An Introduction to Forex Technical Analysis

by

One of the most popular ways for individual Forex traders to analyze the Forex markets is using Forex technical analysis. Technical analysts work on the concept that as the market digests economic news, world events, and other data that it becomes reflected in the price.

Technical analysts use combinations of price, time, and or volume in their trading research.  This type of analysis has become increasingly popular especially with the ready availability of Forex market data and the increased processing capabilities of personal computers.

Often times in technical analysis Forex traders will start by looking at a Forex chart.  Forex charts allow traders to see how past prices relate to one another. This “perspective” allows traders to visually identify price trends.  The objective of looking at these price trends is to find patterns in price data that are likely to repeat themselves in the future.  If you can find price patterns with a good probability of repeating themselves, then you may have a good chance at developing a profitable Forex trading strategy based upon those patterns.

The use of charts in Forex technical analysis also allows for the use of technical indicators.  Indicators are named as such because they “indicate” when a price has met a particular criteria.  Technical indicators are shown on Forex charts right along with the price data.  They can come in the form of dots, dashes, lines, etc. all in the variety of different colors.

Here are some examples of some indicators commonly used in Forex technical analysis:

Moving average —  The moving average is probably one of the most commonly used Forex technical indicators.  Moving averages come in a variety of forms such as simple, weighted, and exponential.  In its simplest form a moving average simply take the last X number of prices add them together and then divides them by X. The average is called “moving” because it changes with time.  If we are looking at a daily moving average as an example the average will change with each new trading day.  Here’s a quick example of a simple 5 day moving average:

Day 1 = 1.41140
Day 2 = 1.40770
Day 3 = 1.40390
Day 4 = 1.39650
Day 5 = 1.38910
=============
Total  = 7.00860

7.00860/Number of Periods (Days) 5 = Moving Average = 1.40172

As you can see from this example in the prices from day 1 to day 5 were moving in a downward direction.  This means that the moving average line is also sloping downward.  We can see from our example that the price on day five is less than the moving average.  The typical interpretation of this is that the market is currently in a downtrend based upon this moving average.

Stochastic oscillator – While the moving average is typically used to measure the momentum of trends and the stochastic oscillator is typically used to indicate periods of trend exhaustion.  The values of the stochastic oscillator are between 0 and 100.

A Forex market is said to be in overbought (uptrend losing momentum) territory when the stochastic oscillator is above 80. A Forex market is said to be an oversold (downtrend losing momentum) territory when the stochastic is below 20.

With a basic introduction to Forex technical analysis you can instantly see how useful this can be in your own trading research.  Our moving average and stochastic oscillator examples are just that, and examples only.  In your own trading research you will want to experiment with a variety of parameters for these and other technical trading indicators as well.  It is been proven by successful traders the world over that technical analysis can be used to trade Forex very profitably.  Learning the ins and outs of technical analysis can definitely put you on the path to successful Forex trading.

Filed Under: Forex Trading Systems Tagged With: ,

What Is Forex Technical Analysis?

by

Forex technical analysis is a research method whose objective is to find profitable ways to trade Forex. This type of analysis differs from Forex fundamental analysis which has the same objectives Fundamental analysis looks at such things as the gross domestic product, interest rates, employment numbers, trade balance, and other important economic factors. Technical analysis, on the other hand, uses three basic sets of data in various combinations. The data that is analyzed is price, time, and volume.

Technical analysis is commonly used in order to create a Forex trading system. The system then takes the price, time, and/or volume data for a currency pair and generates Forex trading signals. These signals in turn are instructions telling the trader what action needs to be taken and when that action needs to be taken.

Forex technical analysis has really become popular over the last number of years. One of the reasons for this is the readily available data. The majority of Forex brokers offer free quotes and many even offer free Forex demo accounts which traders can use to practice their trading skills. There is also a wide variety of Forex trading software which makes it possible for more people to analyze the markets with greater ease and efficiency.

One of the basic tools that many used in technical analysis is Forex charts. A Forex chart is basically a graph of Forex data over time. Charts are great visual aid and allow traders to see Forex price movements. Using charts for your analysis lets you see where Forex prices are in relation to one another. This is particularly important because it will allow you to analyze past price data and find price patterns. Finding price patterns which are likely to repeat themselves can be particularly useful. For instance, if you locate a price pattern which tends to precede market movement in a certain direction, then you may really be onto something. The key is finding price patterns which reliably repeat themselves. In other words, you want to find price patterns that have a good probability of allow you to anticipate profitable market direction.

In my humble opinion the best way to learn Forex trading is to learn the ins and outs of Forex technical analysis. By learning to analyze the Forex markets you will learn to make your own Forex trading decisions. This will allow you to create Forex trading strategies which will be best suited for you and your individual lifestyle and financial situation.

Filed Under: Forex Trading Strategies Tagged With: , , , , , , , , ,

What Is a Forex Trading System?

by

A Forex trading system can be thought of simply as a set of rules for an organized method used to trade Forex.

Forex trading systems have become extremely popular for a number of reasons. One of the most important reasons for this popularity is that fx trading systems allow you to trade in a more systematic and organized manner.

The objective of a Forex trading system should always be to allow the trader to trade profitably. In order for this to happen, of course, the FX system used must be a good one. In order for a trading system be a good one it needs to be thoroughly tested and researched to ensure it will have a good chance of producing profits when trading in the future. Often these test are performed on past Forex market data in a process called “back testing”. Back testing is done using Forex technical analysis techniques in order to find price patterns and parameters which will allow traders to anticipate future price moves.

One of the very best things about Forex trading systems is that they remove the subjectivity from your trading. By removing any subjectivity you are much less likely to trade haphazardly and therefore much less likely to make needless mistakes. Removing subjectivity from your trading also helps you to eliminate any limiting emotions which may negatively impact your trading performance. Also, the fact that good Forex trading systems have been thoroughly tested gives trader a great amount of confidence going forward. This confidence makes it much easier to trade consistently as a trader need only follow the instructions as dictated by the trading system.

In its simplest form a Forex trading system consists of an entry and exit. A simple example might be as follows:

“Buy the EURUSD if it closes above the 200 day moving average”

“Sell the EURUSD if it closes below the 200 day moving average”

Now understand that what we have just looked at is simply an example for the purposes of illustration. It is an example of a simple entry as well as a simple exit to make a basic trading system.

Forex trading systems are in use by successful individual traders and financial institutions around the world. With a good trading system you too can put yourself on the road to successful trading.

Filed Under: Forex Trading Systems Tagged With: , , , , , ,