The Forex Patterns and Forecasting Methods the Pros Use

This follow up to Forex Patterns and Forecast Methods Used Today For Successful Forex Trading! Part 1 picks up where we left off, (if you have not read part 1 please do so to bring yourself up to speed).

Technical analysis and fundamental analysis differ greatly, but both can be useful forecasting tools for the forex trader. They have the same goal - to predict a price or movement.

The technician studies the effects, while the fundamentalist studies the cause of the forex market movements. You should combine a mixture of both approaches to get the best results.

Note: If both fundamental analysis and technical analysis point to the same direction, your chances for profitable trading are much better.

So let's pick up where we left off with the technical analysis from part 1:

Moving Averages - Are used to emphasize the direction of a trend and to even out price and volume fluctuations, or "noise", that can confuse interpretation. There are seven different types of moving averages:

- Simple (arithmetic)

- Exponential

- Time series

- Weighed

- Triangular

- Variable

- Volume adjusted

The only significant difference between the various types of moving averages is the weight assigned to the most recent data. For example, a simple (arithmetic) moving average is calculated by adding the closing price of the instrument for a number of periods, then dividing this total by the number of times.

The most popular method of interpreting a moving average is to compare the relationship between a moving average of the instrument's closing price, and the instrument's closing price itself.

Sell signal: when the instrument's price falls below its moving average Buy signal: when the instrument's price rises above its moving average The other technique is called the double crossover, which uses short-term and long-term averages.

Typically, upward momentum is confirmed when a short-term average (15 'day) crosses above a longer-term average (50-day). Downward momentum is confirmed when a short-term average crosses below a long-term average.

MACD - Moving Average Convergence/Divergence - A technical indicator, developed by Gerals Appel, used to detect swings in the price of financial instruments. The MACD is computed using two exponentially smoothed moving averages of the security's historical price, and is usually shown over a period on charts.

By then comparing the MACD to its own moving average (the signal line), experiensed traders conclude that they can detect when this will affect the RSI by creating false buy or sell signals. The RSI is best used as a valuable complement to other stock-picking tools.

Stochastic Oscillator - A technical momentum indicator that compares an instrument's closing price to its price range over a given period. The oscillator's sensitivity to market movements can be reduced by adjusting the time, or by taking a moving average of the result.

This indicator is calculated with the following formula:

%K=100* [(C-L14) / (H14-L14)] - C= the most recent closing price - L14= the low of the 14 previous trading sessions - H14= the highest price traded during the same 14 day period

The theory behind this indicator, based on George Lane's observations, is that in an upward-trending market, prices tend to close near their high, and during a downward-trending market, prices tend to close near their low.

Transaction signals occur when the %K crosses through a three-period moving average called "%D".

Trend Line - A sloping line of support or resistance.

- Up trend line - straight line drawn upward to the right along successive reaction lows

- Down trend line - straight line drawn downward to the right along successive rally peaks

Two points are needed to draw the trend line, and a third point to make it valid trend line. Trend lines are used in many ways by traders. One way is that when price returns to an existing principal trend line, it may be an opportunity to open new positions in the direction of the trend in the belief that the trend will hold and the trend will continue further.

A second way is when a price action breaks through (the principal trend line) an existing trend, it is evidence that the trend may be going to fail, and you (the trader) may consider trading in the other direction to the existing trend or exiting in the direction of the trend.

Note: Do not fall in love with your Forex position, and never take revenge of your Forex position.