Have you ever realized that everything has its own story and history? The presence of things is shaped by their previous actions and decisions. What happened in the past has been accumulated in today’s codes and is still living. The situation is not different in the Forex industry. The prices of products write their own tale and there is a framework to read it: technical analysis. If you are familiar with the Forex market, you have probably heard of it. However, you may still feel too lazy to learn its principles. Here, you can find some useful information to open the door.
The Definition
Technical analysis is the examination of price movements in a specific market. Assuming that the future price can be predicted by looking at the previous pattern of prices, traders benefit from the historic chart patterns. Nevertheless, it should be noted that technical analysis is pretty subjective and does not give an absolute result. The reason is that there are so many indicators and patterns to follow and traders are free to choose which one they want. If the characteristics of the market are not well-understood, there is a possibility of using wrong indicators and failure.
Important Terms For Technical Analysis
Support and resistance levels are crucial for a healthy technical analysis. The support level is a psychological limit where a bearish trend is expected to pause due to an increase in demand. If the price breaks the support level and keeps going down, it means that you are making a profit as a short positioner and you can consider reopening the position. However, the price may increase and go in the opposite way. In that case, the most logical thing would be to close your position and exit.
The resistance level is exactly the opposite of the support level. It symbolizes the expected maximum price level of a product where a bullish trend may stop. Suppose you have taken a long position on the USD/EUR pair. If the price of the pair reaches a resistance level, you have to observe its direction. If it exceeds the limit, then you predict that the price will go even higher and you can keep your position or open a new one. On the contrary, if the price goes back and starts to decline, it means that your position loses value, and it would be better to close it. In technical analysis, you always have to look for these levels according to the indicators you have chosen.
The Types of Indicators
The indicators are mainly divided into two categories. While lagging indicators confirm trends after happening on the chart, leading indicators give the signal usually before a change has occurred on the chart. Since the leading indicators are trying to warn traders about a potential reversal early, they have a relatively lower success rate of signals than the lagging ones do. Additionally, you can use the leading indicators with other tools such as candlesticks to get better results.
Moving Averages, Parabolic SAR and the Moving Average Convergence Divergence (MACD) are some of the most popular lagging indicators. On the other hand, traders mostly use the Stochastic Oscillator, the Relative Strength Index (RSI) and the Momentum Indicator as the leading indicators.
