Investing With Forex Technical Analysis

Most, if not all traders in the foreign exchange market would agree that trading in this market is not simple. Millions of traders lose their hard earned money every day in this market and are forced to quit. This is caused by simple mistakes in judgment and sometimes because these traders lack the information and the basic skills required in trading. The secret in trading successfully is to have a solid strategy which enables you to control your own fate and not rely on luck. And in order to create your own strategy, you would have to learn to analyze the forex market.

There are actually two ways to analyze the forex market. The first is called fundamental analysis which deals with the different factors that can affect the price of a currency like political stability, economy and overall performance of the government. The other one is called technical analysis.

The forex technical analysis is a skill to predict the coming changes in the market. The trader would use different charts in order to see and analyze how the prices of each currency could change based on the past performance. This works in line with the saying that history would eventually repeat itself in the future. All information is based on statistical data and not on subjective data.

This is one of the most useful and most common ways to analyze the forex market. Perfecting this procedure could lead to better profits and help the trader achieve his or her financial goals faster.

Currency Trading Success using Technical Analysis

Anyone can achieve currency-trading success – you can learn everything about trading currencies by simply investing the time necessary.

Fundamental Analysis

A currency trader who makes trades based upon fundamental analysis, will look at the supply and demand situation relevant to the particular currency studied, and try and predict the impact of such factors as:

The health of the economy
• Interest rates
• Balance of payments
• Employment
• Trade deficit
• Other factors

Technical Analysis

Technical analysis is the study of a currency, based strictly on using only the price history of the currency.

Technical analysis uses no information about the currencies supply and demand situation - it simply focuses on price action. The secret of currency trading success is using technical analysis to spot them.

Long Term or Short Term Trading

For long term currency-trading success, is it better to be a long-term trader, rather than a short-term trader.

While traders can, and do make money with short-term methods of trading, the fact is, currencies trend longer term and these are the trends that yield the biggest profits.

Choosing a Trading Method

While there are many ways to achieve currency-trading success, all methods have the following salient points in common:

1. Simplicity

Most of the best trading systems are simple. There is no correlation between how complicated a strategy is and how successful it will be.

2. Liquidate Losers Quickly and Run Big Profits:

The basis of any successful trading systems that deals in leveraged products is:

You need to be able to run the big profitable trends and exit losers quickly.

Understand your Method

This may sound obvious, but you need to understand your trading method, and the logic behind it, so you can execute it with confidence and discipline.

The Importance of Discipline

Currency trading success is rooted in a successful method applied with discipline. This means a trader has a method and follows it. This however is much harder in practice than many traders believe.

The more disciplined you are in trading, the more profits you will make longer term.

You should not underestimate the need for discipline, if you want long-term currency trading success.

Robust trading method + discipline = currency trading success

There are a number of variables involved in longer-term currency trading success and the above are the salient points to keep in mind when deciding how to trade currencies.

Choosing A Forex Strategy

Technical analysis and fundamental analysis are the two basic areas of strategy in the FOREX market which is the exact same as in the equity markets. However, technical analysis is by far the most common strategy that is used by individual FOREX traders. Here is a brief overview of both forms of analysis and how they directly apply to forex trading:

Fundamental Analysis

If you think it's hard enough to value one company, you should try valuing a whole country instead. Fundamental analysis in the forex market is often an extremely difficult one, and it's usually used only as a means to predict long-term trends. However it is important to mention that some traders do trade short term strictly on news releases. There are a lot of different fundamental indicators of the currency values released at many different times. Here are a few of them to get you started:

* Non-farm Payrolls * Purchasing Managers Index (PMI) * Consumer Price Index (CPI) * Retail Sales * Durable Goods

You need to know that these reports are not the only fundamental factors that you have to watch. There are also quite a variety of meetings where you can get some quotes and commentary that can affect markets just as much as any report. These meetings are often brought out to discuss any interest rates, inflation, and other issues that have the ability to affect currency values.

Even changes in how things are worded when addressing certain issues such as the Federal Reserve chairman's comments on interest rates; can cause a volatile market. Two important meetings that you have to watch out for are the Federal Open Market Committee and Humphrey Hawkins Hearings.

