Technical Analysis - The Basics

Technical Analysis is a method of forecasting of changes in currency rates in the future basing on the information about the market. Technical analysis includes the market data in the past and at this moment of time. By receiving such information, an investor tries to recognize the signals given by the market, or "read" the market.

Technical analysts' exclusive use of historical price and volume data is what separates them from their fundamental counterparts. Unlike fundamental analysts, technical analysts don't care whether a currency pair is undervalued - the only thing that matters is its past trading data and what information this data can provide about where the currency pair might move in the future.

There is a wrong statement that technical analysts ignore fundamental data. Most of successful traders combine technical and fundamental analysis and all of them say that the price reflects all fundamental data. As the price includes such information, a certain pattern forms with the help of which we can predict the further movement of the price.

Technical analysis is based on three assumptions:
  • The market discounts everything.
  • History tends to repeat itself.
  • Price moves in trends.
6 Simple Tips Regarding Forex Technical Analysis
To create big profits using technical analysis, forex traders need to know how to use it correctly and accurately. Technical analysis is based on data which is derived from historical prices. The forex trader needs to interpret this data correctly. Here are six simple tips to help you manage technical analysis efficiently.

Always make sure that the data you are using is valid for what you are using it for. Forex charts are there to help you get a trading edge. Use the charts wisely and don’t fall into the trap of trying to day trade. Short term trends are random and contain noise and it is extremely difficult to make a profit as a day trader.

Look for the support and resistance levels. Use weekly and daily charts to check where the levels are and that they coincide on both charts. A level that has been tested at least three times in a couple of different time frames is probably valid.

If you want to spot and follow trends use time frames where the trend is obvious. Use the weekly charts to see the major trends. Trends tend to follow economic cycles which can have a duration of many years. These trends can be observed on weekly charts. Once you have spotted the trend it is then easy to spot where your entry and exit points should be.

Most major trends in forex trading tend to breakout from new market highs not from market lows. For some traders it goes against the grain to buy on a new high as they feel they have missed out on some heavy profit. However, breakout trends quickly move higher so wait for them and then get in there.

Use Relative Strength Index and stochastic as momentum indicators to predict when a currency will have price momentum and see that the support and resistance levels will not hold. Trading with momentum will get you better more profitable trades. If you trade without momentum you will lose your capital for sure.

Never ever trade because you feel you should be doing something. Keep it simple. If you don’t have clear forex signals don’t do anything. Have patience and wait for the right opportunities. Discipline is paramount to good decision making. When you do trade make sure your stop loss and limit loss are placed correctly. Don’t be greedy.

Following these six simple steps will give you a trading edge and enable you to make some reasonable profits.