Technical analysis is another effective Forex trading strategy which is more commonly used by experienced traders.
What does technical analysis entail?
Technical analysis refers to an attempt to foresee price movements and changes by looking into previous market data and is a strategy adopted like fundamental analysis. In fact, traders usually adopt technical analysis in order to get the full picture of price history for particular currency. At times, traders will ensure that the currencies bought are sold at fair rates by checking the chart via technical observation.
Assumptions and analysis
Technical analysis are made based on several common assumptions – combination of market forces such as political stability, economic health, interest rates as well as supply and demand will influence price changes within the market. Even though most traders realized that currency changes cannot be control by any particular wealthy individual or financial firm, the prices tend to follow trends.
Historical data crucial
Hence, Forex trading strategies can depend on previous history to foresee the upcoming price changes. Traders can gather Forex data from as long as 100 years ago. Over the years, patterns and trends have emerged. The basis of the trends is based on people’s reaction towards circumstances as well as human psychology on these events. Technical analysis and fundamental studies are inter-related. Traders may use fundamental analysis to support the findings acquired from technical analysis.
Why use technical analysis?
An advantage for using technical analysis – it can be used widely in different markets and various currencies at one particular time but unlike fundamental studies, it requires traders to keep track of political and economic health of a country. Therefore, it is almost impossible for one to observe these conditions (political and economic) in more than several countries.
What about the indicators?
As mentioned earlier, there are several technical indicator types including trend, strength, cycle, support, momentum and volatility. Other than learning these types of indicators, one need to understand about moving averages as well.
Moving averages assist traders to identify and predict upcoming trends. You need to familiarize with few terms – simple moving average, weighted moving average and exponential moving average. Simple moving average measures price point during particular period regularly. Traders calculate the high, low and close price points to create a line while weighted moving average emphasizes on the current data. Lastly, exponential moving average is similar to weighted moving average as it focuses on current data but in a different way. For exponential moving average, the outcome is based on multiplication of the recent price by previous term’s average price.
Charts and Graphs
What you want to do really in technical analysis is to plot a chart to your advantage. This is for you to predict a trend in the price of the currency. When you do this, you begin to see a pattern in how the pricing changed throughout the past. In other words, you identify the pattern of the past in order to predict the future. It must be noted this is one of the riskiest form of analysis as there is no guarantee for any success. All you have is the tool to chart a trend and you take the data as it is.
You might have heard of the term, bet big, win big, bet small, win small used in gambling. In technical analysis, you very much use the same concept because you can be a small player as compared to the big corporations like banks and hedge fund managers. These corporations are the ones with the money to buy large equipment and computers systems that crunch numbers 24 hours a day. Always remember that you might not be imperative in changing the trend or turning the tide, but they can. So, what you analysis is purely in your small context.
What to bank on?
In trading of Forex, the movement could be 2 ways. It would either go range or go trend. When you chart a graph, you tend to analyse a trend. So you basically connect the dots based on historical data. This will give you a direction of whether it will increase or decrease. This will be quite common especially in other financial markets like shares and commodities.
In the Forex market meanwhile, you will be investing based on pairs. Either it is EUR/USD or USD/JPY, it does not matter but some pairs have a stronger likelihood to go within a range. Thus, if you are looking to invest in any of these pairs, you need to adopt the right strategy as to what to apply before proceeding.
Your advice giver
Ultimately, you need a broker that can give you the exit strategy. While your broker can help you identify which pair to invest in and what markets to enter, you will need your own analysis (yes, its the charts and graphs) and then get the advice you need.