What is Technical Analysis
The Forex market has a 3.3 billion dollar daily turnover, making it is the most liquid existing market. According to technical analysis, the transactions in the foreign exchange market are efficiently defined in terms of both liquidity and trading volumes. The presence in the foreign exchange market of players such as central banks, institutional investors and 24 hour market makers, definitely guarantees the excellent liquidity of the market. From a technical analyst's point of view, this feature ensures greater efficiency in the negotiation and absolute precision of the graphs, as the more trades that are executed in the market and the more players involved, the lower the "price outliers" are originated from the so-called "rumors" that could consistently alter the mechanism of price formation.
Technical analysis is a technique used to forecast the future direction of prices
through the study of historical market data, primarily price, volume and open interest.
Technical traders use trading information (such as previous prices and trading volume) along with mathematical indicators to make their trading decisions. This information is usually displayed on a graphical chart updated in real time that is interpreted in order to determine when to buy and when to sell a specific instrument
Type of Technical Indicators
The simple moving average is frequently used by traders to find signals for buying and selling. Many traders use these signals as a confirmation of a trend in place and moving averages are configured as supports or resistances.
Experience shows that moving averages are:
:: very useful when the market clearly has a direction, as they follow and track the price movements,
:: not very helpful during lateral trends, as they may provide false signals.
While a lateral trend is in place, traders find INDICATORS more functional
Moving averages are used in technical analysis to filter spot price charts. The
lower the time frame, the more adherent the moving average is to the movement of
the spot price (in this case the average is defined as fast). Theoretically the
slower the average is, the more it departs from the spot price movements.
This consideration, even if obvious from a mathematical point of view, is very important and can be considered as a fundamental law in technical analysis. It's clear that using 2 moving averages in the same graph with opposite time frames (fast/slow) can help the trader to identify, understand and forecast the dynamics of spot prices.
Indeed, a fast average is defined as such because it reflects faster acceleration of a movement. A comparison with a slow moving average shows a sign that should identify a movement in place, that needs confirmation by other studies concerning volatility and market strength.
The purpose of Bollinger Bands is to provide a relative definition of high and low. By definition, prices are high at the upper band and low at the lower band. This definition can aid in rigorous pattern recognition and is useful in comparing price action to the action of indicators to arrive at systematic trading decisions. Bollinger Bands consist of: a middle band — a simple moving average, with a typical time frame of 20 — an upper and a lower band — the standard deviation above and below the middle band.
The use of Bollinger Bands varies wildly among traders. Some traders buy when the
price reaches the lower Bollinger Band and exit when the price reaches the moving
average in the center of the bands. Other traders buy when the price breaks above
the upper Bollinger Band or sell when the price falls below the lower Bollinger
As always, traders are inclined to use Bollinger Bands with other indicators to see if there is confirmation. In particular, the use of an oscillator like Bollinger Bands will often be coupled with a non-oscillator indicator like chart patterns or a trend line; if these indicators confirm the recommendation of the Bollinger Bands, the trader will have greater evidence that the Bands forecasts are correct.
The Relative Strength Index (RSI) is a financial technical analysis oscillator showing
price strength by comparing upward and downward close-to-close movements. For each
day an upward change (U) or downward change (D) is calculated. "Up" days are characterized
by the daily close being higher than yesterday's daily close, conversely, a down
day is characterized by the close being lower than the previous. An average for
U is calculated with an exponential moving average using a given N-days smoothing
factor, and likewise for D. The ratio of those averages is the Relative Strength,
thus calculated below:
RS = Exponential moving average of U / Exponential moving average of D
This is converted to a Relative Strength Index between 0 and 100,
RSI = 100 − 100 / 1 + RS
The recommended smoothing period is 14 days. A currency could be considered overbought if it reaches the 70 level, meaning that the speculator should consider selling or, conversely oversold at the level 30. The principle is that when there's a high proportion of daily movement in one direction it suggests an extreme level, and prices are likely to reverse. The RSI should confirm price movement; therefore, if the price is moving up, the RSI should be moving up as well.
The stochastic oscillator is a momentum indicator used to compare the closing price
of a commodity to its price range over a given time span.
This indicator is usually calculated as:
STS = 100 (closing price — price low) / (price high — price low)
The idea behind this indicator is that prices tend to close near their past highs in bull markets, and near their lows in bear markets. Transaction signals can be spotted when the stochastic oscillator crosses its moving average. For the purposes of our analysis we suggest using a 14 days time frame.