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The Basics of Forex Trading: Tracking Trends and Ranges with Technical Analysis

How do forex traders know when to make their move on the market? One of the most popular tools is called technical analysis. As opposed to fundamental analysis, which incorporates factors such as current events, the world's economy and political events, the only data that is relevant to technical analysis is the prices' history. Various calculations and manipulations with this data are able to provide the trader with likely predictions regarding the prices of currencies in the near future. This method also incorporates points at which it is wise to either buy or sell currency.

MACD

MACD - stands for Moving Average Convergence/Divergence. The MACD is essentially the relation between two different graphs: one that shows the average price at closing time over twelve days, and another line that shows the closing price averages over twenty six days. You find the difference between the first line and the second, and create a signal line that is an average from the ninth day. Depending on how these two lines interact, the trader will know whether or not to buy or sell currency. The vital areas are where the two lines meet. These junctions indicate likely price changes. If the MACD graph is the one that goes up, that means that you should probably buy. If, on the other hand, the signal line is the one that is going up, traders usually take that as a sign to sell.

Relative Strength Index

RSI - stands for the Relative Strength Index. The main purpose for this tool is to assess a price's strength. The way to calculate this index is straightforward. You simply find the ratio of strong days to weak days that a currency experiences. To determine the closing price in the forex market which actually never closes, traders arbitrarily chose the closing of the New York Stock Exchange as the cutoff time. Once the ratio has been found, find the average over a period of fourteen days. Create a fraction that contains the strong average on top and the weak average on the bottom. The result is a number between one and one hundred. The closer your result is to the top of the scale, the currency has been going through an increased selling period. The lower down the result is, the more the currency has be bought over that period. Most analysts rate a score of 30 or below as showing an oversold currency, and a score of 70 or over as representing a currency that is overbought and therefore should be sold.

Coppock Curve

Coppock Curve - this is a tool that helps trades know when the market has hit the bottom. Analyzed on a monthly basis, this curve is calculated over a year and two month period and a ten month period and then working out a moving average between them. When the curve is negative, traders should buy, whereas when the curve is positive that is a sign to sell. Originally based on psychological criterion, the curve is in "mourning" when the market is down. In the Episcopalian church people traditionally mourn for a period of between eleven and fourteen months, hence the application to the Coppock Curve.

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