EURO.uz -The Forex quick guide for beginners and private traders

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The Forex quick guide for beginners and private traders

Technical Analysis categories / approaches


Technical Analysis can be divided into five major categories:

  • Price indicators (oscillators, e.g.: Relative Strength Index (RSI))
  • Number theory (Fibonacci numbers, Gann numbers)
  • Waves (Elliott's wave theory)
  • Gaps (high-low, open-closing)
  • Trends (following moving average).

Price indicators

Relative Strength Index (RSI): The RSI measures the ratio of up-moves to
down-moves and normalizes the calculation, so that the index is expressed in
a range of 0-100. If the RSI is 70 or greater, then the instrument is assumed to
be overbought (a situation in which prices have risen more than market
expectations). An RSI of 30 or less is taken as a signal that the instrument may
be oversold (a situation in which prices have fallen more than the market
expectations).

Stochastic oscillator: This is used to indicate overbought/oversold conditions
on a scale of 0-100%. The indicator is based on the observation that in a
strong up-trend, period closing prices tend to concentrate in the higher part
of the period's range. Conversely, as prices fall in a strong down-trend, closing
prices tend to be near the extreme low of the period range. Stochastic
calculations produce two lines, %K and %D, that are used to indicate
overbought/oversold areas of a chart. Divergence between the stochastic
lines and the price action of the underlying instrument gives a powerful
trading signal.

Moving Average Convergence/Divergence (MACD): This indicator involves
plotting two momentum lines. The MACD line is the difference between two
exponential moving averages and the signal or trigger line, which is an
exponential moving average of the difference. If the MACD and trigger lines
cross, then this is taken as a signal that a change in the trend is likely.

Number theory:

Fibonacci numbers: The Fibonacci number sequence (1, 1, 2, 3, 5, 8, 13, 21,
34 ...) is constructed by adding the first two numbers to arrive at the third.

The ratio of any number to the next larger number is 61.8%, which is a
popular Fibonacci retracement number. The inverse of 61.8%, which is 38.2%,
page 42 of 110
is also used as a Fibonacci retracement number (as well as extensions of that
ratio, 161.8%, 261.8%). Wave patterns and behavior, identified in Forex
trading, correlate (to some extent) with relations within the Fibonacci series.

The tool is used in technical analysis that combines various numbers of
Fibonacci retracements, all of which are drawn from different highs and lows.

Fibonacci clusters are indicators which are usually found on the side of a price
chart and look like a series of horizontal bars with various degrees of shading.

Each retracement level that overlaps with another, makes the horizontal bar
on the side darker at that price level. The most significant levels of support
and resistance are found where the Fibonacci cluster is the darkest. This tool
helps gauging the relative strength of the support or resistance of various
price levels in one quick glance. Traders often pay close attention to the
volume around the identified levels to confirm the strength of the
support/resistance.

Gann numbers: W.D. Gann was a stock and a commodity trader working in
the '50s, who reputedly made over $50 million in the markets. He made his
fortune using methods that he developed for trading instruments based on
relationships between price movement and time, known as time/price
equivalents. There is no easy explanation for Gann's methods, but in essence
he used angles in charts to determine support and resistance areas, and to
predict the times of future trend changes. He also used lines in charts to
predict support and resistance areas.

 

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