Advanced Technical Analysis

By Ahmad A Hassam

Technical analysis depends on the use of indicators in finding the optimal points for entry and exit for each trade. A number of advanced technical indicators have been developed over the years that are used by the traders to confirm a particular market pattern. Two or more indicators are used in conjunction to confirm whether the markets are trending, ranging etc.

You should understand how to use these technical indicators to confirm trending or non trending conditions. Each technical indicator plays a unique role in the overall technical analysis process. Time periods and the technical indicators are useful tools for the traders. Spotting interday or intraday turning points caused by large moves, retracements, continuances or reversals is very important for traders and technical indictors are used to identify and confirm these turning points.

Each technical indicator performs differently in both trending and non trending markets. You should understand how each technical indicator shows direction, entry, exit or weaknesses or strength of price action in trending or non trending market conditions. You should memorize these differences to make the best use of these tools in your trading.

Let's discuss some of the important technical indicators. Directional Movement Indicator (DMI) consists of the Average Directional Index (ADX) and the Directional Index (DI). The Average Directional Index measures the strength of a prevailing trend. It rises when the trend is strong and falls when the prior confirmed trend or direction is weakening. ADX measures the trending quality of the market. It isolates those periods where the market is not trending.

Directional Index (DI) comprises positive DI+ and negative DI-. When DI+ rises above DI-, an upward direction is confirmed. When DI- rises above DI+, a downward direction is confirmed. Both DI+ and DI- show direction. A strong move in the currency markets is confirmed when ADX is rising and both DI+ and DI- are apart.

The Stochastic Indicator is often referred to as the overbought or oversold indicator. The Stochastic Indicator identifies swings, tops and bottoms. It measures the relationship between the closing price of a currency pair and its high or low during a specific number of days or weeks.

It does a wonderful job in finding the reversal tendencies in prices. When the price of the currency pair rises, the closing price tends to be closer and closer to the extreme high prices of the currency pair in that time period. Likewise when the prices fall, the closing price tends to fall on average closer and closer to the extreme low prices.

The Stochastic Indicator is very popular among the traders. It is considered to be a highly accurate method of picking the tops and bottoms. It is a very useful tool that can used as a timing aid in knowing when to take action in a currency pair particularly when it is used in conjunction with other technical indicators. This indicator tries to find a correlation between the moving closing price of the currency pair and its reversal tendencies.

Mr. Ahmad Hassam is a Harvard University Graduate. He is interested in day trading and swing trading stocks and currencies. Read about L.M.T Forex Formula. Discover Forex Magic Machine..

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