Technical Analysis and Forex Trading | Tools for Forex Traders

While there are many who claim that trading stocks OR Forex Currency is nothing more than a random walk, there are far more who incorporate technical analysis into their forex trading. That said, there are a lot of different ways to go about analyzing charts. The methods of technical analysis and forex are all over the board with different traders claiming that their method is better than the other.

Real quickly, here are the various technical analysis tools that a forex trader would have at his disposal:

• MACD- This tool basically takes a 26 day average and subtracts it from a 12 day moving average of the price. What essentially happens is the price oscillates above and below zero. The School of thought here is that if the MACD rose above zero, it would indicate that investor's believe that the market is rising as well and therefore, it would be correct to BUY. Likewise, if the MACD was below zero, it would indicate that investor's are leaning to a bearish market and someone using this indicator would consider SELLING.

• Momentum Indicator- This indicator measures the momentum of a currency pair over a given period time. There are two common ways that someone would use this indicator........1. Investors could use this indicator much in the same way you would use a Moving Average Indicator (like MACD) to find trending in their currency pairs. Basically, you would BUY when the bottoms out and turns back up and Sell when the market peaks and looks to head downward.....2.You can also use the momentum tool as a leading indicator- In other words, you assume that the market tops are easily identifiable by a quick price increase OR on the other side, you assume when the market bottoms, it will be easily identifiable by a fast sell-off from investors.
  

• Moving Averages- This is probably one of the most used analysis tools, primarily because it is very easy to understand. A moving average is nothing more than an average of a price over a period of time. One of the best methods to using a moving average is to compare a moving averages closing price with the actual closing price (use NY markets as the close in this 24 hour market). Basically what advocates of this indicator will do is to buy when the actual price rises above the moving average and SELL when it falls below. Of course, this has some problems in terms of technical analysis- everyone has 20/20 hindsight and when a beginner forex trader is looking over data, they will find entry points in which they could have profited. The key to using a moving average is to find a system that is consistantly profitable. Another problem that people who emply moving averages is that Trader's Remorse often enters after a resistance or support line is broken.

• Relative Strength Index- With a name like this, you would think that the RSI would compare the relative strength of two currency pairs, but instead it actually measures the internal strength of the currency pairs themselves. The RSI can be used to find the support and resistance levels of a currency pair.

• Stochastic Oscillator- To understand what stochastics are, it is best to define the term stochastics...designating a process having infinite progression of jointly distributed random variables...what??!! Layman's terms, please...to use a stochastic oscillator, you need to set some variables...%K variable is basically the number of days that you want it to "oscillate". A real common %k variable is 3 days. Here is the math behind the stochastic oscillator-
  

(today's close)-(lowest lows %k periods) divided by (highest high %k periods)-(lowest lows %k periods)

I will go more into detail about these different indicators at a later date, since all deserve a page exclusively made for each.

So, the magical, million dollar forex question is what technical tools work best in forex trading? When I first started out, I tried them all with a varying degree of success but one of the things that I realized was that the theory known as the random walk really foiled most of my attempts at finding a consistent profitable indicator, long term.

About 2 years ago, I put all my indicators to rest and started to really graph things out by hand and using fibronacci numbers as a way to analyze retracements (which I will get into at a later date).

That said, I have spoken with a number of forex traders that claim that simple things such as EMA's work for them. The key is to open up a demo account and play around with them until you find what works best for you.