Technical analysis is used by many Forex traders to study and predict price movements. It is based on historical market data and uses different approaches. People who use technical analysis are called technicians, while those who rely on macroeconomic indicators are called fundamentalists. Technical analysts believe that trading history repeats itself and that you can recognize a trend pattern that has already happened in the past. As a result you will be able to predict future price movements.
Charts are the most common tools that are used by all technicians in order to identify patterns and trends. Charts allow traders to quickly identify common archetypal price patterns like triangles, head and shoulders, double top, double bottom and others. Charts are also used to show the moving averages and the lines of resistance and support. There are different types of charts with the most popular being the line chart, the candlestick chart and the bar chart.
LiteForex prepares a daily Forex Technical Analysis on major currency pairs. These analyses include the current trend, support and resistance levels and trading tips and can help you identify trading opportunities every day. There are several advantages of using technical analysis when trading Forex. Unlike fundamental analysis where you have to follow specific economic reports in order to keep up with market changes, here you can get a clear picture of the market with just one glance at an instrument’s chart. Oscillators, price movements and trading volumes are just some of the indicators that can immediately show you the current state of the market.
Another advantage of technical trading is that you can easily identify trends and their strength. By studying the moving averages you can quickly identify if the price is trading in a range, or if it’s trending up or down. Also, by applying the support and resistance lines you will get an idea of the point where the price is most likely to change its direction.
Technical analysis may seem simple but it is not flawless and there is no guarantee that all trades based on this method will be successful. Interpretations of technical data vary from one trader to another and each of them uses the technical indicators and tools according to their own understanding. One of the most difficult questions that a technician must answer is when exactly a price change will happen and how long the movement will last. The difference in opinion is a major factor that keeps the financial markets moving all the time.
Technical analysts often use Technical Indicators which are available on their MetaTrader 4 or MetaTrader 5 platform. The most popular technical indicators include: Bollinger Bands, Moving Average Convergence Divergence, Exponential Moving Averages, Momentum, Relative Strength Index (RSI), and Stochastic Oscillator.
For example, many believe that technical indicators like the EMAs (Exponential Moving Averages) clearly show the future price trends. All you need to do is choose a currency pair that you want to trade and open its chart on the MT4 or MT5 platform. Once you have set the preferred time frame, let’s say one hour H1, you can add the technical indicators 144 EMA and 169 EMA. It is expected that if the price line passes both moving averages, the uptrend will continue and it is a good time to open a long position.
As with any Forex trading method, there are certain guidelines that traders need to follow in order to be successful and profitable in the long run. The first one is to keep your trades simple. When you use technical analysis you should keep in mind that not every technical indicator is suitable for all market conditions. There are times when the RSI can be used to identify a market trend but in other cases the Moving Averages are more suitable to identify the right direction. Needless to say the more experience you gain as a trader, the easier it will be for you to choose the most appropriate tools. The second, and probably most important rule, is to control the risk you take. Technical analysis may bring significant returns to Forex traders, but until you have mastered this trading approach it is best to use a more conservative investment strategy.
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The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.