FOREX TRADING [TECHNICAL ANALYSIS] [2]

9. Technical Analysis As a Tool for Forex Trading Success

The Concept of Trend

We all know that prices do not rise or fall in a straight line but rather move in a series of zigzags which resembled waves. Now, the relative positioning of the peaks and troughs in these waves define the trend.

For a currency to be in an uptrend, it must make successive higher peaks (highs) and higher troughs (lows). For a currency to be in a downtrend, it must make lower peaks

(highs) and lower troughs (lows).

Simply by figuring out these types of peaks and troughs, we are able not just to explain the present trend and set it in its historic framework but, equally as important, figure out when it is changing. We do this by looking at the patterns created by the peaks and troughs.

Here's an example of a trend:

Moving Averages

The moving average is probably the most widely used indicator and is used by technical analysts for numerous sorts of tasks. Moving averages can be used to discover regions of short term support/resistance, to look for the current trend and as a component in numerous other indicators like the MACD, or Bollinger bands.

The primary benefits of moving averages is first of all that they smooth the data and therefore offer a sharper visible picture of the present trend and subsequently, that moving average signals can provide an accurate answer as to what the trend is. The primary downside is that they are lagging rather than leading indicators.

There are actually two major types of moving average:

The simple moving average calculates the average price over a specific moving time period. For example, a 50 day simple moving average will calculate the average mean price from the last 50 days closing prices..

The exponential moving average also averages the last x days closes but designates a greater weight to the more recent prices which makes it more sensitive to present price action thereby decreasing the lag impact.

Here's an example of moving averages: