Monday, August 9, 2010

Foreign Exchange Trading - How Technical Analysis Is Vital To Profits

Foreign Exchange Trading - How Technical Analysis Is Vital To Profits

With the growing popularity of forex robots, one question on everyone's mind is how do they work? Of course all of these robots use different mathematical algorithms to trade, but the principal on which they function remains the same and has been used for many years to trade stocks, bonds and currency. They all use technical analysis to determine when to buy and sell currency. Technical analysis in its most basic form is simply looking solely at the price movement of an investment to determine what the price will be in the future. There are three main areas that most people look at when analyzing an investment, chart patterns, candlestick patterns and economic factors or government intervention.
Looking at chart patterns is one of the most common methods of determining the direction of an investment. There are a couple particular patterns that investors look for. Some of the most used patterns are: the double bottom and double top, the head and shoulders, the rising and falling wedge, the triangle, and the flag and pennant patterns. All of these patterns are named based on how they appear visually on the chart and there is a slightly different way to trade each of these patterns. One of the benefits of using these charts patterns is that each of them provide a very distinct entry point and a precise stop/loss price. This is not necessarily the case with analyzing candlestick patterns.
Using candlestick patterns in your technical analysis is primarily for a shorter time frame analysis. A candlestick is a formation on the chart that contains all the trades for a predefined time period, for example - one minute, one hour, a day, or any designated period of time. It gets its name because the formation looks like a candlestick with a wick at the top and sometimes a wick at the bottom as well. Some of the candlestick patterns traders look for are the called the spinning top, doji, bullish and bearish engulfing patterns, the hammer, the hanging man, and the morning and evening star patterns. While considering chart patterns can help determine a trend, looking at these candlestick patterns can signify whether a trend is going to continue, whether it is reversing itself or if you made a mistake and there was no trend at all.
The third analysis is far more abstract and may be considered by some traders to be more fundamental analysis than technical. Support and resistance levels can be set by outside stimulus. With the forex market many central banks tie their currency to the dollar. For instance, Japan strives to keep the exchange rate at 100 yen per dollar. Of course this means when the Yen goes over 100, the central bank may sell yen and buy dollars. The currency market works like any business so creating a larger supply of yen, while the demand remains the same should lower the price of the currency. Knowing these levels can be very beneficial in determining how long a trend may continue or whether it may stop prematurely.
This third analytical tool can be used on common shares of stock in addition to currency trades. The formerly mentioned support and resistance levels can be created by stock buy back programs, options expiration and exercises and warrants or convertible shares being exchange for stock at a specific price. Most investors argue that chart and candlestick patterns do not work for analyzing individual stocks as they do with currency pairs. One of the reasons is because the forex market is so large it takes important macro economic events to move it, where as individual stocks can be crushed instantly with news so trivial as a C.E.O. retiring. That is why most traders limit their technical analysis to market indexes and the foreign exchange market.

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