My Forex

Charting price data is very important. Charts shows you the history of the currencies behaviour over time and therefore provides much more information than simply looking at a single quote of the present rate. Adding technical indicators to the charts allows you to view the price data in an alternative manner which yields even more information. Therefore, it is important to know at least the basics of technical analysis and the information you can gain from it.

There is a multitude of information available about technical analysis on the Internet. Therefore, it is not necessary to rush out and buy a number of books on the subject. On this web site we seek to provide an introduction to the subject only to enable readers to research the subject themselves more fully

Price data can be represented as lines, candles, bars or point and figure (P&F) charts. Each representation yields unique information about the data.
Trend, channel, Fibonacci, Gann and other lines can be plotted on the charts to delineate and clarify price trends, ranges or other patterns.
Technical indicators can be calculated and plotted on or under the charts.

Trend lines are drawn by joining the lows (support line) or the peaks (resistance line) of the price data. This helps to clarify existing trends and produces clear exit criteria as the trend has ended when the price breaks through a resistance or support line. The problem with trend lines is that you are only able to draw them once a trend is well established, by which time it is too late to enter a trade. Also, trend lines are very subjective, no two people will agree on exactly where they should be drawn. This allows emotion to creap into your trading.

Technical indicators are mathematical constructs which aid the trader in interpreting a graph of a particular currency pair. Indicators can be used to gain more information about the price movement but can also provide entry and exit signals in a trading system. There are two main kinds of indicators: leading and lagging indicators.

Lagging indicators usually smooth the price data and therefore produce information which lags the movement of the currencies. These indicators are most useful in trending markets. Some of the more popular examples of this type include moving averages and Bollinger bands.

Moving averages are simply averages of the price data over a certain period of time. Averages calculated over shorter periods vary more greatly with time than longer term averages. Where the shorter average crosses the longer one, an entry/exit signal into/from a trend is denoted.

Bollinger bands create an envelope around the price movement based on the standard deviation or volatility of the currency pair. Therefore the bands widen during times of violent market movement and tighten when the markets range.

Leading indicators claim to predict market movement. They measure how "overbought" or "oversold" a currency pair is and assume that they will reverse, as is common in a ranging market. Following these indicators is riskier than the lagging indicators as they attempt to predict price behaviour. This contrasts with one of our basic principles which states "Don't predict the markets - rather follow their lead". Therefore, in our opinion this type of indicator yields useful information but is not ideal as a source of entry or exit signals in a trading system.

Technical Analysis