Applying Technical Analysis on the Forex

Generally speaking there are two ways of analyzing the forex market, fundamental and technical analysis. The former concerns itself with economic indicators, while technical analysis looks at the data in the forex scurrencies market itself.

The goal of the technical analyst (the technician) is to predict the price movement of a particular currency (or currencies) by checking the price data, the averages, volume, rates etc. there are several instruments available, and the most basic is the chart.

There are many different types of charts -bars, candlesticks, points and figures, etc- but most of them are set up to display the price history of a currency in the forex. This "history" can be a matter of years, days or minutes. By evaluating the history, a trader will be able to decide when it is time to buy or sell.

The price chart is only one tool, and a good technician will rely on other instruments to gauge the market before making any assessment. These tools are also studies, or technical indicators.

One of the most useful instruments in gauging market trends are the moving averages. A trend is simply the direction that the market or currency has been taking. Moving averages are lines (representing price trends) laid on a chart. Price points are placed on the lines. There are three types of moving averages: simple, weighted and exponential.

In a simple moving average, price points (which can be high, low or close) are set up over a predetermined time span, and these points are added, and the result is the average. By far this is the most used moving average. Weighted moving averages, on the other hand, take into consideration weighted factors in evaluating the price data. Weighted moving averages are often used in analyzing new data.

An exponential moving average is used to determine the premium moving average for currencies. It takes a percentage of the currency's price and multiplies it with the average price in a preceding period. To attain the premium moving average several time periods are tried until they match the price data.

Bollinger Bands are often used to determine the volatility of currency prices in the forex. To use Bollinger Bands for technical analysis, a technician will choose a specific moving average period (5 day, 10 day, 21 day etc) and establish standard deviations. A standard deviation measures how widely the values (in this case prices) are dispersed from the average.

A Bollinger Band chart will depict the prices over a specified moving average period. It will also show (usually) two standard devotions above the average, and another deviation below the average. The fluctuations will help determine if the trends will continue or change.

Other instruments used in technical analysis is the RSI (Relative Strength Index), a scale for checking the strength of the current trend; Stochastics provide information on possible price reversals; Fibonacci Retracements help forecast prices after strong fluctuations.

You don't need to know the ins and outs of all these instruments, but a sound knowledge of even the basics will go a long way in helping you as a forex trader.