Technical Analysis & Technical Indicators In Currency Trading

Technical analysis comprises of the study and research of the market data and securities as it relates to their supply and demand in the marketplace. Charts and computer programs are used to identify and project price trends. The technical analysis in currency trading also includes studying price movements and trading volumes to determine patterns such as Head and Shoulder Formations and W Formations. The technical indicators in currency trading include support and resistance levels, and moving averages. Unlike fundamental analysis, technical analysis in forex does not take into account a corporation's financial data for analysis purpose. Technical analysis does not help in making absolute predictions. Rather it helps in projecting the “likely" price movement over time.

In simple terms, the technical analysis in currency trading uses historical price action to predict the future price action. Since the forex operates 24-hour a day, there is lot of data and information which can be analyzed to determine future price activity. Therefore investors take help of technical tools such charts, trends and technical indicators. However, it is important to note that, in general, the interpretation of technical analysis remains the same regardless of the asset being monitored. Although, the topic of technical analysis & technical indicators in currency trading is quite vast and there is elaborate information available on the internet on this topic but in this review of technical analysis and indicators, we will only touch on the basics of why technical analysis and indicators is so popular in currency trading market.

Our discussion will be more currency trading specific and hence taking into account technical analysis & technical indicators in currency trading aspect of the same.

How is Technical Analysis in currency trading done?

Technical analysis is based on the belief that price movements are never completely arbitrary and follow a trend. Following methods are used for technical analysis:

Moving Averages: With this method various support and resistance levels for the short and long term are identified. The most commonly used moving averages are the 30-day moving average and 200-day moving average.

Charts and Patterns: Based on the historical data on price movements charts are made and these are are used to identify patterns and shapes, such as double top, double bottom, head and shoulders and triple bottom.

The main benefits of using technical analysis in currency trading are that it assists traders to identify and predict a trend hence giving investors an ability to judge the direction of the current trend and enables them to gauge the best time to take a position in the market. There are some drawbacks too associated with technical analysis like it heavily depends on person’s opinion or interpretation. It is more a study of probabilities than of actual value and hence most useful only for short-term investments.

There are so many different kinds of technical indicators in currency trading used by traders in forex markets. These technical indicators provide a great deal of help in predicting the future direction of exchange rates. It is important for a trader to learn and understand how to interpret various forex technical indicators. A few of very popular indicators are Fibonacci retracement, moving averages, moving average convergence divergence (MACD), Bollinger bands and stochastic. These technical indicators in currency trading also known as technical tools are mostly used in conjunction with other indicators and chart patterns to generate signals.

Technical analysis and technical indicators in forex discussed above will give you a deeper insight of currency trading.