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Technical Forex Trading: The Inside Scoop

May 31, 2012 | Comments: 0 | Views: 163

Background The foreign exchange (also called "ForEx," "Spot FX" or "Forex") currency market involves the trading of currency pairs based on their spot exchange rates. The Spot FX market is larger than all other asset markets combined. It is 53-times the size of the New York Stock Exchange (NYSE), and weighs in at over $4-Trillion daily in global trades.

Since the Forex went public after the 1998 passing of the Commodity Future Modernization Act, there have been many Forex fortunes made by the general public. Before that time only international banks and large corporations were able to invest the $1-Million margin required per lot to participate. Now with online advancements, traders have unlimited options, and can invest a humble amount to get started.

Chart Reading Basically, market analysis charts can be looked upon as the technical trader's treasure map. While to the untrained observer, these market analysis charts may look like only lines and numbers, these charts hold the keys to evaluating the market and predicting its future movements. There are various styles of charts-to give different perspectives of the market activity, and different time intervals available-allowing charts to define market activity during specific time periods.

The various styles of charts used in FX trading include:

1.line chart-simple chart that draws a line connecting the closing prices illustrated by the chart; chart-shows the high, low, open, and close of a currency pair using simple vertical lines with short horizontal lines, and; 3.candlestick chart-also shows highs, lows, opens, and closes, but using a graphic that looks like a candle that has a wick on either end.

The most preferable chart type used by most traders is the candlestick chart. This is primarily because it clearly displays the information needed to determine the state of the market-more so than any other chart type. Candlestick chart style was designed by a Japanese rice trader (named Munehisa Homma) in the 18th century, and was used to document the activity of his rice trades.

If you are unfamiliar with the appearance of these chart styles, there are a variety of charting software applications, and websites that you can use to obtain up-to-date Forex charts for review.

All chart types are also classified using time periods that show activity in specific time intervals, these are as follows: - 1, 2, 3, 5, 10, 15, 30 or 60 minute intervals- 1, 2, 3, 4, or 8 hour intervals- 1-day intervals - 1-week intervals - 1-month intervals

Depending on the style of trader you are, the time intervals you use will differ. For instance if you are a day trader that does not hold positions overnight, you may opt to use a 15-minute chart; conversely, if you are a long-term investor, you may wish to use a chart based on monthly intervals. As you become familiar with chart reading, you will be able to best determine what charts are suitable for you.

Chart Indicators The understanding and use of technical chart indicators separates the technical trader from the rest of the herd. Technical chart indicators are graphic depictions of market activity placed on or below currency charts to determine the chart's future movement. These indicators are derived from mathematical formulas, and they appear as lines, bars, or dots applied to the chart to assist in spotting trends, predicting future price points, and evaluating other chart phenomena.

There are many different chart indicators, but some of the most commonly used include: - Bollinger Bands - measure the volatility of a specific currency pair - Moving Averages [Exponential (EMA) and Simple (SMA)] -- Moving Average Convergence Divergence (MACD) - assists in trend spotting - Fibonacci Support/Resistance Levels - help to identify future "breakout points" - Parabolic SAR - aids in determining when a trend is to end - Relative Strength Index (RSI) - shows whether a currency pair is overbought or oversold- Stochastic - Similar to RSI and also measures if a trend may be concluding - Average Directional Index (ADX) - measure the strength of a currency pair's trend

While each of these indicators is at the least worthy of its own article, this list is intended to display the most frequently used indicators and their overall uses. Further research into each is encouraged.

Trading Systems With the boom in software technology many new trades feel they are technical traders, and they have no idea about the structuring of indicators. The truly technical traders will devise their own trading systems, by combining various indicators to identify and confirm current and future market events.

A serious trader will take the necessary effort required to learn how the indicators function, and also how the economic news and economic calendars aid in the process. The most powerful skill any trader can have is the ability to perform good research.

Source: EzineArticles
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