TECHNICAL ANALYSIS BASICS


Technical Analysis is one of the main tools in forecasting future market price movements according to the study of historical price movements. Like any other forecasting tool, for example population and weather forecasts, the future predictions can never be 100% accurate. However this is a very useful tool in indicating what is the most probable outcome and helps traders identify how prices may behave in the future. Technical Analysis uses a wide range of charts to indicate price movement’s overtime.

WHAT IS TECHNICAL ANALYSIS

  • Head and Shoulders:


    The Head and Shoulders formation is one of the most common reversal patterns. It consists of a left shoulder, a head, and a right shoulder and a line draw as a neckline. If there appears a formation where the prices break through the neckline and keep on falling after forming the right shoulder, then it confirms the completion of the Head and Shoulders pattern and prices should continue declining. This is known as a Head and Shoulders Top formation. The Head and Shoulders Bottom formation is simply the inverse of the Top and likewise indicates a change in trend and sentiment. You can see below an example of a Head and Shoulders Top formation.

  • The Double Top & Bottom


    The Double Top is a common price pattern that appears towards the end of an existing bullish (rising) market. It is formed in the shape of two consecutive peaks of approximately the same price. In between the peaks there is a minimum price and it appears as a so-called "valley". The price level of this minimum is called the neck line of the formation. A reversal in trend is confirmed when the price falls below the neckline, indicating that a further price decline is the most likely scenario. The Double Bottom is the exact inverse of the Double Top and it appears towards the end of an existing bear (declining) market.

THE POPULAR INDICATORS

Below is a brief description of some of the most popular technical indicators that are used by traders worldwide on a daily basis:

  • Average True Range (ATR) -:

    This indicator is one of the key yardsticks used in measuring market volatility. The ATR is based on the True Range which is most commonly measured according the difference between the greatest high and the greatest low.


  • Simple Moving Average (SMA) and Exponential Moving Average (EMA)

    This SMA is the unweighted mean of the previous n data points while the EMA is an indicator that applies weighting factors which decrease exponentially. These indicators are used mainly for Time Series data in order to flatten short term fluctuations and highlight longer term trends


  • Bollinger Bands

    This indicator was developed by John Bollinger and it is used to indicate relative price levels and to measure the volatility of the market. Bollinger Bands consist of the following components:
    • A middle band which is most commonly the 20-period Simple Moving Average(MA)
    • An upper band which is most commonly 2 times the 20-period Standard Deviation above the middle band.
    • A lower band which is most commonly 2 times the 20-period Standard Deviation below the middle band.
    Instead of using the simple moving average the exponential moving average may also be used. Bollinger Bands are mostly used in comparing price action to the action of other indicators and in pattern recognition. The way traders use Bollinger Bands to determine entry and exit points in the market vary widely.


  • The Moving Average Convergence/Divergence (MACD)

    This indicator is the calculation of the difference between 2 exponential moving averages (EMAs) closing prices. It is used by traders regularly in order to identify strength, direction, momentum, and duration of the trend of a certain instrument (currency, commodity or CFD).
  • Relative Strength Index (RSI)

    It is a price Oscillator used in indicating changes in price strength. The biggest advantage of this indicator is that it is easy to interpret. The price monitoring oscillator is shown as a basic graph which ranges from 0-100, with high and low levels marked at 70 and 30 respectively. The RSI is most commonly used on a 14-day time frame and any breach by the price of the high or low levels indicates stronger momentum.


  • Momentum

    This indicator measures the overall rate of change of the price of an instrument (currency, commodity or CFD). Traders use the Momentum indicator to measure the volume of a market. The Momentum indicator remains positive during an uptrend and negative during a downtrend. If the Momentum indicator shows an upward cross of zero then it may be interpreted as a signal to buy, while a downward cross of zero may be interpreted as a signal to sell. In addition the high or low of the indicator shows the strength of the trend.


  • Stochastics

    There are different types of stochastic indicators depending on the time period used (Fast or Slow). These indicators compare closing prices to the high and low prices of an instrument during a certain period of time. Stochastic indicators provide traders with a signal to act depending on convergence-divergence or crossover of the different period stochastic s (Fast or Slow).


  • Ichimoku Kinko Hyo

    This indicator is an equilibrium chart and its Japanese name literally means "equilibrium chart at a glance". It is normally referred to among traders just as Ichimoku. It uses candlestick charting to improve the accuracy of forecasting price movements. It does not only consider price action but also factors in time as a key element.