Forex Trading Basic

Forex Trading Technical Analysis

Emotional Weakness of Forex traders

What is Technical analysis in Forex?

Forex trading technical analysis is one of the most significant areas to be good at in order to become a successful Forex trader. In the previous article, we have already mentioned that technical analysis studies the price action in the past history of any instrument to try to determine or predict its future behavior.

While analyzing the behavior of market price, we are actually studying the behavior of all traders in a market. All investors and traders are behind every price movement; after all, they were the ones who brought the price to a certain level.

Usually, the price moves based on the expectations of the future price movement and actions taken by the traders and investors. Most often, investors and traders are handled by their emotions (fear, greed, etc.) These emotions are visible in the charts through repetitive behavior patterns. The pattern in the chart, which is a result of trader’s future behavior, is what technical analysis attempts to predict.

5 Basic Principles of Forex Trading Technical analysis

  1. Markets Tends to Move leaving a trend

Trend is your friend! – believed by most of the technical traders across the globe. It is believed to be a basic principle underlying the theory of technical analysis, and most of the indicators and oscillators, trend lines, and chart patterns are ways of discovering the trends, its reversals, and its ranges.

  1. Price Is Determined By the Interaction of Supply And Demand

It’s a common theory thought in basic economic courses- when demand increases, price goes up, when demand decreases price goes down. A key factor behind supply and demand is buyer and seller expectations, and expectations result from human decisions based on information, emotions and cognitive limitations such as behavioral bias.

  1. Price Discounts Everything

All information related to the currency pair is discounted by price, as well as the interpretation of expectations derived from that information. Instead of trying to consider all the economic factors that will influence the demand for EURUSD, such as GDP, Inflation, Interest, Unemployment, Debt of the Euro Zone versus that of the US, the technical analyst believes that the all these factors are already factored into the price of the currency pair.

The fluctuations of the closing price of EURUSD reflects the hopes, disappointments, and knowledge of everyone trying to trade that currency pair, and the effects of coming events can be anticipated in its price movement. Price not only reflects the information on the currency pair, but also the rational and irrational interpretation of that information, and the expectations derived from that information.

  1. Price Patterns Tend To Repeat Themselves

In technical analysis, we get to know that the movement of prices is random. Past prices can be used to predict future price trends. They assume that history in principal will repeat itself and that humans will behave similarly to how they have behaved in similar situations. Thus prices tend to form into patterns and have predictable results, yet these results are never identical and are thus subject to interpretation by the technical analyst.

  1. Price Patterns Are Fractal

It doesn’t matter of what time frame or period, patterns occur with every similar, though not identical shapes and characteristics, which allows traders to see the same patterns on five-minute charts as he sees on daily charts. These patterns suggest that the behavior that produces them is dependent on the participant’s point of interest, with the pattern in a five-minute bar being the result of other traders looking at that smaller time horizon. Each group of participants is defined by their investment period and has its own little world of patterns that may or may not affect each other but will be similar in shape.

Basis of Technical analysis

The technical analysts believe that the technical analysis is based on the idea that market behavior follows certain patterns that tend to repeat over time. The causes of these patterns can be several, for example: many believe that psychological factors are elements that make this happen; others indicate that much of the market moves are guided by a technical analysis. The Irony is- most Forex traders are not interested in investigating based on psychological facts, they don’t seem to care whether technical analysis tools are used or not for the performance.

The whole process of Forex Trading Technical analysis works with the help of certain indicators or charts based on market data such as prices of currency pairs and trading volume. Such factors like interest rate of a given country, the level of GDP of a country, trade balance of a country, monetary emission in a given country, etc. doesn’t have anything to do with technical analysis. These data is taken into account by the fundamental analysis, not technical analysis.

Tools of technical analysis

There are some basic tools of technical analysis. Knowing the use of these tools is the first step to begin studying technical analysis. Each of them in isolation will be of little use to you. You must make a thorough analysis of different uses of these tools and develop a systematic plan to follow when trading using real money.

  • Trend lines
  • Forex charts patterns
  • Support and Resistance
  • Forex Indicators

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Please note that: Successful Technical Analysis largely depends on the functionalities of the MT4 Platform provided by your broker. If you are new in forex trading, you might consider reading the article on what is the best trading platform, Introduction to MT4 Platform and MT4 Platform functions. We have used a fully functional MT4 platform provided by HYCM Broker. Read why their MT4 platform has better trading conditions from the HYCM Broker review.

READ MORE

Chapter 5

Technical Analysis in Forex Trading

Lesson 1Forex Trading Technical Analysis
Lesson 2Forex Trading Trendline Analysis
Lesson 3Forex trading Chart Patterns
Lesson 3.2Double Tops and Double Bottoms
Lesson 3.3Head and Shoulders Pattern
Lesson 3.4Rectangle Chart Patterns
Lesson 3.5Triangle Chart Patterns
Lesson 4Japanese candlestick Trading Strategy
Lesson 4.2Japanese candlestick Trading Strategy Part 2
Lesson 5Support and Resistance Levels
Lesson 6Types of Technical Analysis Indicators
Lesson 6.2moving averages Technical Analysis
Lesson 6.3MACD Indicator Technical Analysis
Lesson 6.4RSI Indicator Technical Analysis
Lesson 6.5Stochastics Indicator Technical Analysis
Lesson 6.6Technical Analysis with Bollinger bands Indicator
Lesson 7Fibonacci Retracement Forex Strategy
Lesson 8Forex Trading Pivot Strategies

Go back to Main Page: Forex Trading for Beginners

About the author

Syed Nazim

Syed Nazim is the Marketing Manager of RedMaroon, a Digital Marketing Agency for Financial Institutions. He is also involved with Forexing24.com as a writer and financial Analyst. He is a brilliant marketing geek with vast experience in every sector of Digital Marketing. He likes sharing strategies, tactics and proven methods to help you build a business and live the life of your dreams.

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