Taking a Look at Forex Technical Analysis Theory
Making use of charts to understand the flow of the currency market is an essential tool for the Forex trader. The use of such charts can help determine the flow of the market and guide the Forex investor into make better investment decisions in the future. The theory that involves technical analysis of the Forex market includes five categories that one should be familiar with.
These five categories would include the indicators, number theory, waves, gaps, and trends.
Relative Strength Index or RSI and Stochastic oscillator are examples of Indicators. RSI would measure the ratio of up and down moves and eventually, would normalize the calculation in such a way wherein the index is shown in ranges of zero to a hundred. The Stochastic oscillator, on the other hand, is often used to convey conditions of over buying or over selling on a zero to one hundred percent scale. This indicator bases itself on observing strong up trends wherein period closing price will end up gathering towards the higher level of a period's range. The divergence that occurs in between stochastic lines and price activity of an underlying instrument can relay powerful signals for trading.
The second category or number theory would include Fibonacci numbers and Gann numbers. The Fibonacci numbers, would entail that the sequence is 1,1,2,3,5,8,13,21,34 and so on. Such a number sequence is made by the addition of the first 2 numbers wherein the third number is the outcome. Gann numbers on the other hand, draws its roots from the use of methods developed for instruments of trade that bases themselves on time or price equivalents. Angles in charts were used in order to determine areas of support and resistance, predicting future trends and changes.
Thirdly, there are the Waves which is based on the Elliot wave theory that studies wave patterns that are repetitive in nature and involves also the Fibonacci sequence of numbers.
The fourth category involves the Gaps. These are spaces that are left on a bar chart wherein there has been no trading to have taken place. There are many forms of gaps. An up gap, for instance, is created when the smallest price on a day's trading has become high in comparison to the highest high price of the day before.
Lastly, we have the Trends! This would refer to a price's direction or to the direction of various prices in the market. The rising peaks would pertain to an up-trend, while the falling ones, would pertain to downtrends.
The technical analyst bears no concern over the whole picture of the market. Nor is he concerned with any of the factors which would affect that given market. His only main concern is on the market's instruments and their perspective activities.
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