Today we present a theory with which to put into practice some of the skills learned in our latest study. It should be remembered that the term Technical Analysis describes a study that analyses the variability of prices on the financial markets. This discipline is mainly based on the use of mathematical graphs and indicators; all to predict future price developments.
Unlike fundamental analysis (which is based on the identification and prediction of economic variables, interpreting both macro-financial and micro factors), technical analysis does not consider the market to be a rational and efficient environment. One of its objectives is therefore precisely to identify levels of market entry and exit. To do this, it is essential to study historical price series, which also make it possible to identify the reversal points of the various market cycles and the duration of the various phases of the trend.
The premises on which the technical analysis is based:
At the base of this theory, developed in the early 1800s by Charles Dow, is the close relationship between prices and the temporal axis (where the former move in a very precise direction that can be identified with one or more trend lines called trendline).
According to this theory, therefore, the market does not move in a chaotic way but follows trends; in 1887 Dow developed two market averages, now known as Dow Jones Industrial Average and Dow Jones Transportation Average. To summarize this interesting theory, however, it is possible to list four fundamental principles:
Dow's rules are the basis for chart reading in the markets for price analysis. This analysis makes it possible to visualize the time series and the related statistical data.
The Forex (FOReign EXchange market) is the virtual place where different types of traders meet to exchange all the currencies in the world. As a result, the currency market is an unregulated market or, as one might say in technical terms, an over-the-counter (OTC) market. With an average volume of between 3 and 4 trillion dollars traded every day, it is the most liquid market in the world. This allows traders to always and immediately find a counterpart for any position. Operators can be of extremely different types.
On Forex, in fact, one can "meet" a private speculator who tries to round up his salary from the sofa in his home by buying money, or even a central bank of some country that has to replenish its foreign currency reserves, or, for example, large multinationals that want to protect their foreign currency investments from exchange rate fluctuations. To trade in Forex just open an account with a Broker who provides a platform and start with the first analysis to choose which pair of currencies to buy and especially when.
The objective of this article will be to provide the reader with a detailed explanation of the basic tool used by operators: the Furniture Averages. These, graphically of the lines, represent the underlying trend of the underlying financial instrument (in fact, trend-following indicators are defined). The term "average" derived from the formula used to calculate it, that is, the arithmetic, exponential or weighted average. The term "mobile", on the other hand, refers to the fact that the instrument is continuously and automatically updated. For example, if we are calculating a 10-period moving average (a period can refer to a day, such as a month or an intraday interval of 15 minutes - it is the operator who chooses it by setting the time frame of his graphs), when you close the tenth and open the eleventh period, automatically the average no longer takes into account in the calculation the first value of the series (the oldest), but starting from the second also includes the eleventh. They are particularly easy to use. We study the cross-overs, that is the intersections that the moving averages draw.
First of all, the crossings between the average chosen by the analyst and the price. If the latter cuts it upwards, the signal sent will be bullish. And vice versa on the contrary. Secondly, we can also study the crossings between different averages, i.e. between an arithmetic moving average and a weighted average calculated over 10 periods, and between two simple (arithmetic) moving averages calculated over 25 and the other over 50 periods. The approach preferred by operators (although no general standard can be defined) is the combined use of averages of 10, 50, 100 and 200 periods (structure that generates the so-called beam of moving averages).
As a trend indicator, a rising average indicates a bullish trend, and vice versa. The main advantage of this instrument, therefore, is that the signal it sends to the operator is particularly reliable. On the opposite side, however, this typically arrives later than those sent by other instruments. Obviously this defect can be reduced by reducing the calculation period of the moving average but always keeping in mind the following rule: the shorter the chosen period, the more numerous and reactive the signals will be, but the more likely it will be to send a false signal. Before concluding, let's look at some practical examples where moving averages have been used in the currency market.
Since trading has developed widely on online platforms, there have also been more and more trading forums where you can exchange opinions, deepen and broaden your knowledge through online trading reviews, find out about, practice, learn about market trends, stay up to date, collect suggestions, interpret market movements and derivative instruments.
Visual Trader is a technical analysis software, which allows Direct traders to use real-time charts and trading systems. You can back test to see if the data of the indicators on the graph false alarms are or not, is active the alarm system: with which you can put alarms for all assets, the signaling arrives when the condition occurs.
Continue our journey around some of the best known advanced trading strategies. In this case, we will analyze Bull Spread, a technique that is usually used if you have the feeling that the market is taking on bullish traits.