What is Technical Analysis?
Technical analysis is the science and art of forecasting future price movement based on historical prices combined with Forex indicators. This study often interprets the data by studying a chart and looks for chart patterns and signals for buying and selling.
The history and origin of this method dates back several hundred years to Japanese and Arabian markets, it involves using mathematical manipulation of price data to optimize buy and sell points. The use of this type of analysis in modern computerized trading programs has become increasingly popular.
The information which the is studied and assessed is price movement so as to plan an entry or exit into a trade. The goal is to determine how the Forex market is trending.
What Does It Really Measure?
This analysis studies the supply and demand of a currency pair in an attempt to determine in what direction the price will continue to move in.
While technical analysis deals with price and indicators it is just a measure of investor sentiment.
What to Look For
Find the Trend
The motto of technical analysis is: "the trend is your friend." Finding the prevailing Forex trend will help you become aware of the overall direction and offer you better trading opportunities-especially when shorter-term movements give conflicting signals.
Daily charts are more ideally suited for identifying long-term trends. Once you have found the overall direction then you generally open buy or sell orders in that direction.
Trend or Range
No matter what price is doing, it usually falls into one of those two categories. If the it is moving in a pattern or in one direction, you can use trend lines to analyze where the it should go. If the market seems to be bouncing back and forth in a range, you can use support and resistance lines to make note of where the to open buy or sell orders.
One of the greatest goals of technical studies and methods in the FX is to determine whether a given pair will trend in a certain direction, or if it will move sideways and remain range-bound. The most common method to determine these is to draw trend lines which are used by investors to determine whether or not the current direction will continue. Many investors avoid trading in a range-bound market and only buy or sell currencies when there is a trend since this makes trading more predictable.
For technical analysts the most important tool is the chart. The purpose of a chart is to provide a visual representation of exchange rates (plotted on the y-axis) against time (plotted on the x-axis) for a given currency pair, this chart is used as a basis for making predictions of the future price direction.
The direction of these lines determines the market direction. A line drawn moving upward represents a bullish market and a line drawn moving downward represents a bearish market.
Support & Resistance
Support and resistance levels are points on a chart that tend to act as boundaries. A support level is usually the trough or low point on a chart whereas a resistance level is the high or the peak point on a chart. These points are used as buy/sell points.
Moving averages are used to show the average price of a currency pair over a given period of time. They are called moving because they reflect the latest average in the movement of the prices.
To be a successful investor you need to come up with a strategy. There is not one set Forex strategy that is good for all traders. But Rather, each investor needs to develop his own strategy.
Technical analysis is the most widely used strategy in the market and is used to decide the entry and exit points.
Market movements have identifiable repeating patterns that have been studied over many years providing a thorough understanding of these trends and how they can be used to form the basis of a good trading strategy.
There are many analytical tools available provided to facilitate this study
The beginner currency trader is advised to study each tool separately for getting a working knowledge of the concepts and application for each study. Once you understand one, keep on using it while studying others. Each tool tends to combine well when used with others.
Support and resistance levels are also used in many Forex strategies. Support is defined as the level that is repeatedly seen as the bottom (floor) - when the price reaches this level it tends to bounce. Resistance level is the ceiling, the upper boundary (ceiling) that a currency pair rarely trades above.
Support and resistance levels are valid for a period of time, until they are broken, When the market breaks through these levels, the price is expected to continue in that direction. For example, if market rises above the previous resistance level, it is seen as a bullish signal and the bullish movement should continue upwards.
Longer time frames establish more stronger support and resistance levels. Investors can use these levels to determine when to enter or exit an open position.
Moving averages is another common indicator used as to create Forex strategies. Moving averages try to smooth out short term market fluctuations giving a clearer picture of the currency movements and trends. Traders can plot SMA to determine currency movement tendency to move up or down.
If price crosses above the simple moving average then it will keep on moving up.
If it crosses below the SMA then it will keep moving down
These are examples of strategies that can be used individually or combined.
Traders use two or more studies and to determine when to open an order when both indicators support the same direction. If several indicators show that the market is moving towards a particular direction then one can trade with more reassurance than when he is only relying on a single indicator.
Fundamental analysis should also be used together to reinforce technical findings, or vice versa. One should ideally take into account two or more indicators when developing a strategy.
Every currency trading strategy should provide clear guidelines about when to enter and exit a buy or sell position, how much loss can be accepted if the market moves in the other direction and how much profit is expected. Following these simple guidelines can help you become successful.