Technical Analysis can be defined as a way of evaluating market conditions by examining historical statistics such as previous prices and volume. Technical analysts use charts to pinpoint patterns that can help them predict future behaviour, this is because is has been proven that past performance is an indicator of what will happen in the future. Forex traders of all levels and abilities make use of technical analysis to help them make profitable trades. This type of analysis is used to predict short term trends – this is because of the nature of the data being analysed.

By analyzing a combination of short and long term market trends, supply and demand as well as trading volume, price movements can be forecast quite accurately. To do this analysts use a process called “charting” which is a graphical illustration of repeating price-volume factors. In this way, it is possible to determine market swings well in advance.

Technical analysis only incorporates price and volume behaviour and does not take into consideration any other currency specific data. This is normally incorporated into another form of analysis which is known “fundamental analysis”. Some traders use either technical or fundamental analysis however large banks, brokers and other financial institutions will usually have both technical and fundamental analysis teams working for them. Dow Theory which is the oldest theory in technical analysis states that prices fully reflect all existing information.

Technical analysts employ a series of models and trading rules to make their calculations. These include the relative strength index, moving averages, regressions, inter-market and intra-market price correlations, Put/Call ratios, Implied Volatility, cycles as well as chart patterns. An experienced Technical analyst will use their professional judgment to interpret this combination of factors.

Over recent years, with the advent of more advanced computer technology, there have been many developments in the field of technical analysis. There are now a number of automated technical analysis systems, and analysis theories have developed immensely. It is no longer necessary for human experts to interpret the data which makes it much more user friendly and accessible to more people. Computer based analysis also makes it much easier to combine other analysis disciplines such as fundamental, and quantitative, as well as economics and even astrology with the technical data which can result in much more powerful results.

Technical Analysis is highly regarded as a profession with most countries having professional bodies representing this particular field of expertise. The professional bodies around the world are working together to create a “Body of Knowledge” which will document this vast and fascinating field.

Like everything else relating to Forex trading, there are no guarantees. Technical analysis is extremely popular amongst Forex traders, and traditionally produces accurate forecasts however nothing is 100% accurate. Using technical analysis will give you greater odds of success and it is one of the less demanding ways of trading Forex as it is very practical and easy to follow. For someone just starting out in the world of Forex trading it is well worth taking some time to learn the ins and outs of technical analysis as you are likely to become more profitable and successful as a result.

Leading Indicators

Leading indicators are those which are believed to change in advance of changes in the economy, giving you a preview of what is going to happen before the change actually occurs. Regardless of their accuracy, leading indicators are helpful because they give an early warning of impending trouble. These leading indicators are used to find a breakout into an upward or downward trend and are often meant to identify reversals. Although the leading indicators are useful for forecasting turns, advance warning may be short. Two of the most well-known leading indicators are the relative strength index (RSI) and the stochastic oscillator. When leading indicators are understood, they can often be used to predict and affect outcomes.

Lagging Indicators

Lagging indicators are economic indicators which don’t usually move until after the economy has moved in a certain direction. Regarded as more useful during trending periods, the most well-known lagging indicators are the moving averages and bollinger bands. Governments produce certain lagging indicators such as the unemployment rate, business expenditures, labour cost per unit, loans outstanding, bank interest rates, and book value of manufacturing and trade inventories. Also known as momentum oscillators, these lagging indicators are observed as a way of confirming trends. Because they react rather slowly to economic change, they have no predictive value. They are things that have already happened so represent the current state of affairs and can confirm and verify long term trends. The downside of lagging indicators is that they are generally quite late and have been described as being like looking in the rear-view mirror.
One of the best indicators used within forex trading are Bollinger Bands, which were invented by John Bollinger in the 1980s as a technical analysis tool. They are widely used by Forex traders as an indicator which compares volatility and relative price levels over a given period of time. Most charting systems incorporate the use of Bollinger bands and are useful when used in conjunction with other types of indicator. Based upon a simple moving average, they can capture the vast majority of price movements and are one of the most recommended indicators to utilize for forex trading. For a more in depth look at Bollinger bands, John Bollinger has written a book “Bollinger on Bollinger Bands”, which has been translated into seven languages.

Forex indicators are usually included as part of any charting software that might be available from your broker. This type of service is normally subscription based so you should establish what is included in your package before shelling out. Most brokers offer a demo account and/or trial period for the charting software so you can try out the service to see if it is for you. There are free forex indicators available on the internet, however these are often of dubious quality and are often linked with websites that want to bombard you with lots of not very useful information.
For more information about Forex indicators, visit:

http://www.forexindicators.co.uk/

http://www.studyforex.com/economic-indicators.html

http://www.how-to-trade-currency.com/