Technical Tools to Improve Your Forex Trading
Technical analysis is the most commonly used method of analysing the forex market. It is important that you know about the technical tools that will improve your forex trading. There are three technical tools that you should know about which will help your trading. These tools look at volume, the Aroon indicator and Fibonacci numbers.
Forex Trading and Volume
On the forex market volume is defined as the number of lots traded during a specified time. This is what moves the market price for a currency pair up and down. When there is a low volume of trading then the market is less liquid and less volatile. When this happens the market tends to range and move in a sideways motion. When there is high volume the market is more volatile and more liquid. This generally translates to trends appearing in the market. These trends could be upward or downward depending on the way all the traders are viewing the market.
It is often harder to find out the trading volumes with forex than with any other financial market. The decentralised nature of the market means that there is no one body keeping track of trades. The best way to view volume for the purpose of trading forex is through MACD histograms and market sentiment.
Using the Aroon Indicator
A way of looking at the strength of a trend and the possibility of it continuing is the Aroon indicator. On the Aroon indicator there is a zero level and this is considered the neutral or no trade zone. Traders generally look for movement above and below this line. When the indicator crosses over this level and sits above zero it is an indicator of an uptrend. However, if the price crosses below the zero then there will be a downtrend. When the indicator sits close to zero then the market is ranging and trend traders should not look at trading.
When you use the Aroon indicator you can predict possible trends in the market. Of course, you have to be aware that the market can change and the Aroon indicator is not 100% accurate. Using the indicator to predict trends does give you the edge in forex trading and could lead to greater profits. It is important that you keep stop loss orders on your trades in case there is a shift in the market.
The Fibonacci Retracement
The Fibonacci Retracement helps traders identify trends and when the price movement may hit the support or resistance levels. Fibonacci numbers are a series of numbers that follow a set pattern. The pattern is that the number is the sum of the two numbers that have come before it. When there is a movement in currency pair prices they generally retrace back by a set percentage.
When these movements occur, traders use the Fibonacci numbers to determine whether or not the price will break the support and resistance levels or bounce off them. It is important that you use Fibonacci retracements with resistance and support levels. This is the only way that you are able to get the most out of this technical tool. If the price does break the levels you should look at the next level of support and resistance to see the trend.