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How to Profit From Forex Using Technical Analysis

Jul 17, 2008
Technical analysis is price movement study. You can track the history of price movement by using price charts and try to work out which way the prices are likely to go in the future.

Online Forex brokers will give you a variety of different tools which you can use in technical analysis. Here are some of the most common ones:

Bollinger Brands

These are used to measure the volatility of the market. They comprise 3 lines:

1. A moving average in the center.

2. A lower band which shows the moving average minus 2 standard deviations.

3. An upper band which shows the moving average plus 2 standard deviations.

When the volatility of the market is low, the bands will come further together. When the volatility of the market is high, the bands will spread further apart.

The Bollinger Bounce

The middle band usually stays between the outer bands. The outer bands can be compared to border control. When the middle band gets too close, it is bounced back towards the middle. This is why it is called the Bollinger Bounce. It is helpful to be aware of this because if you see the middle band getting close to an outer band, it will probably bounce away.

This strategy works the best when there are no clear trends and prices seem to be fluctuating.

A good strategy to use to spot an early trend is called the Bollinger Squeeze. This is when the bands squeeze closely together and can often mean that a breakout is imminent. If the middle band breaks through either the lower band or the upper one, this means that the trend is likely to continue to go in that direction.

Parabolic SAR (Stop and Reversal)

This indicator is used to identify trend reversals. It is an easy indicator to read. Dots appear on the chart in positions either below or above the candles (the formula used to work out where the dogs must go is rather complicated).

Dots below the candles are an indication to buy and dots above the candles are an indication to sell.

Parabolic SAR does not work well when price movement is small but it does work well when there are clear trends, either in an upward or downward direction.

Stochastics

Stochastics has a scale from 0 to 100. It is an indicator used to measure oversold and overbought conditions in the market. When the lines are over 80, that means the market is overbought. If this happens, a downward trend might form. When the lines are below 20, this means the market is oversold and an upward trend might form.

Stochastics can be useful in working out when to issue sell or buy orders and when to lock in profits. You should never use just one indicator. It is better to combine several of them and adjust these to your own trading strategy.
About the Author
Ian Armstrong is an avid Forex enthusiast.

Ian recommends Avi Frister's "Forex Trading Machine", which uses only price and time as trading indicators. Full details at Frister's FX Trading Machine
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