conclude that they can detect when this will affect the RSI by creating false buy or sell signals. The RSI is best used as a valuable complement to other stock-picking tools.

Stochastic Oscillator – A technical momentum indicator that compares an instrument’s closing price to its price range over a given period. The oscillator’s sensitivity to market movements can be reduced by adjusting the time, or by taking a moving average of the result.

This indicator is calculated with the following formula:

%K=100* [(C-L14) / (H14-L14)] – C= the most recent closing price – L14= the low of the 14 previous trading sessions – H14= the highest price traded during the same 14 day period

The theory behind this indicator, based on George Lane’s observations, is that in an upward-trending market, prices tend to close near their high, and during a downward-trending market, prices tend to close near their low.

Transaction signals occur when the %K crosses through a three-period moving average called “%D”.

Trend Line – A sloping line of support or resistance.

- Up trend line – straight line drawn upward to the right along successive reaction lows
- Down trend line – straight line drawn downward to the right along successive rally peaks

Two points are needed to draw the trend line, and a third point to make it valid trend line. Trend lines are used in many ways by traders. One way is that when price returns to an existing principal trend line, it may be an opportunity to open new positions in the direction of the trend in the belief that the trend will hold and the trend will continue further.

A second way is when a price action breaks through (the principal trend line) an existing trend, it is evidence that the trend may be going to fail, and you (the trader) may consider trading in the other direction to the existing trend or exiting in the direction of the trend.

Note: Do not fall in love with your Forex position, and never take revenge of your Forex position.

By: Orlando Elliott Thompson

The Fibonacci retracements are actually based on different mathematical numbers that happen to repeat themselves and make an attempt to measure any of the potential points that can be retraced by any currency pair or simply pulling it back to the defined range. It may happen that you do not have much idea about the mathematical system the Fibonacci retracements follows, but you can get to make a clear understanding about how you can make use of the charting applications and programs that support the Fibonacci function or you can simply suggest this to your Forex trading firm and they are going to help you with the charting.

You need to keep this point in your mind that the Fibonacci retracements can be applied to both the uptrend (bull) and the downtrend (bear) markets. However, you may need to look out for the different retracement levels and then make use of them accordingly as this will be confirming your trading actions.

There are several technical indicators and signals that are based on different mathematical calculations and the technical indicators are actually the statistics of the market trends and market data. Traders make use of these documents extensively while they are conducting technical analysis as this is extremely helpful in predicting the currency trends. There are two main technical indicators which are as under;

The trend indicators are the ones that are helpful in reflecting the strengths and directions of the on-going trend. Traders may happen to enter into a position where they are following a trend and in the end, the trend they are following shows a strong and high momentum in either direction.

One of the most common and preferred trend following indicators are the Bollinger bands and moving averages. The Oscillators are such indicators that are bonded with two extreme values that reflect either short term oversold or overbought conditions. The most commonly used oscillators are; stochastic, moving average convergence difference (MACD) and relative strength index (RSI).

Most of the charting packages normally include the most common Fibonacci retracements technical indicators; you may also be able to find out charting packages and then adding indicators to them if you want to include any.

You need to make sure that the strategies you determine are understandable about how the foreign exchange market actually works, and then in accordance you need to determine your own trading approach. You can also opt for a random procedure which is the trial and error method. While opening an account, you should be initially opting for a demo account and unless you learn the fundamentals, you can continue using it. Always keep this in your mind that slow and steady wins the race.

By: Simon Grimshaw

As forex trading becomes a more extended financial activity around the world the need of innovative approaches to forex trading increases and naturally develops as a result of the constant search for profitable trading systems that are also reliable and understandable even for the beginner trader.

Considering the great number of people already involved with forex trading it’s not really surprising that some of them may find innovative systems that can make good amounts of money even for most aspiring traders without having to pay dearly for the common mistakes committed at the beginning of the road to profitability.

Recently a veteran trader, one of those traders that have tested almost everything on Forex, has been spreading the word about an original and quite revolutionary way to trade the markets. It is a system based on what is called Price Driven Forex Trading (PDFT). This new system is a system based in three trading strategies that are able to produce consistent and systematic profits for the trader that follows PDFT to the letter.

Many would agree that in order to be successful in the markets; this is, making more money than the amounts you may lose in a bad trade; you must be original, innovative and different in your trading systems. And this is in all its extension the basis of the Forex Trading Machine which is based on a different approach to currency trading, this is by the use of PDFT which is a method of trading the forex market without using any type of indicators, support or resistance levels, moving averages, pivots, oscillators, fibonacci, trend lines or any other trading tool you can think of.

It sounds almost “heretical” for some traders, specially the old ones, but everything indicates things work pretty well with PDFT and the Forex Trading Machine. If you are in doubt your are welcomed to test it risk free. Who knows and you may find that the system is right for you and even make some extra bucks while you realize this.

By: Adrian Pablo

As a beginner in forex trading you might wonder which analysis suits you best – technical or fundamental. Is it better to concentrate on one of them, or rather combine the two for better understanding? What do other traders use to analyze price movements?

Technical analysis uses forex market data, such as prices, volume, etc., together with technical indicators, such as relative strength index, moving averages, Fibonacci, etc., to decide the trading positions and forecast future price movements.

Technical analysis is based on:

1.???? examination of chart formations

2.???? differentiation of trends

3.???? identification of buying and selling prospects

4.???? analyzing highest and lowest price of a currency

5.???? understanding of opening/closing prices and volume of transactions

Depending on the trading style, forex trader can use technical analysis on a daily basis (5 minute, 15 minute, hourly), weekly or monthly basis.

Technical analysis uses the assumption that all market information and possible currency volatility can be obtained from the price chain. Forex trader who uses technical analysis believes in three fundamental assumptions – the market moves according to all factors, the price movement is purposeful and connected to these events, the history tends to repeat itself over and over again. In other words a trader looks back at what has already happened and makes decisions based on the believe that volatility will generally have the same pattern of the past.

Fundamental analysis uses financial news and economic news, such earnings and consumer reports, economic data releases, interest rates updates etc., together with non financial information, such as political news, weather broadcasts to determine the trades.

Fundamental analysis involves the analysis of current political and economical situation in the country of the selected currency. Generally, the country’s economy relies on the following factors:

1.???? Central Bank’s interest rates

2.???? National unemployment data

3.???? Tax policy

4.???? Inflation rate

5.???? Political unrest or transition

Forex trader who uses fundamental analysis studies the external factors which may affect the supply and demand of the market. Fundamental analysis in forex assumes that the market is unpredictable and the information can’t be immediately obtained; the currency prices are inconsistent and will change according to the future economic conditions.

So which analysis is more vital? Can a trader use only one in order to succeed or it is important to combine the two together?

The answer is simple – don’t limit yourself to one kind. Fundamental and technical analysis complete one another and both are vital for successful forex trading.

By: Danielle Franklin