Technical analysis is a methodology that helps you determine the future direction of an asset. Technical analysis uses past price changes to forecast future movements. This is one of the quickest ways to learn how to forecast future prices. It takes time to learn how to use different technical analysis tools. Don’t rush the process. Before you begin to trade, try to determine which technical analysis tool is right for you. You can then practice you technical analysis trading using a trading demo account.
Support and Resistance
Supply and demand for an asset, can be subjectively measured using specific price levels. For example, the average of the prices over a specific period can have a way of describing levels of strong supply or robust demand. For example, you can see that the 10-day moving average (red line – black arrow), appear to be a level with the price is supported. Prices have been traversing this level for a while. Resistance, or supply appears to be the monthly highs which is designated with a horizontal trend line (and a red arrow). Trend line can be horizontal, upward sloping or downward sloping. The trajectory of a trend line helps you determine supply and demand levels.
You can use supply and demand points to help you enter a trade or exit a trade. You might consider purchasing gold, as it bounces on its 10-day moving average and sell it when it rises to resistance. Your stop loss might be the 10-day moving average of another point that represents support (for example the horizontal lows near the green arrows).
In addition to price points, which help you determine patterns that designate support and resistance, there are studies that help you understand, market sentiment. The rate of chance of prices, help determine momentum. Momentum can drive markets. Momentum can increase sentiment which can help a market develop a trend. Momentum generally occurs as the price of an asset begins to break out. When momentum accelerates too quickly prices can become overbought or oversold.
One of the most efficient momentum indicators is the MACD (moving average convergence divergence) index. This indicator uses moving averages to develop momentum. The change is calculated using two different moving averages and looks at whether a shorter-term moving average is moving away from a longer-term moving average.
The MACD created by Gerald Appel, creates two different types of buy and sell signals. You either look at the MACD or the MACD histogram. A MACD crossover signal occurs when the MACD line (the 12-day moving average minus the 26-day moving average) crosses above (below) the MACD signal line (the 9-day moving average of the MACD line). The MACD sell signal is located int eh green circle. The sell signal indicates that negative momentum is accelerating.
An alternative study is the fast stochastic. This is an oscillator that measures prices over a specific period. The oscillator index is generating a number between 1-100 based on relative price changes. When the oscillator is rising momentum is rising. When the oscillator is falling momentum is falling. An index level above 80 designates that the underlying asset is overbought. An index level below 20 designates that the asset is oversold.