Just by reading the reports and examining the commentary, it can help FOREX fundamental analysts to get a better understanding of any and all long-term market trends and also to allow short-term traders to be able to profit from extraordinary happenings. If you do decide to follow a fundamental strategy, you will want to be sure to keep an economic calendar handy at all times so you know when these reports are released. Your forex">www.forexmachine.com">forex broker may also be able to provide you with real-time access to this kind of information.

Technical Analysis

Just like their counterparts in the equity markets, technical analysts of the FOREX trading market analyze price trends. The only real difference between technical analysis in FOREX and technical analysis in equities is the time frame that is involved in that FOREX markets are open 24 hours a day.

Because of this, some forms of technical analysis that factor in time have to be modified so that they can work with the 24 hour FOREX market. Some of the most common forms of technical analysis used in FOREX are:

* The Elliott Waves * Fibonacci studies * Parabolic SAR * Pivot points

A lot of technical analysts have a tendency to combine technical studies to make more accurate predictions on your behalf. (The most common method for them is combining the Fibonacci studies with Elliott Waves.) Others prefer to create trading systems in an effort to repeatedly locate similar buying and selling conditions.

Choosing Your Strategy Most successful traders will develop a strategy and perfect it over a specific period of time. Some people will focus on one particular study or calculation, while still some others use broad spectrum analysis as a means of determining their trades. Most experts would likely suggest that you try using a combination of both fundamental and technical analysis, with which you can make long-term projections and also determine entry and exit points. Of course, in the end, it is the individual trader who has to decide what works best for him.

The Advantages of Technical Analysis for Currency Trading

There are many different methods and tools utilized in technical analysis, but they all rely on the same principles - that price patterns and price trends exist in the market and that they can be identified and turned into profit opportunities.

Technical Analysis in currency trading is based on three core principles:

Markets Discount

The actual price is a reflection of everything known to the market that could possibly have an affect on price movement and includes supply and demand, political factors, and the market sentiment.

The pure technical analyst is only concerned with price movements, NOT the reasons behind the price movements.

Prices Move in Trends

Prices can move in three directions - they can move up, down or sideways.

Once a trend in any of these directions is in effect it usually, will persist and create a trend.

The market trend is simply defined as the direction of market prices, a concept that is essential to the success of technical analysis in currency trading.

Identifying trends in theory is simple; a price chart will usually indicate the prevailing trend as characterized by a series of waves with obvious peaks and troughs.

It is the direction of these peaks and troughs that constitutes the market trend, if they move up, the trend is bullish, if they move down the trend is bearish and of course if they move sideways then the market is in a period of consolidation.

History Tends to Repeat Itself

To a technical analyst in currency trading, the trader psychology that affects prices is extremely important, as human nature is repetitive and this shows up in repetitive price patterns.

This allows anyone using technical analysis in currency trading to predict where prices are likely to go next and traders can then act upon this information for profit.

The market price reflects everything

Technical analysis in currency trading is primarily concerned with price trends and everything that can possibly affect a currency is reflected in price action.

Technical Indicators

The logic of technical analysis for currency trading is universally accepted, and there are numerous ways to execute technical trading systems, with the huge amount of available indictors used either alone, or in combination.

We will look at the different technical indicators below and some that have proved highly effective in the technical analysis of currency trading. Any traders, who wish to profit from the currency markets, should consider these indicators.

Trend Indicators

A trend is a term used to describe the persistence of price movement in one direction over time. The easiest way to spot trends is via trend lines, drawn below price lows or above price highs.

While basic trend lines have gone out of fashion in recent years in favor of more complicated indicators, they are still one of the most effective ways to technically analyze currency movements.

Support/Resistance Indicators

Support and resistance describes the price levels where markets repeatedly rise or fall and then reverse. This phenomenon reflects basic supply and demand and when prices break above or below significant support or resistance, a big move can follow very quickly.

Again, the best method for spotting and acting on these breaks is the humble trend line.

We believe that trend lines should be the basis on which ANY technical analysis of currencies should be based on - and the indicators below are for confirmation:

Volatility Indicators

Volatility is a general term used to describe the magnitude, or size, of day-to-day price fluctuations independent of their direction. Generally, changes in volatility tend to lead changes in prices.

One great indicator to use is the Bollinger band

Any trader should look at Bollinger Bands, as they represent one of the most effective indicators for the technical analysis of currency markets.

