Be like Nostradamus?
We can’t all be like Michel de Nostredame who published several famous prophesies back in the 16th century. But we can use technical analysis to try to forecast future prices by studying past market movements. Using technical analysis, a trader has the ability to analyze (monitor) multiple instruments by evaluating how the market, as a whole, is trading a particular instrument. It has become evident, because so many traders use technical analysis (and their reaction to market movements tends to be similar) that the validity of this technique is strengthened. Like many of Nostradamus’s prophesies (where scholars have tied in many of his prophesies to real world historical events) technical analysis can become a self-fulfilling prophecy that feeds on itself, therefore increasing the reliability of the trends/patterns generated from the analysis.
Bottoms & Tops (aka Support & Resistance)
One of the most effective forms of technical analyses is the use of “support” and “resistance”. Support is the “bottom”, “floor” or lower boundary level that an instrument has trouble breaching (going through). Conversely Resistance, is the opposite: it is the “top”, “ceiling” or upper boundary level that an instrument has trouble going through.
When a market is stuck in a range (often called Range Bound) Support and Resistance levels are important as they indicate the boundary levels where the market is likely to reverse (change direction). Most often, if the market breaks through these boundaries, it is referred to as a “breakout” and can lead to increased market activity (volatility).
Traders will use Support and Resistance levels in many ways. For example: a “range trader” would typically buy just above support levels and sell just below resistance levels in the hope that the market remains within the current range. A “trend trader” would buy when the price breaks above a level of resistance and sell when it breaks below the support level.
Studies and Overlays
Depending on your Broker, and the trading platform you are using, you will find a plethora of technical analysis indicators. If you are trading on MT4 you will have a ready-made library of EA indicators that cover: Trend, Oscillators, Volumes, Momentum, Support & Resistance – the list goes on…. Many Brokers will also provide you with advance pattern recognition tools that will help you recognize channels etc. I highly recommend you review each indicator your Broker offers to find which one suits your particular trading strategy. I have found that using technical analysis helps “confirm” a strategy and, with experience, will assist you in identifying entry and exit points more effectively.
If there is a particular study you would like to learn more about, please send us an e-mail and we will do our best to help you.
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