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The past decades have been filled with attempts by traders and researcher aimed at finding appropriate methods for predicting the Forex Trading and consequent action of securities. Some of these attempts faced down in the muck, and some made news. The latter has resulted in the availability of various technical and fundamental analysis methodologies and theories that work wonders. This article will shed some light on the beauty of technical analysis used in forex trading.
Technical analysis of Forex Trading is a common method of evaluating securities and contemplating the next direction of price using patterns displayed on chards, mathematical phenomenon, or a combination of both. This method is touted as the most reliable method for finding the probabilistic change in demand and supply and the decisions made by market participants. Furthermore, a major chunk of traders even use technical analysis to confirm chart patterns and opportunities concerned in forex trading.
When they fail
It’s possible that indicators seem completely out of clue sometimes while predicting or confirming the market’s direction. Does that mean they’re drunk? No. The concept is that market environment’s suitability shall be checked while deploying an indicator. If a trending indicator is used in a range market, or vice versa, the indications won’t be better than pukes on the table. Moreover, it’s possible that different technical indicator signals direct in opposite directions and cause confusion while judging the possibilities they suggest. This happens when the ‘nature’ of the indicator is different and they’re being employed in the ‘wring setup’. One must understand the fact that no indicator can always be right in Forex Trading. So, it’s one’s duty to understand the nature of an indicator and thus avoid noises.
Important indicators, these are of the following types:
1. Simple Moving Average (SMA): This indicator does the job of measuring the echange rate or price average of security with respect to a specific frame of reference. In simple words, Simple Moving Average is the sum of closing/opening price of the last ‘X’ days divided by the number of days (X).
2. Exponential Moving Average (EMA): Since the above indicator is a victim of lagging one, an individual might want to cut the lag short. This is where Exponential Moving Average comes into play. This indicator cuts the lag short by applying more weight on the most recent prices. In simple words, it’s a weighted simple moving average with more weighting towards current closing price. The weighting applied to the recent price depends on the moving average’s period. This implies that if shorter period is applied to exponential moving average, then more weight is placed on the most recent price. Therefore, it would be smart on your part to know that exponential moving average reacts much quicker to most recent price movements.
3. Weighted Moving Average (WMA): is the type of moving average where the weight placed on the data which is most recent is more, and older data is less. This type of moving average is calculated by multiplication of previous day’s data by a weight. Here, we have to place a weight of 1 to oldest data, 2 to the next and so on, upto the current price. The applied weight is based on the sum of the number of delays in the moving average.