Forex technical analysis - an introduction to its advantages

Knowing the fundamentals or the news does not guarantee currency trading success – You need to be able to measure investor psychology and how they perceive the fundamentals, to get the big picture and that’s exactly what forex technical analysis does.

Many traders don’t fully understand the advantages of technical analysis – and refuse to believe that it works but it does - so let’s look at how and why it works.

Forex Technical Analysis Defined?

Is defined as the study of price action through the use of forex charts - for the purpose of identifying price trends - Forex technical analysis uses the following equation:

Market Perception (trader psychology) + Fundamentals = Price Movement

Forex technical analysis assumes that all known fundamentals are instantly reflected in price action and with the news available to all in a split second this is true. Forex technical analysis therefore concentrates on the price action.

So technical analysis does study the fundamentals and more importantly how they are perceived by the participants.

Many forex traders claim that technical analysis can’t work - because you need to know and study the fundamentals in depth - this is simply not true and won’t help you.

Why?

Because we all have the same facts to look at and we all draw different conclusions from what we see – its is humans that determine the price of anything and this is the key to why technical analysis is so powerful it gives you the whole picture.

The fundamentals and how humans perceive them.

Some of the largest price moves in history have occurred with little or no change in the fundamentals and any market is most bullish at a market top and most bearish at a market bottom – this is investor psychology at work.

If you use technical analysis you are trading the reality and you don’t have to guess or predict it’s clear for you to see from your forex charts.

You don’t need to let your emotions get involved or listen to the opinions of experts you simply trade on what you see.

Of course because human nature is constant you can trade repetitive chart patterns that reflect human psychology and if you look at the price history of any currency you will see them.

Technical analysis is easy to learn and takes very little time to apply but if you use forex charts correctly you can make huge long term gains.

It’s an art not a science and you need to use the right tools and that will be the subject of the second article in this series.

Is technical analysis important in forex trading?

Is it important to learn technical analysis (TA) such as chart patterns and candlestick formations in Forex trading? Since the Forex markets is huge where no single player is able to manipulate the price action, therefore, technical analysis seems to apply better in Forex trading rather than stocks. Thus, it is important to know how to read charts.

There are many technical indicators and sometimes we ask ourselves do we really need to know every indicator to become 'Forex master of Technical Analysis'? My personal experience is that a trader does not need to know everything (it is not possible to remember every indicator anyway). Rather, a Forex trader should at least understand the basics such as candlestick formation, trend lines and Fibonacci support and resistance levels. I strongly believe the words in bold are important as they prove to be consistently reliable through the course of Forex trading. For other indicators, which indicator to use depends on the market condition, an oscillator such as RSI works well during a ranging market while a trending market should use a moving average or Parabolic.

If you are new to Forex trading, you might want to check out these three recommended titles that provide comprehensive coverage on technical analysis and you can also learn what economic indicators are important for a country economy:

1. Japanese Candlestick Charting Techniques, Second Edition by Steven Nison
2. Technical Analysis of the Financial Markets: A Comprehensive Guide to Trading Methods and Applications by John J. Murphy
3. The Secrets of Economic Indicators: Hidden Clues to Future Economic Trends and Investment Opportunities (2nd Edition) by Bernard Baumohl

Technical analysis?

Technical analysis is a non-traditional way of picking stocks to buy and sell. It is based off of human emotions and patterns in those emotions.

A technical trader realizes that stocks do not move up and down because a company is making or losing money. A stock goes up and down based off of supply and demand. If there are more buyers than sellers a stock will normally go up until it reaches a point where sellers start to come in. This can be flipped around. If a stock has more sellers than buyers it can push the stock down until the stock gets to a low enough point and buyers start to come back in.

Technical analysis tries to play off of this. They notice human emotions create patterns and trends that occur over and over again. So playing off of these trends and patterns rather than looking at a company's financials can be a smart way to approach the market. This simplified approach to the market disregards all fundamental factors such as dividends, cash flow statements, P/E rations, and so on.

There are a variety of instruments a technical trader can use to determine if a stock is a good buy or a good sell. Oscillators, chart patterns, stock trend, and candlestick patterns are all used to determine if a company makes a good trade or not.

So does it work? Technical analysis has proven to be a great way to approach the stock market. Combing Technical analysis with risk management may be the best way to approach the stock market for a short term trader.

Technical Analysis is built for short term trading. If you have a time frame longer than a couple months it may not be for you. Instead fundamental analysis can be used for longer term time frames.

Why use tecnical analysis

There are a number of reasons why using technical analysis can be a great way to make money in the stock market.

1. Technical Analysis allows you to cut your losses short and let your winners ride. A good majority of trading is all about cutting your losses short. Technical Analysis allows you to enter trades where you stand to lose a little if you are wrong and make a lot if you are right.

2. Technical analysis is founded on price action. Supply and demand is the real force behind the stock market. If a stock has great Fundamentals, but no one wants to buy the stock it is not going to go up. Using price patterns is the most accurate way to determine how fear and greed are running the markets.

3. Technical Analysis allows you to make short term trades. Because it allows you to make short term trades it allows you to take advantage of compound interest. Someone who can consistently make 5% a month will far outpace someone who can consistently make 20% a year.

4. I can't compete using Fundamental Analysis. Fundamental Analysis may be a great way to make money in the stock market but it is hard for the average person to compete. This is especially true when you consider big corporations with billions to invest in spending big money to figure out the fundamentals. It is impossible for someone to know as much as they do so why compete with them.

