In the financial market, it is almost impossible to accurately predict the future price of a security. This is because there are many factors and data points that influence what direction the price will move. To make informed decisions, investors use three main methods of analysis: fundamental analysis, sentiment analysis, and technical analysis. This article will focus on technical analysis and explain how you can use it to trade successfully.
What is Technical Analysis?
This is an analysis method that relies heavily on mathematical calculations and their implications on the future price. The mathematical calculations used in technical analysis were developed many years ago and have been tested by traders from around the world. There are two main types of indicators that are commonly used. The ‘lagging indicators’ such as moving averages and Bollinger Bands use historical data to help predict what will happen in future. Also ‘leading indicators’ like Stochastics and Relative Strength Index (RSI) provide a signal before the new trend or reversal occurs.
Detailed Types of Indicators
After the leading and lagging indicators, there are other types of indicators. The trend-following indicators are used to identify a trend or a reversal. Examples of these are Parabolic SAR and Standard Deviation.
Oscillator indicators, on the other hand, are used to identify extreme levels on a trend. Examples of these indicators are the Relative Strength Index, Relative Vigor Index and MACD.
Volumes indicators are used to show the amount of activity in the market. Examples of these are: On Balance Volume, Money Flow Index, and Accumulation & Distribution.
Apart from the above indicators, there are other technical tools that you need to know. When applied well, these tools can help you make better trading decisions. Examples of these are the Fibonacci Retracement, regression channels, and Andrews Pitchfork. These tools are freely available in Metatrader 4 and easyMarkets platform. They can help you identify the levels where the price will move.
How to Start
From a distance, technical analysis seems like a difficult thing to do. However, as you start getting into it, you will discover that it is not so difficult. This is because you don’t need to perform the calculations behind the indicators. All you need to do is to insert and analyze the indicators on your trading platform.
First, educate yourself about the indicators. There are many books and websites that explain these indicators in more detail. By reading, you will understand how the indicators were developed and how you can apply them. Also, it will help you decide what indicators you will use for your trading.
Second, use a forex demo account to practice with the indicators. For example, when you learn about using Fibonacci Retracement, you should use this technique with a demo trade, and practice without risking real money. You should spend a few months learning and practicing the indicators. This will help you find the best ways to use them before you trade with real money.
Third, you should avoid a common mistake that many traders make, which is applying a lot indicators in a chart. To avoid this, focus on a small number of indicators and practice using them.
While not always accurate, technical analysis is an important process that can help you make trading decisions. To succeed in it, you must spend time reading, watching, and practicing. Doing this will help you avoid making the costly mistakes associated with using the wrong signals in analysis.