
Technical analysis consists primarily of a variety of technical studies, each of which can be interpreted to generate buy and sell decisions or to predict market direction.
Technical analysis is applied only to price action in market trading and has become the primary tool with which to successfully trade shorter-term price movements, and to set stop loss and profit targets.
- Support and Resistance Levels
One use of technical analysis, apart from technical studies, is in deriving "support" and "resistance" levels. The concept here is that the market will tend to trade above its support levels and trade below its resistance levels. - Popular Technical Analysis Tools
- Moving Averages (MA): Indicators used to smooth price fluctuations and identify trends. The most basic type of moving average, the simple moving average, is the average of the past x bars ending with the current bar;
- Moving Average Convergence Divergence (MACD): Indicator that utilizes moving averages to identify possible trends and an oscillator to determine when a trend is overbought or oversold;
- Bollinger Bands: Bands that are placed x moving average standard deviations above and below a simple MA line;
- Fibonacci Retracement Levels: Indicator used to identify potential levels of support and resistance;
- Directional Movement Index (DMI): A positive line (+DI) measuring buying and a negative line (-DI) measuring selling pressure;
- Relative Strength Index (RSI): Momentum oscillator that is plotted on a vertical scale from 0 to 100;
- Stochastics: Momentum oscillator that measure momentum by comparing the recent close to the absolute price range (high of the range minus the low of the range) over a period of x bars;
- Trendlines: Straight line on a chart that connects consecutive tops or consecutive bottoms of prices and is utilized to identify levels of support and resistance;
- Calculating Profit
The objective of trading is to buy a market instrument and later sell the same market instrument for a higher price. In case of margin trading, trader can also sell a market instrument first and later buy the same market instrument for a lower price. Either way, trader has to close position in order to lock in the profit.
We can also say that these two trades would bring you 14 "points" profit. A "point" is the smallest increment in an instrument's price.
One point, from the example position above, would bring you 0.01 * 10000 = 100 profit, denominated in the same currency the market instrument is denominated in. - Margin Requirements
Margin requirement is only applicable to margin trading. It allows you to hold a position much larger than your actual account value. Margin requirement or deposit is not a down payment on a purchase. Rather, the margin is a performance bond, or good faith deposit, to ensure against trading losses. - Overnight Interest
Overnight interest is only applicable to margin trading. Trading on margin means that a trader borrows money to buy or sell a market instrument using actual account value as collateral. Traders generally use margin to increase their purchasing power so that they can own more market instruments without fully paying for it.
In case of Forex, Overnight Interest is calculated as interest rate differential between interest rates for particular currencies that make the currency pair that is being traded.
Also Read..» The Basics in Forex Trading..
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