TECHNICAL ANALYSIS

Technical analysis is a tool, or method, used to predict the probable future price movement of a security – such as a stock or currency pair – based on market data.

The theory behind the validity of technical analysis is the notion that the collective actions – buying and selling – of all the participants in the market accurately reflect all relevant information pertaining to a traded security, and therefore, continually assign a fair market value to the security.

Past Price as an Indicator of Future Performance

Technical traders believe that current or past price action in the market is the most reliable indicator of future price action.

Technical analysis is not only used by technical traders. Many fundamental traders use fundamental analysis to determine whether to buy into a market, but having made that decision, then use technical analysis to pinpoint good, low-risk buy entry price levels

Technical analysis refers to studying the demand and supply of the currency pair and its effect on future market prices. The technical indicators that help with the analysis allow traders to identify market trends and opportunities through a currency pair’s trading volume and price fluctuations.

Top technical analysis indicators you should know

1. Moving averages

Moving averages are used to cancel out any irrelevant price fluctuations in the Forex market and identify ongoing market trends. It also helps identify the market direction by calculating the average currency pair price and comparing it with the current currency pair’s price. For example, if the currency pair price of EUR/USD is 2, whereas the average currency pair price is 4, it indicates that the currency pair is currently trading at an extremely low price, suggesting a downward market direction.

2. Relative Strength Index (RSI)

The RSI indicator can identify oversold and overbought market conditions. Any reading below RSI 30 indicates the currency pair is undervalued (oversold), which signals an upward market movement in the future. This means traders should buy more of the currency pair expecting the prices to rise. Readings above 70 indicate that the market is overvalued (overbought), indicating a downward future market movement. This means traders should sell the currency pair as the prices are expected to fall in the future.

3. Bollinger bands

Bollinger bands provide traders with entry and exit points. It works the same way as the RSI indicator and tells traders when a currency pair is overbought or oversold. It consists of three lines:

The middle line represents the actual currency pair price

The upper line indicates the upper price movement

The lower line indicates the downward price movement.

The currency pair price is said to trade mostly between the upper and lower line.

4. Moving average convergence divergence

The MACD indicator helps traders find bullish or bearish market movement. A bullish market sentiment occurs when the MACD line crosses the signal line from below, and a bearish market movement occurs when it crosses the signal line from above.

Bullish market movement signals traders to enter the market and buy more of the currency pair to maximise profits

Bearish market movement signals traders to exit the market and sell more of the currency pair to minimise losses

5. Stochastic oscillator

The Stochastic oscillator is widely used to identify trend reversals. It compares the currency pair’s closing price to the price range in a time period.

It consists of a signal line and the indicator line itself. Whenever these two lines intersect, it depicts a shift in the current trend.

Whenever the closing price is near to the price range’s lower range for a long time, it indicates a bearish trend reversal

Whenever the closing price is near to the price range’s upper range for a long time, it indicates a bullish trend reversal


6. Fibonacci retracements

Fibonacci retracements provide traders with market entry points, exit points, stop loss levels and profit levels. It also helps identify support and resistance levels which can signal market trend reversals. While support price points send an upward market movement signal, resistance price sends a downward market movement signal