In financial markets, traders use Technical Analysis to measure supply and demand. Technical analysis utilizes mathematical formulas to analyze overall changes in prices.
For the most part, traders will use technical analysis to measure whether a Forex pair is undervalued, overvalued, or whether its momentum is building, which could possibly cause a sharp change in prices.
Key indicators and chart patterns used by traders:
Trend lines: There are two types of trends – uptrends and downtrends. An uptrend occurs when a Forex pair moves high and also trades at higher prices as it rises. This is an indication that buyers are becoming more aggressive. A downtrend occurs when a Forex pair trades at lower rates as its price falls. Learn more about trend lines.
Support/Resistance: Support is a level of buying demand, while resistance is an area of selling pressure. For example, if in a particular chart, after every drop of the EUR/USD to 1.3000 it quickly jumps to 1.3100, this indicates that there is buying demand at the 1.3000 level that is supporting prices. Learn more about Support & Resistance.
Moving Averages: Moving averages are calculated based on the average price over a particular timeframe. For example, a 50-period moving average calculates the average price over the last 50 periods of a trading instrument. Traders use moving averages to identify support/resistance levels in the market.
Bollinger Bands: Bollinger bands measure the standard deviation of a moving average. It is used to determine when Forex instruments are overbought or oversold. Depending on the strategy, Forex traders will often buy when current prices trade below the lower Bollinger Band and sell when prices rise above the upper Bollinger Band.
Relative Strength Index (RSI): RSI measures a trading instrument’s recent gains versus losses over a given period of time. A rising number indicates upside momentum is increasing.