Technical analysis is the study of past prices to predict future price action. It depends on the use of technical indicators in finding the best points for entry and exit for each trade. A number of advanced technical indicators have been developed. They are used by the traders to confirm a particular market pattern. Two or more technical indicators are used in conjunction to confirm whether the markets are trending, ranging etc. You need to master these technical indicators if you want to become a successful trader.
Each chart and technical indicator plays a unique role in the overall analysis process. You need to learn how to use these technical indicators to confirm trending or non trending conditions. The time periods and the technical indicators are useful in spotting interday or intraday turning points caused by large moves, retracements, continuances or reversals.
You should know how each technical indicator shows direction, entry, exit or weaknesses or strength of price action in trending or non trending market conditions. Each technical indicator performs differently in both trending and non trending markets. You should know and memorize these differences to make the best use of these tools in your trading.
Lets discuss some of the vital technical indicators that are well loved among the forex traders. Directional Movement Indicator (DMI) combines Average Directional Index (ADX) and the Directional Index (DI). The Average Directional Index measures the strength of a prevailing trend. ADX isolates those periods where the market is not trending. ADX rises when the trend is strong. It falls when the prior confirmed trend or direction is weakening. It measures the trending quality of the market.
Directional Index (DI) comprises positive DI+ and negative DI-. Both DI+ and DI- show direction. When DI+ rises above DI-, an upward direction is confirmed and when DI- rises above DI+, a downward direction is confirmed. A strong go in the markets is confirmed when ADX is rising and both DI+ and DI- are apart.
The Stochastic Indicator is often referred to as the overbought or oversold indicator. The Stochastic Indicator identifies swings, tops and bottoms. It measures the relationship between the closing price of a currency pair and its high or low during a specific number of days or weeks.
As the price of the currency pair rises, the closing price tends to be closer and closer to the extreme highs of the currency pair. Similarly as the prices fall, the closing price tends to fall on average closer and closer to the extreme lows. The Stochastic Indicator does a wonderful job in finding the reversal tendencies in prices.
The Stochastic Indicator is considered to be a highly accurate method of picking the tops and bottoms. This indicator tries to find a correlation between the moving closing price of the currency pair and its reversal tendencies. It is a very useful tool that can be used as a timing aid. It tells you when to take action in a currency pair particularly when it is used in conjunction with other technical indicators. It is very well loved among the traders.