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Technical analysis is a kind of analysis that helps in analysing the price trend that exists in the market. This type of analysis is best suitable for making predictions. The categories of technical analysis are price indicators, waves, number theory, trends and gaps.
Price Indicators of Foreign Exchange
There are various indicators available in the foreign exchange market with which the trends in the price of currencies are indicated. The indicators make use of their own typical method for determining the price levels of the currencies that exit in the market of foreign exchange. The various price indicators that are used in the field of foreign exchange are RSI, moving averages and oscillator. Relative – strength Index is kind of measurement that finds the ratio between upward movement and downward movement of the price trends that exists if the market. Stochastic oscillator is an indicator that is used for indicating the overbought as well as oversold conditions that exist in the foreign exchange market. This indicator is developed on the basis of the observation that in the case of strong upward trend, closing prices concentrate in higher part of a period’s range. When the prices of the currencies go below a particular point of down trend then the closing price needs to go close to the lower extreme of the range of period. The calculations connected with the stochastic oscillators have two lines which are helpful in indicating the overbought as well as oversold conditions that exist in the areas on the chart. Divergence that occurs between price action as well as stochastic lines gives power to trading signal. MACD is a kind of indicator that involves two momentum lines to be plotted over it. MACD line can be considered as the difference that occurs between the two exponential – moving averages and also the trigger line.
There are various number theories that are used as indicators for determining the price levels of the currencies. The Fibonacci numbers are used in determining the trend of the prices of various currencies. In the Fibonacci series we can find the existence of a particular ratio. Ratio between any number and its next number is 61.8 %. Gann numbers were formulated by Gann who is a stock trader. This method is used for the trading of instruments on the basis of relationship between time and price movement. The lines are used for predicting supporting and resistance areas.
The various kinds of waves are used for indicating the trends of the price of the currencies. The Elliott wave is the wave theory approach which is purely based up on repetitive patterns of wave.
Gaps can be considered as the spaces that are depicted on bar chart indicating the time when there occurs no trading. The gaps are created due to the various factors like selling pressure or regular buying, new releases, changes in the outlook of analyst and announcements of earnings. The various gaps are exhaustion gap, runaway gap and breakaway gap.
Trends are the type of indicators that helps in indicating the price’s direction.