TECHNICAL analysis is based on the idea that historical prices can provide insight into future prices. Using technical charts, traders seek to determine the likelihood of the continuation of the current trend, as well as the potential point at which the trend may reverse.
While there are countless types of technical charts, most will fall into a handful of categories. Here I will look at a few of the more popular charts.
Moving averages have long been used to reduce market “noise” by filtering the larger price fluctuations. The resulting price line is “smoother”, which can help identify potential market rate trends, and differentiate them from the normal up-and-down fluctuations common to all currency pairs.
A common means of measuring near real-time price volatility is the Bollinger Band indicator. Traders look for change in price volatility – as a sharp decline in volatility indicates waning market interest in the current trend, and could signal a change in price direction.
Traders today can take solace in the fact that modern trading systems automatically perform the calculations required to measure volatility. The results are displayed on a price chart, leaving the trader free to watch for changes in the indicator.
TREND STRENGTH INDICATORS
Another prevalent indicator type measures the strength of the current trend; of these, the Relative Strength Index (RSI) is one of the more popular. It is considered an oscillating indicator, as it moves up and down on a scale in response to changes in market rates. The RSI is considered one of the most accurate indicators for evaluating current market trends, and uses a calculation comparing the magnitude of recent gains and losses to arrive at an index value. This value is plotted on a scale which traders may interpret when determining potential trade actions.
THE BOTTOM LINE
You should never act solely on any one technical indicator (or just on technical analysis alone). Depending on market conditions, technical indicators can send “false signals”, and including a secondary source that confirms your initial findings is one way to help protect your investment.
Paul Hayward is head of sales at OANDA Europe.
The OANDA fxTrade platform – available for the desktop, tablet and smartphone – provides traders with easy to use technical analysis capabilities. For more information on technical analysis, visit: fxtrade.oanda.ca/learn/technical-analysis-for-traders.
Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.