As a forex trader, you may have thought of various ways in which you can enter and exit a trade at the right time to gain profit, right? One of such ways is forex technical analysis. Forex technical analysis is viral among the market players and can be done using charts and trade indicators. Though you are new to this field, this article will clear all your doubts about forex technical analysis and how it can help you predict the market trends.
Forex Technical Analysis for Beginners
Technical analysis helps analyze market price movements through historical charts and indicators so traders can get a hold of future market trends. It uses past trends to predict future trends and market performance before entering a trade. Various candlestick patterns or charts help form indicators. A forex trader uses mostly price and volume data in technical analysis.
The difference between the fundamental and technical analysis lies in the fact that while fundamental analysis considers economic changes and related aspects as the primary contributor, the technical analysis considers past trends. A trader needs to be aware of fundamental and technical analysis basics so that he/she can take advantage by combining them.
Benefits of Using Technical Analysis
Technical analysis is an excellent tool for risk management to prevent downside risk. By understanding the principles and various forex technical analysis concepts, traders can develop their own suitable strategy to trade different currencies. Unlike fundamental analysis, which helps derive the market’s intrinsic value, technical analysis helps find trends and patterns caused by the fundamentals changes.
There are three main benefits of implementing technical analysis in forex trading.
- It can be used as an indicator to enter and exit the market.
- It can be used at any market time frame.
- It helps in identifying the trends of the market.
The best forex technical analysis tools
The best forex technical analysis tools are:
- Previous support and resistance price levels (for example last 20 day high or low)
- Trend lines
- Relative Strenght Index RSI or MACD indicator
- Fibonacci levels
Forex technical analysis Tool – Charts
Historical charts are very useful in forex technical analysis. A chart consists of two things, the past and the present price of the market, which is the starting point to decide how profitable trade can be. The market price is the most significant representation of the market and thus holds the most importance.
Technical charts can help derive the overall market trend from deciding whether the market would soar or slump over any time frame, including hourly, daily, weekly, or even monthly frames. Prices are monitored in various candlestick patterns (for example, cup and handle pattern) or charts, known as price ranges. The commonly used charts in current times are bar charts, candlestick charts, and line charts.
A technical chart has four main points – the opening price, closing price, high point, and the low point. The relationship between the prices and the pattern can give signs to traders for entering and exiting trades. By understanding forex technical analysis basics, beginners can implement and combine the charts and indicators to forecast the future.
What are Forex Technical Analysis Indicators?
Forex technical analysis indicators are useful when a trader is looking to get an opportunity to trade. Most technical analysis indicators are based on volume and price, just like the charts. Though indicator aids in finding the support and resistance levels and how long a trader should hold the trade. A trader can get the current market perspective by utilizing multiple time frame analyses for price or volume-based ranges and changes.
These are some of the most used forex technical analysis indicators,
- Relative Strength Index (RSI)
- Moving Averages
- Moving average convergence divergence (MACD)
- Bollinger Bands
While MACD and moving averages are key for finding market trends, RSI identifies the entry and exit points.
The most important step is to read a good technical analysis book:
Technical Analysis of the Financial Markets, by John J. Murphy
This book is written in straightforward language; you should read it along with the first book to fully understand its content. This is the best book written about forex and stock trading, in my opinion. This is a University book.
Let start the basic things in technical analysis:
1) Oscillators technical indicators
2) RSI Oscillator
In this video, you can learn everything about RSI and how to use it in analysis:
3) Trend lines as an important tool in trading for each beginner trader is presented below:
4) When you learn trend lines, the next thing is to learn are Fibonacci levels, which are presented in the video below:
5) Next thing that novice traders need to learn are candlestick patterns that are presented below in the video:
These are major things in technical analysis to learn.
As a beginner in the forex market, you can also keep yourself updated with the latest trends, news, and events happening across the globe. It would give you a good edge over your trades as the forex market is susceptible to global events.
As a novice trader, you are advised to trade on a practice account and can try different technical analysis patterns and tools on those dummy systems to learn new things. By doing so, you would make mistakes but won’t lose your actual money. You can find such demo accounts from brokers worldwide as it has become a trend in current times.
You should also not fall into any “Get your profit doubled in a month” kind of scams (read our article about forex scams) as there is nothing in this world that gives you easy money without skills and hard work involved. In the end, it’s about how much you are passionate about trading, how much knowledge you have, and how much you are willing to learn through your mistakes.