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Let’s get Technical: A Closer Look at the top 5 Technical Analysis Tools

It’s no secret that a trader’s success relies on the effectiveness of his trading strategy. In order to compose a solid trading strategy, it’s imperative that a trader uses widespread information from both technical and fundamental analysis. Fundamental analysis encapsulates all the economic, political and social aspects that can influence an instrument’s value, whereas technical analysis is all about the price charts and technical indicators that surge into the markets and determine a currency’s movements. 

 

Since forex trading became mainstream, there have been a number of tools springing up from every corner, providing users with the edge needed to forecast price movements. However, very few deliver the kind of results traders expect. In this article, FXTM Senior Staff Writer Samantha Robb looks at the 5 technical analysis tools that are usually part of any trader’s arsenal. 
 
 
Japanese Candlesticks
 
While it was originally used to illustrate the price of rice in 18th century Japan, candlestick charting has become the most common visual asset in understanding price sentiment. Candlesticks are composed by ‘real bodies’ and ‘shadows’ which are used to indicate a currency’s high, open, close and low price during a specific timeframe. Japanese candlesticks have become so broadly known in the financial markets that at present there are dozens of established candlestick formations used in forecasting potential bullish or bearish sentiment. 
 
 
Relative Strength Index (RSI)
 
Much like Japanese Candlesticks, the RSI has had a long standing influence on forex traders and is a staple in almost every trader’s strategy. The tool works by measuring the momentum of an instrument’s price and in return indicates whether the instrument is being overbought or oversold during a specific timeframe. 
 
 
Moving Average (MA) 
 
There are many flavours and variations to the Moving Average, all of which essentially have the same purpose – to drown out any unnecessary data than can be produced from general price fluctuations. What gives the indicators these unique properties is the fact all projected sentiment is based on past prices. Moving Average indicators aid in defining a prevailing trend and determining support and resistance levels, while they also provide the basis for other technical analysis tools such as the Moving Average Convergence Divergence (MACD). 
 
 
Fibonacci 
 
With an origin story stemming from western mathematics, the Fibonacci tool is perhaps the most debated technical analysis tool on the list. At the beginning, Fibonacci numbers were created to describe ratios that applied to the proportions of things in the universe, also known as the ‘golden mean’. What was later discovered, was that some of these ratios could be easy applied to market movements, and essentially forecast potential price direction. The Fibonacci levels are mainly used by traders to pinpoint potential take-profit levels and stop-loss positions. 
 
 
Bollinger Bands
 
Finally, Bollinger Bands are the brainchild of John Bollinger, and were created to measure market volatility. When adding the indicator on a price chart, two bands form, one on the top and one on the bottom, of the Simple Moving Average. If a market is volatile then the bands expand, whereas during quiet periods, the bands are closer together. 
 
For more information, please visit FXTM’s education centre at www.forextime.com/education 
 
Disclaimer: This written/visual material is comprised of personal opinions and ideas. The content should not be construed as containing any type of investment advice and/or a solicitation for any transactions. It does not imply an obligation to purchase investment services, nor does it guarantee or predict future performance. FXTM, its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness of any information or data made available and assume no liability for any loss arising from any investment based on the same.
 
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NOTES TO EDITORS 
 
The FXTM brand provides international brokerage services and gives access to the global currency markets, offering trading in forex, precious metals, Share CFDs, ETF CFDs and CFDs on Commodity Futures. Trading is available via the MT4 and MT5 platforms with spreads starting from just 1.3 on Standard trading accounts and from 0.1 on ECN trading accounts. Bespoke trading support and services are provided based on each client’s needs and ambitions - from novices, to experienced traders and institutional investors. ForexTime Limited is regulated by the Cyprus Securities and Exchange Commission (CySEC), with license number 185/12, licensed by the SA FSB with FSP number 46614, and registered with the UK FCA under reference number 600475. FT Global Limited is regulated by the International Financial Services Commission (IFSC) with license numbers IFSC/60/345/TS and IFSC/60/345/APM.
 
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