<Last updated 25.04.2020>
Hi! If you are interested in Forex please read carefully the below article that shows essential technical tools you must know when you start with technical analysis.
Technical Analysis and Indicators
In technical analysis price charts are studied with the help of various tools such as indicators.
Technical indicators are statistically programmed add-ons to the body of trading platforms that process and display information about the price movement or estimated future price movement in an attempt to assist with price prediction.
> Pricing indicators help you gauge overall price movement trends.
> Oscillator indicators can help you determine the degree to which overall trends are changing.
By analyzing price data, indicators can provide useful information about the strength of a trend, momentum, potential turning points, and possible reversals. It is, therefore, no surprise that indicators are considered the most important technical analysis tool.
Oscillators are momentum indicators that construct high and low bands between two extreme values, and then build a trend indicator that fluctuates within these bounds.
We use the trend indicator to discover short-term overbought or oversold conditions. Oscillators are often combined with moving average indicators to signal trend breakouts or reversals.
The most common oscillators are the stochastic oscillator, relative strength (RSI), rate of change (ROC), and money flow (MFI).
Technical analysts consider oscillators better suited for sideways markets. Better to combine them with an indicator to assess the market.
For example, a moving average crossover indicator can be used to determine if a market is, or is not, in a trend. Once the analysts determine that the market is not in a trend, the signals of an oscillator become much more useful and effective.
A crossover is a point on the trading chart in which price and a technical indicator line intersect, or when two indicators themselves cross.
Moving averages can determine a change in the price trend based on the crossover.
Crossovers are used in technical analysis to confirm patterns and trends such as reversals and breakouts, generating buy or sell signals accordingly.
Longer time frames result in stronger signals. For example, a daily chart carries more weight than a one-minute chart.
Conversely, the shorter time frames give earlier indicators, but they are also susceptible to false signals as well.
A stochastic crossover measures the momentum of an underlying financial instrument. To gauge whether the instrument is being overbought or oversold.
When the stochastic crossover exceeds the 80 band, the asset is determined to have been overbought. When it drops below the 20 band, the asset is determined to have been oversold.
The situation when a short-term moving average (50 days) crosses over a major long-term moving average (200 days) to the upside interpreted as signaling a definitive upward turn in a market.
The death cross occurs when the short term average trends down and crosses the long-term average, basically going in the opposite direction of the golden cross.
Divergence is the situation in which the price of an asset is moving in the opposite direction of a technical indicator, such as an oscillator, or is moving contrary to other data. Divergence warns that the current price trend may be weakening, and in some cases may lead to the price changing direction (reversal).
There is positive and negative divergence. Positive divergence indicates a move higher in the price. Negative divergence signals a move lower.
> Positive divergence signals price could start moving higher soon. It occurs when the price is moving lower but a technical indicator is moving higher or showing bullish signals.
The indicator is signaling the expected future price path.
> Negative divergence points to lower prices in the future. It occurs when the price is moving higher but a technical indicator is moving lower or showing bearish signals.
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