Not only is it good for predicting trend movements, but also it is useful for timing entry and exit levels, as well as when to increase or decrease position size.

Cycle Indicators

A cycle is a term to indicate repeating patterns of market movement, specific to recurrent events, such as elections, year-end monetary repatriation etc.

Cycle indicators determine the timing of a particular market patterns. A good example would be Elliott Wave theory. Cycle indicators however in our view are of little or no use, in the technical analysis of currencies.

Momentum Indicators

Momentum is a general term used to describe the speed at which prices move over given time periods.

Momentum indicators determine the strength or weakness of a trend as it progresses over time. Momentum is generally highest at the start of a trend and lowest at market turning points.

Any divergence of directions in price and momentum is a warning of weakness; if price extremes occur with weak momentum, then an end of movement in the current direction could occur.

If however momentum is trending strongly and prices are flat, it signals a potential change in price direction. Examples of momentum indicators include Stochastics, MACD and RSI.

The most effective momentum indictor is the stochastic and using stochastic crossovers to time entry and exit levels, can be highly effective.

Sentiment Indicators

Many technical analysts in currency trading monitor surveys of investor sentiment such as net trader’s positions and bullish consensus.

These indicators attempt to gauge the general attitude of the investment community, to determine whether investors are bearish or bullish.

These indicators are only to be used when extremes of sentiment are reached, either bullish or bearish.

If used in this way, they are one of the most powerful warning signs of significant market turning points and can be used in technical analysis of currency markets to huge effect.

Putting it all Together

Traders make money from the technical analysis of currency markets in many different ways, however we believe that trend lines backed up by just a few additional indicators (to help time market entry exit and stop levels) can be very effective.

The ones we favor are: Bollinger bands, stochastics and market sentiment indicators, as filters for traditional trend lines.

The best way to succeed in technical analysis of currency trading is to use a simple robust system based on trendlines and just a few filter indicators such as the ones above and you will soon find yourself catching the big trends that yield the big profits.

Better Understand Forex Technical Analysis and Some Indicators

We could say, all wealthy traders use technical analysis but not all technical analysis traders are wealthy although.

Technical Analysis is the most precise way of trading the Forex market. It's also useful note that fundamentals play their part in indicating whether a price will move up or down. It gives you the edge over other traders.

Technical Analysis is so powerful because of a few reasons:

1. It represents numbers. All information and its impact on the market and traders is represented in a currency's price.
2. It helps to predict trends and the foreign exchange market is very 'trendy'.
3. Certain chart patterns are consistent, reliable and repeat themselves. Technical Analysis helps us to see them.

Here's one way of putting technical analsysis into perspective (wish I had a dollar each time I said 'technical analysis'). We all know that prices move in trends. Research has shown that those that trade 'with the trend' greatly improve their chances of making a profitable trade.

Trends help you become aware of the overall market direction and often rescue us from less then profitable entry points. I attended a 2 day course costing me over $2500 AUD and the biggest thing I learned from it was the need for discipline and emotional control. The content was so basic that within the next 3 or 4 articles, I would have covered all of it. So learning the 'tools of the trade' the technical indicators and their applications will help you to diagnose what the market is doing but even then you need to expect ups and down and trade with emotional control.

Stay with the trend, follow the price.

Find the price of the currency pair. If EUR/USD is 1.4224 and moves to 1.4180 then 1.4090 then the market is in a down trend. Concern yourself only with what the market IS doing not what it might do. Listen to the markets and the indicators will backup what they are telling you.

Moving Averages - tell you the price at a given point of time over a defined period of intervals. They are called moving because they give you the latest price while calculating the average based on the selected time measure.

They lag the market so to give you an indication of a change in trend, use a shorter average such as a 5 or 10 day moving average. By combining a shorter term and longer term M.A. you can detect a buy signal when the shorter term crosses the longer term moving average in the upward direction. Or a sell signal if it crosses in a downward direction. For example, you could use a 5 day versus a 20 day moving average or a 40 day versus a 200 day moving average. There are simple moving averages, linearly weighted which gives more importance to the recent prices or exponentially weighted. The latter is a favourite because it considers all prices in a time period but emphasizes the importance of the most recent price changes.

MACD - based on moving averages, a MACD plots the difference between a 26 exponential moving average and a 12 day exponential moving average, with a 9 day used as a trigger line. If a MACD turns positive when the market is still plummeting it could be a strong buy signal. The converse also works.

