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Technical Analysis is probably the most common and successful means of making trading decisions and analyzing forex and commodities markets. Technical analysis differs from fundamental analysis in that technical analysis is applied only to the price action of the market, ignoring fundamental factors.

As fundamental data can often provide only a long-term or "delayed" forecast of exchange rate movements, technical analysis has become the primary tool with which to successfully trade shorter-term price movements, and to set stop loss and profit targets. Technical analysis consists primarily of a variety of technical studies, each of which can be interpreted to generate buy and sell signals or to predict market direction.

Support and Resistance Levels. One use of technical analysis, apart from technical studies, is in deriving "support" and "resistance" levels. The concept here is that the market will tend to trade above its support levels and trade below its resistance levels. If a support or resistance level is broken, the market is then expected to follow through in that direction.

In other words, EURUSD has risen up to. For example, in chart below EURUSD has established a resistance level at approximately. The trading strategy would then be to sell EURUSD the next time it gets close to. This would have indeed been a good trade as EURUSD proceeded to fall sharply, without breaking the.

Hence a substantial upside can be achieved while only risking 10 or 15 pips. On GCI's integrated charting system GCI Multi-Currency Charts , the red support line shown above can be drawn by clicking on the "Trend" button at the top of the chart window, and then drawing a line by clicking the mouse once at the beginning of the line, and again at the end of the line. Technical Studies and Charting. Technical analysis has witnessed the development of a large number of technical studies or technical "indicators" over the past several years.

Click on the technical study below for a definition and to learn how it may be applied to trading: Developed by John Bollinger, Bollinger Bands are an indicator that allows users to compare volatility and relative prices levels over a period of time. The indicator consists of three bands designed to encompass the majority of a currency's price action. Using the standard deviation ensures that the bands will react quickly to price movements and reflect periods of high and low volatility.

Sharp increases or decreases in prices, and hence volatility, will lead to a widening of the bands. Long periods of sideways movements will lead to a narrowing. Bollinger Bands are designed to capture the majority of price movement.

When prices move beyond the upper or lower band, they are considered high overbought or low oversold on a relative basis. Moving Averages are one of the most popular and easy to use tools available to the technical analyst.

By using an average of prices, moving averages smooth a data series and make it easier to spot trends. This can be especially helpful in volatile markets. A moving average MA is an average of data for a certain number of time periods. It "moves" because for each calculation, we use the latest x number of time periods' data. There are two major types of Moving Averages: A simple moving average SMA is formed by finding the average price of a currency or commodity over a set number of periods.

Most often, the closing price is used to compute the moving average. If the next closing price in the average is 15, then this new period would be added and the oldest day, which is 10, would be dropped. The new 5-day moving average would be calculated as follows: Over the last 2 days, the moving average moved from 12 to As new days are added, the old days will be subtracted and the moving average will continue to move over time.

Because moving averages are lagging indicators, they fit in the category of trend following. When prices are trending, moving averages work well. However, when prices are not trending, moving averages do not work. In order to reduce the lag in simple moving averages, technicians sometimes use exponential moving averages, or exponentially weighted moving averages.

Exponential moving averages reduce the lag by applying more weight to recent prices relative to older prices. The weighting applied to the most recent price depends on the length of the moving average. The shorter the exponential moving average is, the more weight that will be applied to the most recent price. The method for calculating the exponential moving average is fairly complicated. The important thing to remember is that the exponential moving average puts more weight on recent prices.

As such, it will react quicker to recent price changes than a simple moving average. For those who wish to see an example formula for an exponential moving average, one is provided below. Others may prefer to skip this section and move on the comparison of the moving averages. Exponential Moving Average Calculation. The formula for an exponential moving average is: The smoothing constant applies the appropriate weighting to the most recent price relative to the previous exponential moving average.

The formula for the smoothing constant is: For a period EMA, the smoothing constant would be.

There are two possible outcomes: Developed by Welles Wilder, creator of RSI and DMI, the Parabolic SAR sets trailing price stops for long or short positions.

Also referred to as the stop-and-reversal indicator SAR stands for "stop and reversal" , Parabolic SAR is more popular for setting stops than for establishing direction or trend. Wilder recommended establishing the trend first, and then trading with Parabolic SAR in the direction of the trend.

If the trend is up, buy when the indicator moves below the price. If the trend is down, sell when the indicator moves above the price. The formula is quite complex and beyond the scope of this definition, but interpretation is relatively straightforward. The dotted lines below the price establish the trailing stop for a long position and the lines above establish the trailing stop for a short position.

At the beginning of the move, the Parabolic SAR will provide a greater cushion between the price and the trailing stop.

As the move gets underway, the distance between the price and the indicator will shrink, thus making for a tighter stop-loss as the price moves in a favorable direction. There are two variables: The higher the step is set, the more sensitive the indicator will be to price changes.

If the step is set too high, the indicator will fluctuate above and below the price too often, making interpretation difficult. The maximum step controls the adjustment of the SAR as the price moves. The lower the maximum step is set, the further the trailing stop will be from the price. Wilder recommends setting the step at. Developed by Gerald Appel, Moving Average Convergence Divergence MACD is one of the simplest and most reliable indicators available. A 9-period exponential moving average of the MACD itself is usually plotted over this line as a signal or trigger line.

By using moving averages, MACD has trend following characteristics. In addition, by plotting the difference of the moving averages as an oscillator, MACD also has momentum characteristics. There are three techniques commonly used to interpret the MACD: When MACD moves counter to the direction of the currency itself, it is a warning that the currency's trend may change.

