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Technical Analysis


Technical Analysis

Technical analysis is being used for the prediction of market movements (that is alterations in currencies prices, volumes and open interests) outgoing from the information obtained for the past. The main instruments of the technical analysis are different kinds of charts, which represent currencies price change during a certain time preceding exchange deals, as well as technical indicators. The latter are being obtained as a result of the mathematical processing of averaged and other characteristics of price movements. The instruments of the technical analysis are universal and applicable to any Forex sector, any currency and any time span.

Technical analysis is easy to compute what is important while the technical services are becoming increasingly sophisticated and reasonably priced. They are available to all the Forex participants independent on their trade plans, strategies applied and the time of position continuance. Under contemporary conditions it is executed by means of computers, which is important if to account that means of the electronic support become more and more sophisticated.
 
The Fibonacci theory named so after a prominent Italian mathematician of the late twelfth and early thirteenth centuries gives ratios, which play important role in the forecasting of market movements. Fibonacci introduced an additive numerical series that has come to be called the Fibonacci sequence, which consists of following series of numbers: 1,1,2,3, 5, 8, 13,21, 34, 55,89, 144,233, 377, 610,987,1597,2584,4181,(etc.). These numbers exhibit several remarkable relationships, in particular the ratio of any term in the series to the next higher term. This ratio tends asymptotically to 0.618. In addition, the ratio of any term to the next lower term in the sequence tends asymptotically to 1.618, which is the inverse of 0.618. Similarly constant ratios exist between numbers two terms apart, three terms apart, and so on. The ratio 0.618, referred to as the Fibonacci ratio, or the Gold Spiral which is being observed in structures of many natural objects and events from clams construction till the form of whirlwinds and hurricanes. The financial markets exhibit Fibonacci proportions in a number of ways; particularly they are powerful tools for calculating price targets and placing stops. For example, if a corrective wave is expected to retrace 61.8 percent of the preceding impulse wave, an investor might place a stop slightly be¬low that level. This will ensure that if the correction is of a larger degree of trend than expected, the investor will not be exposed to excessive losses. On the other hand, if the correction ends near the target level, this outcome will increase the probability that the investor's preferred wave interpretation is accurate.
 
Trend
Finding the prevailing trend will help you become aware of the overall market direction and offer you better visibility, especially when shorter-term movements tend to clutter the picture. Weekly and monthly charts are most ideally suited for identifying that longer-term trend. Once you have found the overall trend, you could select the trend of the time horizon in which you wish to trade. Thus, you could effectively buy on the dips during rising trends, and sell the rallies during downward trends.

Support & Resistance
Support and resistance levels are points where a chart experiences recurring upward or downward pressure. A support level is usually the low point in any chart pattern (hourly, weekly or annually), whereas a resistance level is the high or the peak point of the pattern. These points are identified as support and resistance when they show a tendency to reappear. It is best to buy/sell near support/resistance levels that are unlikely to be broken. Once these levels are broken, they tend to become the opposite obstacle. Thus, in a rising market, a resistance level that is broken, could serve as a support for the upward trend, whereas in a falling market; once a support level is broken, it could turn into a resistance.

Lines & Channels
Trend lines are simple, yet helpful tools in confirming the direction of market trends. An upward straight line is drawn by connecting at least two successive lows. Naturally, the second point must be higher than the first. The continuation of the line helps determine the path along which the market will move. An upward trend is a concrete method to identify support lines/levels. Conversely, downward lines are charted by connecting two points or more. The validity of a trading line is partly related to the number of connection points. Yet it's worth mentioning that points must not be too close together.

A channel is defined as the price path drawn by two parallel trend lines. The lines serve as an upward, downward or straight corridor for the price. A familiar property of a channel for a connecting point of a trend line is to lie between the two connecting point of its opposite line.

Averages
Moving averages tell the average price in a given point of time over a defined period of time. They are called moving because they reflect the latest average, while adhering to the same time measure. A weakness of moving averages is that they lag the market, so they do not necessarily signal a change in trends. To address this issue, using a shorter period, such as 5 or 10 day moving average, would be more reflective of the recent price action than the 40 or 200-day moving averages.

Alternatively, moving averages may be used by combining two averages of distinct time- frames. Whether using 5 and 20-day MA, or 40 and 200-day MA, buy signals are usually detected when the shorter-term average crosses above the longer-term average. Conversely, sell signals are suggested when the shorter average falls below the longer one. There are three kind of mathematically distinct moving averages: Simple MA; Linearly Weighted MA; and Exponentially Smoothed. The latter choice is the preferred one because it assigns greater weight for the most recent data, and considers data in the entire life of the instrument.