The Foreign Exchange market is a highly liquid and volatile market. It is affected by numerous variables, each with its own set of data and statistics. Accounting for each of these statistical inputs is important but doing so for a single individual is impossible. But traders need to be able to anticipate and pre-determine the market to be able to profit in it. It is at this juncture that forex technical analysis tools come in.
What is a forex technical analysis tool?
It is a software application dealing with a very specific form of economic data which it interprets and translates in the form of a graph or a chart for the convenience of a trader. Forex Technical Analysis Tools are various and deal with varied types of FX data. They deal with different theories regarding market trends, structures, and substructures in order to make forecasts easier and reliable.
A forex technical analysis tool is the right-hand of any trader or broker for understanding and pre-anticipating market trends. Let’s illustrate with an example:
Considering that a trader invests $10,000 in USD/EURO at 1.25. He thus has a Euro asset worth €8000. He expects this price quote to reach 1.32 where he puts his sell order. However, he sees that this quote bottoms a 1.17 and learns that it might go further down. The question would then be to sell to avoid further loss or not. He instead holds onto it because the technical tools indicate that the USD/EURO is gaining strength and momentum, i.e. other traders are buying it at that price quote which would obviously push it higher in within some point of time.
The trader perseveres and the next day he sells it when it opens at 1.32 to get back $10560, a profit of $560. His trading account had a 10:1 leverage; a total investment worth $1000 gives him a profit a $56, a high wide and handsome 5.6% profit.
Important forex technical analysis tools:
Each of these tools caters to very specific types of data which a trader can use to pre-anticipate market trends. Two of the most commonly used technical analysis tools for forex are mentioned below: -
- MACD Line – This technical analysis tool abbreviates for ‘Moving Average Convergence Divergence.' This is one of the most popular tools or indicator used by traders to understand both trend and momentum of an investment. It measures short-term momentum as against long-term momentum to against a specific time-period. These two types of momentums are known as exponential time averages (ETAs), and this graph helps in understanding future trends with the help of the relation of the ETAs. The more positive the graph, the higher the trend of an asset.
- A/D Line – This technical tool, the accumulation/distribution line shows the investment flow behind a currency pair. It takes into account the trading range of a security followed along with its closing price as against time. An upwards trend in A/D line means increased buying pressure while a downwards trend means a selling pressure and in each case, the expected price quote too.
Other important tools and indicators:
- OBV Line (On-Balance Volume)
- ADX (Average Directional index)
- Aroon Indicator
- Elliott Wave Tool
- SSI Index (Speculative Sentiment Index)
It is more than obvious that for understanding and anticipating FX trading, a trader or broker needs the interpretations of this forex technical analysis tools. Conclusively understood, these tools and indicators can show enough of the FX future to make it a more profitable one; they make forex trading easier and traders richer.
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