Bollinger Bands - prices tend to stay between the upper and lower bands. They widen and become more narrow depending on the volatility of the market at the time. A sell signal would be when the moving average is above the Bollinger bands and vice versa for a buy signal. Some traders use it in conjunction with RSI, MACD, CCI and Rate of Change.

Fibonacci Retracement - describe cycles found throughout nature and when applied to technical analysis can find shifts in the market trends. After a climb prices often retrace a large portion sometimes all of the original move. Support and resitance levels often occur near the Fibonacci retracement levels.

RSI Relative Strength Index measures the market activity to see whether it's overbought or oversold. This is a leading indicator so helps to indicate what the market is going to do (awesome!). Ahigher RSI number indicates overbought (so expect a bearish shift) and a lower number indicates oversold.

Successful traders will generally use 3 or 4 signals to provide a more conculsive signal before entering a trade.

Always remember, "If in doubt, stay out!" . Technical analysis doesn't factor in political news, a country's economic profile or fundamental supply and demand.

Technical Analysis helps us figure out how much money to risk on a trade. How and when to enter the market and how to exit the trade for profit or to minimize loss.

The Technicals And The Fundamentals

The Fundamental analysis

Fundamental analysis basically means studies of surrounding events that affect the market trends. For example FOREX market, fundamental traders will consider events and situations that will affect the value of a country currency value. These factors include the local bank policies, political states, country growth rates, natural disasters, market speculator's mood, terrorism attacks, and wars.

The fundamental is commonly known as no-number analysis where traders are investing solely on their personal reviews on one-country economy trends. Fundamental traders normally review a country economy's situation base on these fundamental elements and respond accordingly. Generally speaking, natural disasters and unstable political state poison a country's economy; thus currency value drops. Vise versa, if a country is basically free of natural disaster, and it's showing a steady economy growth rate, currency of the country will be strong.

In FOREX market, it would be difficult to trade solely based on fundamental analysis as it only provides an overall view on the market condition. Numeric data and graphs are much needed to give a more accurate estimation on the market movement. This will lead our discussions to the second type of analysis method - the Technical.

The Technical analysis

Quoted from one of the FOREX well-established website, www.Forex.com, forex technical analysis is "a method of forecasting price movements by looking at purely market-generated data." (Well, at most of the time, this market-generated data means the price of the currency) The analysis is done base on the concept of 'history repeats itself' and thru comparing present situation with the past, technical analysis is quite effective in drafting out the entry/exit price indicator.

Price charts are often the only item a pure technical trader concerns in. Through patterns of charts, various indicators will be generated and used for planning the investment tactic. A few well-known indicators for FOREX traders are strength indicator, momentum indicator, and volatility indicator. Technicians strongly believe currency price (or any other market numeric data) moves in trend and it will always follow a pattern similar to the past.

Although the methodology looks secure with proven tracks in the olden times, it would be relative unsafe to trade FOREX purely base on technical analysis. The future does not equal with the past. There are a lot of unexpected variables that technical analysis does not reflect on: change of country leaders, change of government, natural disasters, change of bank policies, investor's mood, war-- all these factors affect currency value directly and might not have happened before in the past. A combined of two approaches (fundamental and technical) is always encourage to get the optimum plots on your investment plan.

FOREX can be extraordinarily beneficial to a variety of people. It gives huge leverage rates, it gives incompatible liquidity to your money, it gives convenience to trade on the Internet, and it can definitely give you a lot of money if you trade smartly. Like any other trading business, if you are new to it, best advice you can get is to learn and practice more before you test your 'wings'. Seminars, eBooks, Internet, papers, video courses - all these are handy to get yourself ready. You can also try out your skill on the demo account provided free. After all, FOREX trades 24hours a day and there is always money to make in the market, so why not be patience until you are fully ready for it?

What is Technical Analysis?

When trading in the foreign exchange market, part of the process involves forecasting future price movements in order to determine the best time to buy and sell. One method, called forex technical analysis, takes a look at the market's past price movements to determine where the numbers will go in the future. Most investors who employ this type of analysis look mostly at price data, but sometimes information such as volume and open interest in futures contracts are also taken into consideration. If you're just starting out in forex, the rule of thumb is to keep your methods simple - follow the basics, which have been proven over time, and only when you have gained some experience introduce more difficult techniques into your plans.

