Forex Technical Analysis is Based on 3 Factors Common in the Forex Market:
1. Price Moves in Trends
Forex price movements follow trends. This means that after a forex trend has been established, the future market movement is more likely to be in the same direction as the Forex trend than to be against it. Most forex trading strategies are based on this concept - forex trend trading.
2. Price Discounts Everything
Forex technical analysis only considers forex price movement and assumes that, at any given time, a currency price reflects everything that has or could affect the currency including a country's economy and even the fundamental factors. This only leaves the study of price, which is a product of the supply and demand for a particular currency in the market.
3. History Tends to Repeat Itself
History repeats itself mainly in terms of price movement. The repetitive nature of forex market movements is attributed to investor psychology; in other words, Foreign exchange participants tend to provide a consistent reaction to the market most of the time. Forex technical analysis uses forex chart patterns to analyze these forex price movements. Although these forex charts represent historical data they are still relevant because they illustrate chart patterns that often repeat themselves.
Understanding this forex technical analysis of the Forex market can be a valuable tool in determining the trend of any market and assisting with entry and exit levels for your trades.
The goal of these forex technical analysis methods is to help traders determine when the market is trending, and when it is not. If the forex currency pair is moving in one particular direction, then we want to be on board. If it is not, all you are going to do is lose money as you will get whipsawed around and this is not what we want as investors and traders.
Unfortunately, many people fight the trend and buying/selling in the opposite direction of a this direction, trying to pick a top or a bottom, only to see the forex market move further in the direction of the trend.
Another common mistake traders often make is adding on to a losing trade position, averaging a loss. This is not a good forex trading strategy especially in a strongly trending forex market. It is something that experienced investors never do. The trend is your friend, never go against it.
This forex technical analysis studies alert investors of high probability forex trading setups and there are no certainties in financial market. Profits come from using proven forex trading strategies and methods to find a trending forex currency pair and taking trades in the same direction of the forex market trend.
With so many investors and traders using similar forex trading tools, forex technical analysis can become a self fulfilling prophecy. If many investors and traders use the same level as a buying point, the price goes up as everyone will make similar moves. However, the question is always how long these moves will last?
Understanding this forex technical analysis methods will give the forex charts some meaning when you look at them and help you understand why certain forex price movements occurred.
Forex Charts are used with Forex Technical Indicators to look for chart patterns that have occurred in the past under certain conditions. When these conditions are noted again, you can use the past chart patterns studies to make a buy or sell decision with increased probabilities of success because it has happened before.
Some of the most common Forex technical indicators include:
- Moving Averages Indicator
- Relative Strength Index RSI Indicator
- Stochastic Oscillator Indicator
- Moving Average Convergence Divergence MACD Indicator
- Fibonacci Retracement Indicator
- Bollinger Bands Indicator
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Most forex technical indicators are shown separately from the forex trading chart usually below it. This is because these indicators often use a different scale than that of the price chart.
Some of the forex technical indicators are shown on the price chart itself, such as Moving Averages and Bollinger bands - these forex indicators are referred to as price overlays.
Explanation of these forex trading indicators is found under the topic: List of All Forex Indicators - Forex Technical Analysis PDF - Learn Forex Trading Technical Analysis PDF - Forex Technical Analysis Examples
- Forex Technical Analysis Relies on Defining Probabilities
- Forex Technical Analysis Uses History of Price Patterns
- Forex Technical Analysis Uses Several Analytical Tools (Forex Technical Indicators)
- Forex Technical Analysis Uses Chart Patterns
- Forex Technical Analysis Uses Many Forex Chart Time frames
How to Trade With Technical Analysis - Forex Technical Analysis PDF - Learn Forex Trading Technical Analysis PDF - Forex Technical Analysis Examples
Most traders prefer forex technical analysis over fundamental analysis, because Fundamental analysis is a more difficult forex strategy to implement as it is required for one to have a lot of knowledge and experience required to successfully analyze the enormous and fundamental data and economic reports. In addition forex fundamental analysis is not also very accurate since it involves looking at many factors all at once which might be interpreted differently by other investors and traders.
However, forex trading fundamental analysis that involves news trading is unpredictable and it's not so easy to interpret economic news reports.
Although forex technical analysis is also not so easy to master, you may find it not much simpler to master than fundamental analysis, learning the forex technical analysis methods used will also take you less time and will be easier to learn due to its nature which involves abiding by the forex technical analysis rules.
To learn how to trade currencies successfully, it is important that you understand the 3 forex technical analysis strategies, outlined below:
1. Forex currency pair moves will always follow a forex trend which can be identified by looking at the chart patterns or the forex candlesticks charts. If any investor tells you that you can also profit from the counter-trends consistently it will not be possible because the trend is the only proven method of making money in Forex.
2. The market forces will drive the currency up or down depending on supply and demand. Factors such as economic news releases might play a role in determining the demand supply of a currency. Forex technical analysis seeks to measure the demand supply of any forex currency using various forex technical analysis tools and forex indicators. The demand supply is reflected in the price action. Therefore by simply looking at the price movements themselves and you can predict what direction the price is likely to move towards using one or two forex technical indicators - forex trading technical analysis indicators like the moving average or support and resistance levels.
3. The market not only shows the history of the past forex prices, but will also follow the trend that was in place, until its direction reverses. Some very important forex indicators used to determine these forex market movements are Moving Averages, MACD, stochastic Oscillator and Bollinger Bands indicators.
When a forex currency starts to consolidate, which means there is no forex trend, you should use a different approach to analyze the forex market. You should use support and resistance levels and breakout forex trading strategies to analyze the ranging forex market - sideways moving forex market.
When the forex market retraces, you should use chart patterns and forex technical indicators to analyze whether the current forex trend will continue or reverse.