Here we will give an introduction to Forex technical analysis – the advantages of using it and how to trade, currency charts the right way and enjoy Forex trading success.
What is Technical Analysis
Technical analysis is simply the study of price action of charts which uses historical price data to work out the future price movement of the currency pair being studied. It simply gives traders clues to the likely direction of price and is not a science its an art but for FX traders, who learn to trade with charts the right way, excellent trading profits can be made, using a Forex chart based strategy
The Logic of Technical Analysis
The logic that chart based trading is based on is the following:
The chart is showing you the price with all the fundamentals such as news already discounted by the market and furthermore, all the views of the traders trading the currency pair you are looking at are discounted as well. While prices of any financial instrument are a reflection of the supply and demand fundamentals, a key variable is the view of the traders value of the currency pair.
Traders have the same facts to look at but they have a view, on the facts they see. They will all see the facts differently and most, will buy or sell on their emotions. The three emotions that drive price are - hope, greed and fear and they are just as important as the fundamental facts in determining where prices will go.
The price chart, you are looking gives you all the known fundamentals about the currency you are looking at and also discounts every traders opinion, of what the value of the currency pair should be in their view.
If you look at a price chart, you will see trends up or down which are sustained for various periods of time. Another key assumption in technical trading is to assume that, a trend in motion is more likely to continue than reverse. The logic is to simply follow trends and assume, they will continue until they reverse.
A chart based trading strategy doesn't question why a currency is trending up or down, it simply wants to execute a trading signal in the direction of the trend, follow it for as long as possible and make money from it.
While the fundamentals have an influence on the price, its the traders view of them which creates chart patterns which can be traded for profit. As human nature is constant over time, traders will continue to create high odds chart patterns. Chart patterns are created by human psychology and while you can never predict exactly, what a mass of humans will do with certainty you can, see chart formations which you can trade with the odds on your side for profit.
Different Technical Trading Systems
You can of course use bar charts to show you support and resistance lines and trends but there are many other technical tools you can use in relation to a chart. There are for example, many traders who like to trade moving averages and others who like to trade with volatility and momentum indicators in their trading plan. In terms of charts you can use bar charts, point and figure charts or candlestick charts.
There are many different trading techniques you can use but what of course will determine how successful you are is – how you blend them to make money. There is no single best way to trade Forex, there are many different ways of making money and the system you choose, should be one which is based on logical assumptions, has a trading edge and you feel comfortable with.
Advantages of Technical Trading Strategies
In terms of learning how to trade Forex for profit technical analysis has many advantages which are outlined below:
You can learn to read charts quickly and it can be done by anyone – all you need to do is be able to spot high odds chart formations and trade them for profit. You don't need to know anything about the economic and political reasons behind the price movement of a currency, you simply trade the price action and formations you see on a chart.
Forex charting is of course quick to learn but its also easy to apply because all you have to do to determine the direction of a currency is to look at the chart and look for formations which can be traded for profit with your strategy. This should only take 5 minutes or so to do per currency pair so is ideal for the trader who wants to trade part time.
If you have a technical analysis strategy and have devised rules of entry for your trading signals, you don't have to think about anything else but whether the rules are giving you a potential trade in the market – so its a very objective rule based way of trading.
Best Forex Technical Analysis
We have looked at the best technical systems and strategies elsewhere on this site but there are some keys to making money with technical analysis. While there are many different charting techniques for profit, the best ones will all have certain characteristics in common:
The best Forex trading strategies which are based on charting will tend to be very simple and uncluttered in terms of the trading rules used to generate trading signals.
We have said it in other areas of this site but will say it again here – the best currency trading strategies will be very simple. When trading currencies simple strategies tend to make more money than ones which have to many rules to generate trading signals. In a market where you are dealing with humans which is odds based, a simple trading program simply works better is more robust and more likely to make money.
The best strategies will have defined rules for entry and exit and will work on the assumption of - cutting losing trades quickly, while running winning trades as long as possible. The best strategies will always tend to have a trigger for a buy or sell signal and will not trade, unless one or more of the inputs in the strategy confirms a trade.
Using technical analysis to trade currencies is a great way to make profits from trading. As we have said, its quick and easy to learn, takes very little time to apply and can be learned by anyone who is prepared to do some study and get the right trading education.
The key point to keep in mind is charting is an art and there are only high odds trades for profit – there are no certain trades which will make money. Chart based systems are perfect for beginners and a proven way of trading which can help you, become a successful Forex trader from home.