The most popular tool used by FX traders for making decisions is technical analysis. This differs from fundamental analysis, where one studies the economic data and news events; instead, technical analysis emphasizes past market data studies, specifically the price movement and volume to forecast future trends of price movement. For the traders, it’s a tool to help find the trend and decide entry and exit points with appropriate risk management.
At its most basic, technical analysis is an idea that patterns and trends through historical price movements give away which are repetitive over time. Through charts, such patterns provide an insight into a currency pair direction in which they may move. For instance, if the currency pair was moving upwards during the last two or three weeks, then technical analysis would be a consideration to keep the price movement upward in the next period.
The main steps in performing technical analysis to fx trading begins with understanding charts and using the charts. There are different price charts. There are various charts, but the most commonly used ones are line charts, bar charts, and candlestick charts. Among these, candlestick charts are more commonly used among FX traders as it conveys much information in one glance. Every candlestick symbolizes a time period; open, close, high, and low prices in that period.
The third thing is finding the trends and patterns in the charts. The three major types of trends in FX trading are upward or bullish, downward or bearish, and sideways or neutral. Identifying the trend is very important as it helps the trader decide on buying or selling. In general, one rule of thumb is to trade in the direction of the trend; that is, buy in an uptrend and sell in a downtrend. Another very important aspect is recognizing trend reversals, wherein it could lead to more profitable trades if a trend change is caught early.
Various indicators and tools are key in technical analysis although generally used by the trader for decision-making. Some of the most widely used indicators include moving averages, Relative Strength Index, and Bollinger Bands. Moving averages will smooth out the data price, and a trend will easily be seen. RSI measures the strength of a price movement and assists in determining if a currency pair is overbought or oversold. Bollinger Bands indicate the volatility of the market and can be used to predict when prices are going to break out of their range.
Another critical element of the technical analysis will be support and resistance levels. Support is the point where a given currency pair’s price tends to attract buying while resistance is usually the point or level where some selling pressure typically appears. To help traders enter and place stop orders as well as take-profit on trades, levels of support or resistance are to be identified by them.
While technical analysis can be very revealing, no system is fool proof. It is therefore necessary to combine technical analysis with sound risk management practices. Using stop-loss orders, controlling position sizes, and diversifying your trades are all critical components of a successful fx trading strategy.
FX trading requires a great amount of practice for technical analysis, but it can be quite useful in making a more informed decision based on the market. It enables the trader to gain better opportunities for succeeding in Forex markets in terms of observing the patterns in price movements, the usage of indicators, and knowing the key levels.
