Trading with your gut is never a good idea. It’s like striking a pot of luck that may or may not give you gold. Verily, all experts swear by advanced technical analysis. The reason why tracking technicals is a critical part of the overall analysis is that it helps traders make proper decisions. Unless you don’t know when to enter or exit the market, you can incur hefty losses that will compromise your position.
However, don’t be daunted by the word advance. The adjective does not suggest that beginners cannot understand the concepts. Rather, advanced technicals are very easy to navigate as long as you have their basic knowledge. But before diving into it all, let’s see how and why advance technical analysis can make a difference in your profits.
As a trader, keeping an eye on price movements is the most crucial part of the whole process. Even if you’re glued to your screen 24/7, you still can’t predict the future. Naturally, that’s something not even professional traders can do, so then it is all about forecasting the likelihood of price movements. Typically, people use bar or candlestick charts to analyse the information revealed by the several lines and items made available on their screens. Among the many things, you must consider a few that require special attention.
Moving averages have a special place in the world of forex trading, or trading in general as well. If you skipped your statistics class in school and didn’t know this concept, read carefully. Essentially, there are two types of moving averages, namely, the simple moving average and the exponential kind. The first one presents the average price of a stock or commodity by assigning equal weight to each price being considered overtime.
Conversely, the exponential moving average heavily weighs recent price movements relative to older varieties. The lowest typical time period considered is ten days but can stretch up to hundreds in the case of long terms investments.
To determine whether you should set a sell or a buy trade, you need to plot the EMA across three periods (5, 20, and 50) on the chart and notice crossover positions. While nothing is set in stone, an opening to buy can be identified when the 5-day EMA goes over the 20-day EMA by crossing it from below. At the same time, both these EMAs and the price should be above the 50-day EMA. Similarly, you should sell when the 5-day EMA goes below the 20-day EMA after crossing it from above. Of course, this is if both of these, as well as the price, are below the 50-day variety.
If you have ever heard the name Bollinger bands but couldn’t understand what they meant, you’re not the only one. Not only does this sound challenging, but there are various complicated explanations of it out there. Essentially, Bollinger bands are an indicator that helps the trader understand how the market is doing in terms of real-time volatility. It is no secret that Forex trading is subject to high levels of volatile but does that mean that the latter is stagnant? Absolutely not. Markets can be more volatile at one point in time and much less at the other.
Verily, traders need to know when to proceed with caution and when to take action. That’s where Bollinger bands come in. They detect the oversold and overbought conditions prevalent in the market. In other words, you can take this as two ends of a spectrum. When the market isn’t showing signs of great volatility, you will notice less deviation in ongoing trends – perhaps the prices of a stock are consistently moving close to each other, neither dipping drastically nor rising. Similarly, when the market shows prominent signs of volatility, you can see significant deviations in the trend. If a stock price once seemed stagnant and is now rallying upwards, it wants to be noticed.
In the first case, when the market was perceived to be less loud or volatile, you would notice that the bands stick together. Whereas, when the market is visibly volatile, the bands will be further apart. The upper and lower bands are there to depict how volatile a change in the price of a particular stock or commodity is. Such that volatility is influenced by a long list of factors which also include non-technical variables such as political statements, news, stock company’s ventures, etc. These have been designed to adjust and modify according to prevailing market conditions in order to help traders better understand what is going on with the prices.
It is also important to note that the middle line plays a vital role in determining where the Bollinger bands actually lay. For that, you need to know that the upper and lower bands are actually representations of standard deviations. The latter is constructed in relevance to the moving average. Even if you don’t know the first thing about standard deviations, don’t panic. Take it in simple terms: standard deviation is the measure of the extent of a value’s deviation from a referencing point (in this case, the moving average). Naturally, the greater the standard deviation, the greater the number of price movements that can be traced within the areas enclosed by the upper and lower bands.
Another way to detect overbought or oversold conditions through your chart is by looking at the RSI. The latter is an acronym for the relative strength index, and it is one of the most coveted indicators in the world of FOREX. This is because it lets traders know whether the market will repeat a previous trend after experiencing a prominent strain. To put it simply, you should remember that the conditions are overbought when the value of this indicator is greater than 70.
On the contrary, when the RSI is below 30, it can be said that the market is oversold. In either of these conditions, different decisions will be made. Depending on your risk appetite, you might even consider higher and lower values of each of these conditions, respectively. Regardless, all professional traders know that as great as the RSI is, it is vulnerable to spikes and dips. These are fairly temporary but cause by an abrupt increase or decrease in price owing to inaccurate signals. However, when you use the RSI along with other indicators to predict the trend, you can make a viable forecast.
As of now, you might have got a clear understanding of the basic concepts of forex trading. Let’s get on to the next step to delve a bit deeper into the concepts.
Najeeb Ullah is a versatile content writer and strategist. He loves to make a positive contribution by his writing skills. He has been providing copywriting, Amazon affiliate content marketing, ghost-writing, technical SEO services in different niches like Forex Trading, Business, Tech, Health and Fitness, IT, Fashion, marketing, food, home improvement, and Lifestyle.
When he is not writing, he loves to travel, play guitar, listen to music, and spend quality time with family and friends.