Technical analysis is an advanced form of making forecasts on Forex. It uses market indicators and the history of the market to predict its performance. It is contrasted by the fundamental analysis, which makes forecasts by analyzing the impact the real-world events make on the financial markets.
How does Forex technical analysis work
There are a lot of ways to represent the state of the market using the finance indicators, and there is no single best way to do so. Different forms of analysis are used for different use cases, and we are not even touching upon the custom indicators yet.
However, there are some indicators that are credible enough to be recommended. They are:
- Moving Averages. Commonly referred to as MAs, with a number representing the number of days that the average is calculated from. A lot of analysts use 50 MA and 200 MA to calculate the mood of the market. The MACD histogram is an improvement upon this method and is used to represent the relationship between the two averages.
- Stochastic Oscillator. This indicator showcases the state of the price in relation to the price range recorded in the past. The idea is that the market respects the previous extremums and will close near them. Despite seeming superficial, Stochastic is one of the more reliable indicators and rarely disappoints.
Most indicators are free to use, however, some traders design custom indicators and attempt to sell them. They are rarely worth it but may be useful for inexperienced traders.
How to use technical analysis for online trading
Technical analysis does not produce a set of instructions. Instead, it helps to establish the mood of the market and determine how it is going to perform in the future.
For example, if the MACD is in the positive zone, then the market is in the bullish mood. You can further confirm it by checking the Stochastic Oscillator. If both indicators support your claim, then you can safely buy the currency and expect to sell it for profit.