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The world of investing can appear complicated to those without a great deal of experience. Forex trading is a particularly relevant example, as the fast-paced nature of this marketplace dictates that decisions will often need to be made within an extremely short period of time.
While it is impossible to eliminate the inherent risks, there are plenty of ways to bend the odds in your favour with the help of technical trading instruments. What are some of the most common utilities that investors use, and what advantages can they offer?
How has a specific Forex pair been performing over a certain period of time? For instance, has the pound outperformed the euro in the past 12 weeks? Does a short-term bullish trend signal that the Japanese yen may soon rebound when compared to the Swiss franc? These are some of the questions that moving average analyses can address.
Often referred to as an MA indicator, a moving average is a graphical tool used to illustrate the trend direction of a currency pair. Values of data points within a predetermined time period are divided by the number of readings taken. The intention here is to spot important events such as trend reversals; indicating when it might be prudent to open (buy), or close (sell) a position.
Believe it or not, candlestick charts first began emerging during 18th-century Japan as a means to illustrate the value of rice based on supply and demand. These very same tools are now employed by modern traders, and they provide several benefits. The most practical involves the ability to be provided with a graphical representation of how a FX pair is performing, thanks to elements known as “candles”. Here are some important takeaway points:
There are also many unique terms used to describe unique trading conditions. Examples include (but are not limited to) Bearish Harami, Bullish Harami Crosses, and Bearish Engulfing Patterns. Of course, investors should become familiar with these phrases and what they signify. Learning the ins and outs of candlestick charts will therefore require a bit of time.
Stochastic Trading Instruments
The concept of stochastics (in relation to trade and finance) was first introduced in the 1950s by a man named George Lane. Stochastics provide a way to better appreciate the relationship between the closing price of an asset, and its price range. Similar to candlestick charts, a stochastic indicator can track days, weeks, or months.
What is the point of this method? A stochastic analysis can be used to measure the momentum of a FX pair as opposed to simply determine its value. These tools employ a scale that ranges between 0 and 100. This can then be used to determine whether a position is overbought or oversold. Values rising above 80 tend to signal that the position is overbought, and values lower than 20 hint that it has been oversold.
If a pair is overbought, the chances are high that its prices will soon begin to fall; dictating that it may be wise to liquidate one’s current holdings. Oversold positions often hint that a price rise is on the horizon; providing investors with the opportunity to make a purchase while values are still relatively low. Interestingly enough, stochastic analyses can sometimes be presented in the form of a candlestick chart.
Dispelling the Notion of a “Sure Thing”
All of these methods have proven their values over time. However, we should never assume that their technical nature is capable of providing any degree of absolute certainty. They are instead meant to be used alongside other strategies, and there is no such thing as complete certainty within any financial marketplace.
Still, investors should become accustomed to these instruments. They frequently appear on major trading-related websites, and they can represent invaluable assets within a well-rounded trading strategy. The good news is that partnering with experienced trading platforms can provide an additional level of insight that might not otherwise be possible. Those who wish to learn more should therefore consult with a qualified online brokerage.
