Technical Analysis in the Forex Markets

[RichardCox 10]

Technical analysis is the statistical study of historical price behavior, which is meant to give traders an idea of where prices will move in the future based on the way an asset’s value has traded in the past. Many new investors and people outside the trading community are skeptical of the validity of this type of analysis, as it requires no fundamental understanding of the underlying asset.

 

Even within the investment community, there are opposing views with respect to technical analysis. Some believe that the methods involved are reflective of true science and mathematics and there are those who believe that this form of analysis is nothing more than a self fulfilling prophecy, which has predictive market value only because there are so many traders using it. Either way, there is little doubt that many investors have successfully implemented trading methods using technical chart analysis and these tools can be used by any trader willing to research the different types of strategies that are available.

 

In the forex markets, technical analysis has developed greatly and offer much more complicated assessments of price behavior than what has been seen in the past. Computer algorithms have helped to improve the efficacy of technical analysis in the forex markets but a complicated understanding of mathematics is not required to implement some of the basic ideas in chart analysis and realize consistent monetary gains over the long term.

 

Next, we will look at some of the basic ideas and methods used by technical analysts when making trading decisions and defining parameters for trade entries, exits, stop loss levels and profit targets. First, some commonly used terms should be looked at and the initial terms we will define are “support” and “resistance.” Support is an area where prices have literally been “supported” by active buyers and prices have moved higher. Traders will often view these areas as a good entry for buy positions as history is essentially expected to repeat itself and move higher again in the future.

 

Conversely, “resistance” is an area that is seen limiting rallies. Prices are expected to move lower in these regions because in the past, these resistance levels are areas where sellers have entered the market and sent prices lower. The same logic applies here, as history is expected to repeat itself and because of this, “resistance” levels are generally thought of as suitable for entries in sell positions.

 

The next term we will define here is “trend” as many traders base the majority of their positions based on the trend activity that is currently showing on their charts. An “uptrend” is generally defined as a series of higher lows, followed by a series of higher highs. A “downtrend” is the reverse, with a series of lower highs preceding a series of lower lows. Without these characteristics, price activity is usually described as “range bound” as there is no clear direction visible on the charts. Many traders look only to trade in the direction of the dominant trend as this is where the majority of momentum is seen and reversals in price direction are unlikely in terms of probability.

 

Last, we will look at the “moving average” which is one of the most commonly used technical indicators in the forex market. As could be expected, a “moving average” is simply the average change in price. This can be measured in any time interval, with some of the most common intervals being taken over 10, 20, 50, 100 or 200 days. These averages are described as “moving” because they are constantly changing as time moves forward. These averages are used in many different ways to forecast future price activity and here we will outline a few of these methods.

 

First, traders often look at the direction of the moving average on the chart itself. When the moving average line is pointed upward, it is a bullish signal. When the moving average line is pointed downward, it is a bearish signal. Another method is to look at where prices are in relation to the moving average line. Prices above the line show a bull signal, while prices below the line show a bear signal. Additionally, prices breaking above or below the line can also give traders an indication of where prices are headed next.

 

This article discusses some of the basic underlying ideas that are present in the forex market. Technical analysis plays a major role for many traders and can help to define trading parameters by giving specific exit and entry levels. Most of the forex community does acknowledge that technical analysis has predictive value and because of this a firm understanding of the various methods and strategies involved can help an investor to round out a well balanced trading plan.

[Kiwi 16]

So you smell like a vendor but you claim you are not one.

 

Perhaps you should read the sites rules before the stench makes people sick.

 

 

:helloooo:

[henryduncan12 10]

I am completely agree with the following sentences "Technical analysis plays a major role for many traders and can help to define trading parameters by giving specific exit and entry levels." Even, I prefer to both fundamental and Technical analysis for forex trading.

[RichardCox 10]

  Kiwi said:

So you smell like a vendor but you claim you are not one.

 

Perhaps you should read the sites rules before the stench makes people sick.

 

 

:helloooo:

 

 

What are you talking about?

[vs777 10]

today's most of the traders is taking services through technical analysis and earning a lot. i thought if your technical analysis is sound then there is no need to do fundamental analysis

:helloooo: