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Foreign exchange traders study technical analysis not out of academic interest, but in order to create technical trading strategies that can be used for trading decisions. As such, if analysis is the high school of trading, the creation and application of strategies is a subject to be studied at the forex university.
The most important principle for the creation of technical strategies is that, barring a few illogical scenarios, it is possible to formulate one with any kind of indicators, and to trade it profitably, provided that sufficient precaution is taken against losses by applying money management strategies carefully.
Here we’ll only examine various types of indicators, and the weight that they should assume in the creation of technical strategies. It is a crucial duty of the trader to examine and experiment with each of the different indicator types in order to gain fluency in and familiarity with the tools of the trade.
Pattern:The patterns (like triangles, tops or bottoms) provide only very vague signals, and as such, it is not a good idea to base one’s strategy on them. Tops or bottoms can be very useful for fundamental analysts if it is known that a particular price level is being defended by a well-known actor such as a large corporation, a central bank or a government entity. But in the absence of such knowledge, patterns are not very reliable tools for technical strategies. The best way of using them is regarding them as indicating a need for deeper analysis through the use of other tools.
Oscillator:The most important signal generated by oscillators is the divergence or convergence formed with the price action. Still, it is relatively commonplace, and must be combined with other tools for a more precise signal. Oscillators can be used for determining the breakdown point for range trade strategies (where the strategies is not longer useful), but in trending markets the signals generated by them are of secondary value for the strategies.
- Moving Average: During the market action of any day, prices move between moving averages. It is possible to think of them as the energy levels of between which electrons hop in an atom. In general, any price movement will begin at a support or resistance created by a moving average, and then will move to another where it may break out, or be reflected back. You can examine this for yourself by creating a chart and drawing the moving averages at 14, 30, 50, 100 period of the time frame you desire.
Other indicators:There are also some other indicators which cannot be classified in the above scheme most important among which is the Fibonacci series. This series is among the most efficient tools possessed by any analyst, and since it is dependent on a natural formation evident in the creation of many other phenomena apart from the price action, there is a greater degree of confidence in its employment. The Fibonacci indicator is a higher level indicator, meaning that when used in combination with other tools, it should lay the groundwork of analysis. In other words, we should define the overall period and area of our trade with this tool, and then going on to analyze the pattern in greater detail later with other technical tools. On the other hand, it is possible to use the Fibonacci Series alone by zooming into shorter time periods as we analyze the market action that we wish to trade.
A forex course will provide you some examples of the various ways of combining these tools, but there doesn’t exist a comprehensive guidebook of technical strategies after the study of which you will be proficient in all the necessary technical aspects of trading. There is practically an infinite number of ways in which you could utilize these indicators for trading decisions, and your taste, mental composure, are far more decisive in their choice than their predictive power. As such, practice is the purpose of study, and you should devote your time to experimenting, not memorizing, or even reading about technical asnalysis.
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