Some analysts choose to buy or sell when the MACD goes above or below zero the centerline. When the MACD crosses above the slower trigger line, this is a bullish signal. When the MACD goes below the trigger line, it's a bearish signal.

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The Relative Strength Index RSI is a bounded momentum oscillator that compares the magnitude of a currency's recent gains with the magnitude of its recent losses. It takes a single parameter, the number of time periods that should be used in the calculation; 14 is commonly used.

The RSI was created by J. The RSI's full name is actually rather unfortunate as it is easily confused with other forms of Relative Strength analysis such as John Murphy's "Relative Strength" charts and IBD's "Relative Strength" rankings. Most other kinds of "Relative Strength" stuff involve using more than one stock in the calculation. Like most true indicators, the RSI only needs one stock to be computed.

In order to avoid confusion, many people avoid using the RSI's full name and just call it "the RSI. For a period RSI, the Average Gain equals the sum total all gains divided by Even if there are only 5 gains losses , the total of those 5 gains losses is divided by the total number of RSI periods in the calculation 14 in this case.

The Average Loss is computed in a similar manner. Instead of dividing by the number of gaining losing periods, total gains losses are always divided by the specified number of time periods - 14 in this case. When the Average Gain is greater than the Average Loss, the RSI rises because RS will be greater than 1.

Conversely, when the average loss is greater than the average gain, the RSI declines because RS will be less than 1. The last part of the formula ensures that the indicator oscillates between 0 and The more data points that are used to calculate the RSI, the more accurate the results. If you start an RSI calculation in the middle of an existing dataset, your values will only approximate the true RSI value.

To duplicate its RSI number, you'll need to use at least that much data also. As a leading indicator, momentum measures a currency's rate-of-change. The ongoing plot forms an oscillator that moves above and below Bullish and bearish interpretations are found by looking for divergences, centerline crossovers and extreme readings.

Momentum can also refer to a particular investing or trading style. The rational is that the hot get hotter and the cold get colder. Bullish momentum players buy currency pairs or commodities that are popular or that they believe will become popular. As the word spreads and popularity grows, the advance will accelerate.

Price acceleration is the same as an increase in momentum. The indicator oscillates between 0 and , with readings below 20 considered oversold and readings above 80 considered overbought.

The number of periods will vary according to the sensitivity and the type of signals desired. As with RSI, 14 is a popular number of periods for calculation.

CCI "Commodity Channel Index". Developed by Donald Lambert, the Commodity Channel Index CCI is an indicator designed to identify cyclical turns in currencies or commodities.

There are 4 steps involved in the calculation of the CCI: The final step is to apply the Typical Price TP , the Simple Moving Average of the Typical Price SMATP , the Mean Deviation and a Constant. For scaling purposes, Lambert set the constant at. The CCI fluctuates above and below zero. When the CCI moves below , the security is considered to be in a strong downtrend and a sell signal is given.

The position should be closed when the CCI moves back above Since Lambert's original guidelines, traders have also found the CCI valuable for identifying reversals. The CCI is a versatile indicator capable of producing a wide array of buy and sell signals.

As with most oscillators, divergences can also be applied to increase the robustness of signals. A positive divergence below would increase the robustness of a signal based on a move back above Trendline breaks can be used to generate signals. Trendlines can be drawn connecting the peaks and troughs. From oversold levels, an advance above and trendline breakout could be considered bullish. Rex Takasugi has used this type of system to trade the Russell Traders and investors use the CCI to help identify price reversals, price extremes and trend strength.

As with most indicators, the CCI should be used in conjunction with other aspects of technical analysis. CCI fits into the momentum category of oscillators. In addition to momentum, volume indicators and the price chart may also influence a technical assessment.

ATR "Average True Range". Wilder defined the true range TR as the greatest of the following: The last two possibilities arise when the previous close is greater than the current high potential gap up or lower than the current low potential gap down.

Absolute values were applied to differences to ensure positive numbers. Typically, ATR is based on 14 periods and can be calculated on an intraday, daily, weekly or monthly basis. The first day ATR value is a simple average of the last 14 daily ATR values. Standard deviation is a statistical term that provides a good indication of volatility.

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It measures how widely values closing prices for instance are dispersed from the average. Dispersion is difference between the actual value closing price and the average value mean closing price. The larger the difference between the closing prices and the average price, the higher the standard deviation will be and the higher the volatility.

The closer the closing prices are to the average price, the lower the standard deviation and the lower the volatility. The calculation for the standard deviation is based on the number of periods chosen. The steps for a period standard deviation formula are as follows: The standard deviation for the 20 periods is 6.

Share to Twitter Share to Facebook. Foreign exchange or FOREX is a Method of SMA Part Support and Resistance Level. Labels Technical Forex Tools Basic Forex Training. Labels Basic Forex Training Forex Tools Technical. Moving Average Moving Averages are one of the most popular and easy to use tools available to the technical analyst. Simple Moving Average A simple moving average SMA is formed by finding the average price of a currency or commodity over a set number of periods.

Exponential Moving Average Calculation The formula for an exponential moving average is: If the current price C is higher than the previous period's EMA P , the difference will be positive C - P. If the current price is lower than the previous period's EMA, the difference will be negative C - P. RSI The Relative Strength Index RSI is a bounded momentum oscillator that compares the magnitude of a currency's recent gains with the magnitude of its recent losses.

Momentum As a leading indicator, momentum measures a currency's rate-of-change.