Technical analysis is a pre-requisite step in a short-term trading strategy. Irrespective of the asset class, technical analysis is essential to generate higher profits and manage risks carefully. For example, whether you are trading currency pairs, stocks, indices, cryptocurrencies or commodities, a short-term trading method like scalping, day trading, or swing trading requires technical analysis.
In this article, we will discuss the technical analysis of the most popular and most traded forex currency pair, EUR/USD. In this pair, EUR is the base currency, and USD is the quote currency. Here Euro is exchanged against the US Dollar. So let's discuss the technical analysis of the EUR/USD currency pair.
Significance of EUR/USD Technical analysis
The primary goal of technical analysis is to assess the price movements of both currencies EUR and USD. This is because the EUR/USD currency pair represents the whole forex industry at a global stage as this is the most popular currency pair in the world.
The Foreign Exchange Market (Forex) is a global market dedicated to the trading of currencies. The Foreign Exchange Market, for example, has a very high volume, which leads to a lot of liquidity. Leverage is another benefit of trading in the Forex market. In the Forex Market, there are numerous examples of trading.
This makes it ideal for traders who rely on technical indications like trends, charts, and indicators. It's worth noting that, regardless of the asset under observation, the interpretation of technical analysis is generally the same. This article will cover the basics of why technical analysis is an essential instrument in the forex market.
Before investing, it is critical to comprehend the Forex market's distinct characteristics. This market is quite different from the more well-known New York Stock Exchange. One of the basic tenets of technical analysis is that price behaviour in the past forecasts price movement in the future.
How to Research?
The primary goal is to investigate and determine the global Forex market's progressive growth. Furthermore, in order to critically review and comprehend the working, consequences, and importance of technological tools in real-time, the data can be studied using various tools and methods of Technical Analysis.
With the continually changing financial system around the world, the Forex market will always be a fascinating investment opportunity. Therefore, various technical analysis methods were applied to the closing prices of two foreign currency values for the aim of analysis.
Tools or technical indicators for EUR/USD technical analysis
There are mainly four technical indicators that you can use to conduct the technical analysis.
- Stochastic Oscillator
- Bollinger bands
- Parabolic SAR
- Relative strength index
These indicators serve different purposes and show various metrics required to make an informed trading decision. You can use any of these according to your requirement.
The Stochastic Oscillator attempts to predict the chance of the current bearing pattern continuing by using a scale to quantify the level of progress between costs starting with one closing period and moving on to the next in case of EUR/USD technical analysis.
Even though the price continues to rise, the stochastic oscillator indicates decreasing momentum. A contradiction is called divergence when the stochastic oscillator prints a lower high than previously achieved despite the price attaining a new higher high. It's a clear sign that bullish conviction is waning, and the trend may be nearing its end. This interpretation is based on a hypothesis that states that price moves in lockstep with momentum.
Bollinger Bands include a central band and two outside bands. A simple moving average with a period of 20 is used as the middle band. Because the standard deviation formula also uses a simple moving average, a simple moving average is used. The standard deviation has the same look-back duration as the simple moving average. Typically, the outer bands are two standard deviations above and below the centre band.
In a trending market, this indication is most beneficial. Therefore, while trading short-term volatility with the SAR, it is recommended to utilise it in conjunction with other indicators that establish the broad direction of the trend at a higher level.
It is not uncommon for the SAR indicator's firm signals to be devoid of any practical basis.
Professional traders can use RSI signals to make better trading decisions and quit and rapidly join the financial market. According to the signal, traders should buy when the value passes above the oversold line and sell when the signal crosses below the overbought line.
As a result, the RSI is a fashionable indicator that provides buy and sell signals, depicts overbought and oversold circumstances, validates price trend and movement, and can identify future market reversals through divergence.
Bottom Line
To become a successful trader in the Foreign Exchange Market, market research is required to determine which trading strategies are the most effective. The technical analysis includes a variety of technical indicators that are used to track price data movement patterns. You can conduct the technical analysis of EUR/USD with the award-wining broker ABinvesting. The highly regulated broker is known for providing more than 40 analytical tools for technical analysis. Read our ABinvesting Review.
