Defining Moments Regarding Trading Trends and Ranges with Forex

In the Forex market traders need to determine when to buy or sell, and they do so by a method known as technical analysis. There are, of course, different methods that are sometimes used, such as the Fundamental Analysis method, which employs factors such as politics, current events, and the state of world economies.

Technical analysts, however, concern themselves solely on past and present prices. By using formulas and calculating various lines and indicators, these traders are able to then predict in an educated manner as to what the price of a given currency will be in the future. Nearly all of the indicators used in forex have specific defining moments that tell one when to act.

In the trade there is something known as the Moving Average Convergence / Divergence (MACD), and through it a technical analyst plots a price chart. On this chart two lines are plotted to represent closing prices and moving averages of different lengths, typically in a window between 12 and 26 days. The MACD line is plotted using the difference between these two moving averages.

On a properly plotted chart a second line emerges, called a “signal”. The signal is formed by taking a nine day moving average of the MACD original line. It is the interaction between these two lines that create triggers telling the trader when to act, and one of these defining moments comes when the lines cross, as it indicates that there will likely be a change in trend. These lines can be used to determine proper course of action by investors.

Another powerful and commonly used tool is the Relative Strength Index (RSI). This RSI simply indicates price strength, and so lets investors know when to buy and when to sell. Fairly easy to calculate, this indicator measures the ratio of up days to down days in a currency.

Since the forex market is open 24 hours, most analysts choose arbitrarily the close of the New York Stock Exchange to use as the calculating time. To calculate the RSI one needs only to measure the amount of change up or down each day, and then calculates one exponential moving average each. This is typically done for a 14 day window, in which both the up numbers and down numbers are considered.

A fraction is then formed by using the up moving average as the numerator and the down moving average as the denominator. This important fraction is then represented as a number from 1 to 100 so that it can be spoken of in terms of percent. Essentially, a high RSI indicates the currency has been bought more than sold lately, and vice-versa.

One defining moment in the RSI line comes when it reaches 70, which is the number that most analysts feel represents an overbought currency and one that should be sold. Likewise, an RSI of 30 or below indicates a currency that is ripe to buy, as it is oversold.

A Coppock Curve is another tool which is often used by technical analysts to determine when a bear market has reached its low. Designed to be used on a monthly scale, this line is calculated by adding a 14 month rate of change with a 10 month rate of change, and then simply deducting the average.

Investors know that it is a good time to buy when this number is below zero. Interestingly, and perhaps unknown to most in the business, this powerful tool originated from the practice of psychology. Its creator likened bear markets to the common period of human mourning.

Upon asking members of the Episcopal Church the length of time a typical person mourns, he received an answer of 11 to 14 months, so he used these numbers in his formula. Somehow, it worked. By following predetermined trends, and by acting appropriately when triggers are indicated, many technical analysts find success in the forex market.

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