Technical analysis is almost always used on some level because price charts provide a good visual representation of the price history of a particular currency. At the very least, they can help you determine ideal entry and exit points for a trade based on the historical data. You can decide whether or not you're buying at a fair price, selling at the top of a cycle, or entering into a shaky market.

It may seem as if adherents of technical analysis disregard market fundamentals in favor of mounds of charts and data, but they argue that these fundamentals are ingrained in the actual numbers. Something unpredictable may cause the numbers to unexpectedly spike, but you can still analyze the data, and identify patterns that will aid you in forecasting future prices.

Essentially, technical analysis can be summed up in three points. First of all, as mentioned above, technical traders assume that market fundamentals are tied to the price data. This is why factors such as the fear, hope, and mood of market participants are not contemplated directly.

Secondly, the idea that history repeats itself is core to this system of analysis. It is possible to look for patterns in price movement (called signals) because the market is predictable. When you look at past market signals you should be able to predict future signals.

Lastly, technicians rely on trends. From this analytical perspective, the market is not irregular or unpredictable. Rather, you can determine, to a high degree of accuracy, what direction a price will take: up, down, or sideways. In addition, trends are expected to continue for a period of time, making it possible to formulate predictions.

But it's important to understand that technical analysts use more than price charts to determine good entry and exit points. Price charts are used in conjunction with volume charts, and other mathematical representations of market signals. Called studies, these additional pieces of information add another layer of data to the analysis. They let the trader look at the strength and sustainability of trends, in addition to the bare statistics.

Technical analysis is, of course, quite complicated - but for the new trader just starting out in forex, following the basics is a good place to begin. After you gain some experience and learn more about the foreign exchange market, you can delve into more complex research strategies.

Technical Analysis

Unless you are new to trading you probably know already that technical analysis is a method of forecasting future price movement of commodities, securities, etc (in this case currencies) based on chart analysis, pattern formations, technical indicators, etc. Forex can be traded technically and in my opinion it is quiet predictable.

No trading strategy will work 100% of the time. That's why you need proper money management techniques. Anyway, technical analysis is important to determine where the price of the currencies is going, also when to enter and exit positions.

There are different technical analysis techniques that you can implement to your trading strategies. I show here how to use technical indicators which is a very common technique among most technical traders.

There are many technical indicators. Some of them are more common and useful than others. In my opinion you won't need dozens of them to know when to enter or exit a trade. It is about quality, not quantity. I think though that it is better to relay on a few indicators than in only one.

If you trade based on the signals of only one indicator, you may miss some important information about the market that other technical indicators would reveal to you. By using a few technical indicators instead of only one, you can make more educated and accurate choices.

So, I will show you here some very common technical indicators and how they are used to forecast market prices. Remember that technical indicators are the basis of technical analysis systems.

You can implement three different aspects to your trading systems. One is technical analysis as I explain here. The other is fundamental analysis. The third one is money management as I explain in my other articles on this series.

Common technical indicators and their definitions:

1. Average Directional Index - ADX
   An indicator used in technical analysis to determine the strength of a prevailing trend.
2. Exponential Moving Average - EMA
   A type of moving average that is similar to a simple moving average, except that more weight is given to the latest data.
3. Moving Average Convergence Divergence - MACD
   A trend-following momentum indicator that shows the relationship between two moving averages of prices.
4. Bollinger Band
   A band plotted two standard deviations away from a simple moving average.
5. Fibonacci - There are many Fibonacci indicators like the following:
   • Fibonacci Time Zones
   • Fibonacci Fan
   • Fibonacci Channel
   • Fibonacci Arc
   • Fibonacci Clusters
   • Fibonacci Numbers/Lines
   • Fibonacci Retracement
   • Fibonacci Extensions
6. Relative Strength Index - RSI
   A technical momentum indicator that compares the magnitude of recent gains to recent losses in an attempt to determine overbought and oversold conditions of an asset.
7. Stochastic Oscillator
   A technical momentum indicator that compares a security's closing price to its price range over a given time period.
8. Williams %R In technical analysis, this is a momentum indicator measuring overbought and oversold levels, similar to a stochastic oscillator.