If you are a forex trader, you are probably aware of the
monumental profit potential of trading the foreign exchange
market. Trading this huge market is really like trading
the global economy itself, and the huge profits come from
taking advantage of something called 'leverage.'
Let's say that you noticed that the real estate market in a
particular area was really booming, so you wanted to work
with a bank to acquire as many properties as possible in
this area. The bank told you that instead of paying for
all the homes yourself, you would only need to pay 1% and
the bank would pay the other 99%. Not bad, eh?
This is an example of leveraging money, and your forex
broker will allow to do the same thing while you are making
trades. The most common leverage level is 100:1 or 1%,
meaning that with $1,000 you could potentially trade up to
$100,000.
But all of this money is of no use if you do not know how
to place profitable trades, so today we will cover the
basics of a popular form of picking trade opportunities
called 'technical analysis,' as well as cover a few of the
most widely used technical indicators.
In technical analysis, we are only concerned with the
numbers. We are concerned with only the 'what' of the
exchange rate prices and not the 'why.' We do not care
about why the currency rate is at a new high or low, but
only about the steps that the price fluctuations took to
get there.
A good forex technical analyst can look at a chart of price
history and see potential trading opportunities, as well as
completely separate any emotions such as fear or greed from
said trading opportunities. This ability of looking at
your money without emotion can be very difficult to learn,
but it is really the key to successful technical analysis
and making profitable trades.
The three technical indicators we will cover today are
Moving Averages overlaid onto price data, the Relative
Strength Index, and Moving Average Convergence/Divergence.
First, let's talk about how these indicators will actually
look when they are set up on the chart. The moving average
itself will be on top of the candlesticks or bars that give
the price data, and the MACD and RSI will be below the
price data on a small separate graph.
The RSI will give you a good idea of the strength of a
certain trend, as well as the current overall volatility of
the market. This indicator will show you the 'relative
strength' (duh!) of the market at the present moment. In
setting your RSI indicator on your chart, two of the most
popular periods are 14 and 21.
What this whole 'time period' business means is that the
indicator will track back a certain number of bars or
candlesticks from the present one (14 or 21 in this case),
and the indicator will be based on that data. When the RSI
is at a high value (usually above 70), this can indicate
high volatility, and a good time to trade is when the RSI
is climbing.
Next, we will talk about moving averages, and there are two
different types: one that is one top of price data, and one
that is separate from price data.
Both indicators, simply called a moving average (on data)
or a MACD (off data), really try to tell you the same basic
thing, and that is whether or not the current price action
is significantly different from recent price action.
If the way the prices have been moving within the last hour
is much faster than how they have been moving earlier that
day (if you had maybe 30-minute bars or candlesticks), this
is definitely a potential trading opportunity.
To identify forex trading opportunities with a regular
moving average (you may want to try a period of 10-20 with
this), you will see the price data cross over the moving
average line and keep going in that same direction. This
shows you that this move is different from the way the
market has recently been moving, and can be a good chance
to make some money.
The MACD uses the same basic concept, but you have a
short-period and a long-period moving average instead of a
moving average overlaid on price data. The CD in MACD
stands for convergence/divergence, and this indicator will
show you short-term price action compared with long-term
price action.
The periods of each moving average on the MACD are
generally 12 and 26, and the same basic concept applies:
if short-term action is significantly different from long
term action (divergence in the two averages), this can be a
profitable trading opportunity.
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Online forex trading can be a very profitable business, but
many more people lose money in forex than those who make
money simply because they do not know how to trade
properly. Put yourself in the profitable minority, and go
to http://www.Forex-Prosperity.com to find out how you can
build your fortune in forex.
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