forex market

Technical Analysis of the Forex Market

The Forex market is the largest market of its kind in the world. With over $5 trillion worth of transactions being conducted on it every day, it easily makes the most liquid financial market, too. Therefore, opportunities are abundant in it.

But how best do you approach it to be able to reap maximally from the opportunities that it presents?

There are differing opinions on this. However, all the opinions on the most profitable approach to adopt for trading in this market can be categorized into the two: fundamental and technical analyses.

While fundamental analysis deals with raw economic news and events, market technicians use charts and similar tools to predict the prices of currency pairs.

Even though it is widely believed, in most quarters, that the two are mutually exclusive, technical and fundamental analyses have been successfully applied together to yield amazing results.

Here, we discuss the technical analysis of the Forex trading signals market and how you can incorporate it into your trading plan to evolve a sound and effective strategy. Read on.

First, what is technical analysis?

As a method of approaching the Forex market, technical analysis is based on the idea that the price of a currency pair is all that matters and is all there is.

Consequently, users of the approach use it to analyse the market to identify the strengths and weaknesses of currency pairs in the bid to discover excellent trading opportunities.

Dated to as far as back as the 19th century, technical analysis has grown over the years to incorporate a wide range of tools, which include charts, patterns, and indicators.

Now, technical analysis has become so popular that most traders adhere, in one way or the other, to it. The following are its basic assumptions:

The price reflects all underlying fundamental details

Like their fundamental counterparts, technical analysts too believe that price is a product of the supply and demand of a currency pair. The concept is that all fundamental details — interest rate, GDP, balance of trade, inflation, everything! — are already factored in the price. Thus, the price is the most critical parameter to watch.

However, its postulation that “if price is the major determining consideration in trading and it is perfectly represented on charts, why look for anything else?” is the reason why technical analysis has continued to fall under intense criticism over the years.

History repeats itself

Another fundamental assumption of technical analysis is that history repeats itself. If a particular currency pair has behaved in a certain way, there are chances that it will still behave in the same or similar way again.

As a result, technical Forex traders look for previous patterns on charts and use them to predict future patterns.

Based on this, they seek to know when to buy, sell, and hold. The collective emotions of traders cause the repetitive nature of the behaviour of price.

Price moves in trend

Price moves in directions. At a time, it can be going up. When it is, it is said to be in an uptrend. At another time, the price can be going down. In such cases, it is said to be in a downtrend. And also, at some other unusual times, it can range. These are times at which the price is not having any specific pattern to it.

This trend behaviour of price makes a useful guide for traders. For example, a waning uptrend might suggest a possible reversal in trend soon and a good point to short.

Now that you have understood the basic ideas of technical analysis, the question to answer is: “should I incorporate it into my trading plan?” If you eventually choose to, here are some tips.

The trend is your friend

It has almost become a platitude in trading that the trend is your friend. There is no gainsaying that this precept is not only true, but also effective. Since technical analysis is hinged on patterns, price tends to move in trends. And it is easier if you follow them.

Therefore, do not make countertrend moves except when the trend is already waning. The goal is to discover a trend in its early stages and then ride on it. Trend-following strategies still deliver sterling results for traders that follow them.

Simplify your system as much as you can

You can be easily deluded into thinking that the more complicated a system is, the better it works. This is a lie, and you should not be deceived by it. Simple is good, and simpler can even be better.

Never forget that. Therefore, look for a simple system that can yield positive returns on your trades without you having to go through complicated processes.

For example, many traders use a jumble of indicators. When you look at the charts of those traders, you cannot but cringe at the level of complexity and disorganisation that you see.

To solve this particular problem, it is recommended that traders should not use more than three indicators at a time.

Stay away from the market in times of high-impact news

True, all fundamental details have been factored into the price. However, it would be safe for you if you can stay away from trading when the market is expecting any high-impact economic news.

Interest rate release, balance of trade report, and economic performance updates of countries are news that can determine the direction of currencies.

Hence, it is advised that you stay away. Instead, devote the time to analysing the market and the possible ways by which it can respond. You would realize that you might even find excellent opportunities to make huge gains.

Be disciplined

You must note that no matter the tip, advice, recommendation, or suggestion you hear or read, you will not be able to earn with them if you do not put them to work.

Thus, be diligent and disciplined in applying the recommendations you find worthy of your use. Soon enough, they will become a part of you.