5. Technical Analysis allows you to find the big corporations. If a stock is in an uptrend with high volume it is safe to say someone with big money is investing in that company. Someone who most likely knows more about the company then the average person feels confident to put their money there so why not take advantage of that and trade that stock.

Technical analysis - how can it help beginner forex traders get huge profits?

The logic of Technical Analysis can help you get the training edge to bring in steady profits.
Technical Analysis takes into account all the supply and demand fundamentals. This method works at the starting point and analyzes the statistics produced by the market, prices do not just indicate the supply and demand fundamentals, but it is also the mirror image of how people view them.

This is where Human Psychology sets in; it basically determines the price of anything.

So price equation should be: Supply and demand + Human Psychology = Price

Technical Analysis is also used for recurring price patterns.

This is the portion where the profits are expected to continue in the future. These are profits that are predictable, steady and can be counted on in the future with a high degree of assurance.

Given that human nature is constant and that it can be reflected in the recurring price pattern, forex traders still need to study the chart and the whole host of technical indicators. The reason behind this is for them to determine the chances of where prices will go next. So, in essence technical analysis indirectly studies both fundamentals and human psychology.

Technical Analysis also helps you spot trading opportunities. Using this method a forex trader can recognize the cause of the most short term price spike, which is by emotion and not by the supply and demand fundamentals. Technical analysis can also help you turn the chances into your favor if this art is used correctly.

Technical Analysis can also be use for currency markets as they exhibit long term trends either high or rends go on for months this can bring huge profits.

Forex trading - technical analysis can help you trade better

As a beginner there are two types of trading strategies you can adopt. The strategies are fundamental analysis and technical analysis. Technical analysis is a great tool to trade in the market and achieve success but I have always almost heard that people say that they had tough luck with charting tools and technical analysis software.

The truth is that you should know how to use the software effectively and then you can achieve success with the technical analysis. There are errors that people make which makes them think that technical analysis is not helping them.

The basic error traders make is that assuming that technical analysis will help them reach answers to what is the price is going to be. That is not going to happen, the technical analysis will always tell from the price trends and the historical trading patterns that yes at this level there will support and there may be levels where you can buy or sell. Never assume that there is going to be a price prediction. Use accurately the technical analysis and you will be making an informed decision about the prices. Also, make sure that you use breakout to your advantage and trade accordingly to make money.

As always the best strategy is to keep it simple when comes to using indicators. Stick to basic indicators and you will be on track. Use 5 or 6 or ten indicators and you will be confused as to what is happening to the charts at any given point in time.

Forex charting is simple tool to help you benefit but do not bend it to suit your decisions and never try to evaluate your past strategies from the forex charting. This is known as curve fitting and it will do more harm than good.

So make sure to use forex charting and technical analysis to your best advantage based on the rules above.

Forex trading - technical analysis importance

There are 2 main approaches or methods to forex trading; they are technical analysis and fundamental analysis. This article will discuss the relevance and importance of technical analysis.

Technical analysis essentially looks at the past performance and history of a given forex currency. It is reliant upon statistics and data to determine history, trends and patterns which indicate future market activity. Technical analysis essentially ignores the markets feeling or value towards a currency, and bases decisions solely on statistical data.

As the forex market is reasonably straightforward (minimal variables in comparison to the stock market) it lends itself quite well to technical analysis. The history of the value of currency pairs is a matter of statistical data and can be easily determined and understood. Supporters of technical analysis claim it is the only true way to understand where the market is heading, and predict the next crucial trend. Further to this there is the belief that without technical analysis it would be near impossible to understand or predict where the forex market is heading, and to act upon anything other than instinct.

Essentially the more data you have access to, the greater the probability of making an informed decision in the marketplace. With recent developments in forex trading software, the management of this statistical data has become extremely efficient.

To further understand the difference between technical analysis and fundamental analysis take this example of 2 people buying ice cream. The person favoring fundamental analysis would enter the ice cream store, and try 5 different flavors of ice cream to determine the intrinsic value of the ice cream. The person favoring technical analysis would sit outside the store monitoring who was purchasing which ice cream, and base his decision on that.

Conclusion

Obviously it will in the end come down to preference over which method of analysis you rely upon more heavily in your forex trading ventures. Technical analysis should be your first consideration to gain a broader understanding of market history and market predictions.

Technical analysis in forex

Technical analysis may be the most common and successful means in making trading decision and analyzing Forex and commodities markets. It is different with the fundamental analysis. In technical analysis, the trade applied only to the price action of the market. Here, the price action is ignoring the fundamental factors. Different with fundamental data that is often provide long-term forecast of exchange rate movements, technical analysis will gives shorter-term price movements. It also can set when to stop loss and targeted profits. This way is more useful for traders.

The deriving support and resistance levels are one of technical analysis usable. The market will tend to trade above its support levels and trade below its resistance. If a support or resistance level is broken, the market will expect to follow through in that direction. These levels are determined by analyzing the chart and assessing where the market has encountered unbroken support or resistance in the past.

Technical analysis is consisting primarily of a variety of technical studies. Each of those is can be assumed to generate buy and sell signals or to predict market direction. This technical analysis gives you simple way in analyzing the trading process, as well as its chart of trading. On GCI's integrated charting system, for example, showing red support line that can be drawn by clicking the trend then you can draw a line of the trade movements.