How did I get started with technical analysis forex?
I had flirted with fundamental analysis in the beginning of my career at Deutsche Bank in NY. I tell this story as it is burned into my memory. In the late 1980’s the Money Supply numbers were of great importance to the talking heads on TV. All the worlds’ commentators were touting the figures to find the true Trend of the Markets.
I was working as a Jr. trader at the time in Deutsche Bank NY, a job assigned to me (in lieu of getting coffee, cigarettes and newspapers for the senior dealers) was to do all the research before the numbers were to be released.
They barked at me, “Hey, Tom, go to the Economics Department and get their take on what they think the supply should be, Check COT (Commitment of Traders Reports), and get together two weeks of historical data of the DAX and S&P 500. ” Oh boy, I thought I was learning the “secret sauce” of the market. I couldn’t wait till I was able to trade my research along with the other guys. Fast forward to the release of M1, M2 and M3.
I was given the ability to trade a Minor Currency with a s/l limit of $25,000 USD. I had a position that was based on our numbers: Long USD against South African rand.
The theory was Higher M1 means rates need to go up to combat Inflation. The Numbers came out Higher! Great the research paid off, now to just collect my earnings!
“Price In Dol/Dem,” Wolfgang yells out at the voice brokers.
No price, market DEAD silence.
Sean G “Price in Dol/CHF please…” The rest of the 45 traders were in a roar as well!
”Tom Offer out Dol/CHF 1.36 45 offered!”
I jump in as fast as I can to repeat the order to Gary my Broker “DOL/CHF 1.3645 offered”
This price was 60 pips higher than the current market price.
Gary replies “No takers Market Lower.”
WTF was my thought!
Gary screams out over the Box “1.34 30 GIVEN!”
The market is selling off… ”What’s my South African Rand doing I think to myself?”
I quickly get a price as fast as I can in USD/ZAR, and realize my position is worth $8609.00 dollars less!
I hit the bid as fast as I could with a stinging loss of 35% of my P/L!
What did the talking heads say in the afternoon?
“M1 came in higher today, right about where the market was expecting those numbers to be. So, profit taking occurred!”
They were then onto the next Bullocks subject!
What I started to learn, not fully at the time, is that all the Data in the world will not help, even if you call it correctly.
Price is the ultimate Arbiter.
You must learn to listen to the market, ignore opinion and apply strict attention to the action of the Market Itself.
MARKETS are Never WRONG. Opinions and data often are! That was my first lesson that fundamental analysis is not the way to trade for me.
Later on in my career, I was the technical market analyst and Chief Dealer of CRT Bank in NY. My treasurer was a Fundamental trader and my short-term positions and profits were used to fund his long-term trades, so which never came good and into the money. The rest of the article will be about What exactly technical analysis is.
Forex Technical Analysis
Technical analysis is a popular method used by traders to identify potential trading opportunities in the forex market. It involves studying charts and using various indicators to determine the future direction of the market. Technical analysts believe that past price movements can provide insights into the future direction of price movements, and they use this information to make informed trading decisions.
Technical analysis looks at the price movement of a security, country’s currency or stock indices and uses this data to attempt to predict future price movements. As an aside technical traders outweigh fundamentalists in the global markets.
A Fundamental approach instead looks at long-term economic and financial factors that influence a business’s, a country’s GDP, and stock indices. Part of the reason that fundamental analysts uses a long-term timeframe, is because the numbers they use to analyze economic data are generated much more slowly than the price and volume information used by technical analysts. All the information must be gathered and analyzed, and that tremendous amount of numbers, must be assimilated in order to gain an edge using this kind of analysis.
One of the key benefits of technical analysis is that it can be used to identify entry and exit points for trades. By analyzing charts and identifying support and resistance levels, traders can determine future price action and when to enter or exit a position. This can help traders to minimize losses and maximize profits when they read future price actions, correctly.
However, it’s important to note that technical analysis is just one tool in a forex trader’s toolbox. I personally don’t think the two (technical or fundamental) should be in separate camps. I would have to be a fool to dismiss the fundamentals and only look at technicals. I believe that the methods complement each other and make up for each other’s flaws.
I find that a forex chart is far superior in finding price reversals in forex and other markets than slow-moving fundamental analysis as a market reaches new highs or lows. A caution, and this is where the fundamentals can help, is that many traders can see what they want to see. A chart can support a belief that is otherwise lacking in evidence. We never see things as they are; we see things as we are. That is why no method of analysis can guarantee profits, and traders must be prepared to manage risk and accept losses when their view is wrong.
Understanding the Forex Markets
Forex trading is the buying and selling of currencies with the aim of making a profit. It is the largest and most liquid financial market globally, with a daily trading volume of over $5 trillion. Forex trading takes place in currency pairs. For example, the EUR/USD pair represents the Euro against the US dollar.
Forex trading is done through brokers who provide traders with access to the market. They can use various strategies and tools to analyze the market and make informed decisions. One popular method is technical analysis, which involves analyzing price charts and identifying patterns to predict future price movements.
The forex market is open 24 hours a day, five days a week, with trading sessions in different time zones around the world. This allows people to trade at any time, making it a flexible investment option. However, it is important to note that forex trading carries a high level of risk, and traders should be prepared to manage their risk appropriately.
A successful forex trader has a deep understanding of the market and use a combination of both to make informed decisions. They also have a solid trading plan and risk management strategy in place to protect their capital and minimize losses. The trading plan and money management is more important than the analysis, as new information is always flowing in.
Overall, forex trading can be a lucrative investment option for those with the knowledge and skills to navigate the market. However, it is important to approach it with caution and always do your research before making any trading choices.
The Importance of Technical Analysis
Technical analysis is a crucial tool for folks in the forex market. It involves analyzing charts, patterns, and indicators to identify trends and patterns that can help them predict where prices are likely to go in the future. Technical analysis can be used in conjunction with a fundamental approach to make better decisions.
One of the main benefits of technical analysis is that it allows people to identify trends and patterns that may not be immediately apparent from looking at the raw numbers By analyzing charts and indicators, people can identify key levels of support and resistance, which can help them determine when to enter and exit trades.
Technical analysis is also useful for identifying potential trading opportunities. By analyzing charts and indicators, a trader can identify patterns that may indicate a potential trend reversal or a breakout. This can help them make profitable trades and avoid losses.
Overall, technical analysis is an essential tool for traders in forex. It can help them make better decisions, identify potential trading opportunities, and minimize losses. By combining technical analysis with fundamental, traders can gain a more complete understanding of the forex market and make more informed and successful choices.
Understanding Price Action
Price action is a technical analysis strategy that involves studying historical price movements to identify patterns and predict future market trends. It is a popular approach among traders due to its simplicity and effectiveness.
Price action trading involves analyzing charts and identifying key price levels, such as S/R levels. Traders then use this information to make informed decisions on when to enter or exit trades.
Price action traders often use bar charts or candlestick charts to identify patterns and trends in price movements. Bar or Candlestick charts provide a visual representation of price movements, allowing traders to quickly identify patterns and trends.
One key advantage of price action trading is that it can be used in combination with other technical analysis tools, such as moving averages and trend lines. By combining these tools with price action analysis, traders can gain a more comprehensive understanding of market trends and make more informed decisions. The only Moving Average that I feel is worth anything is the 200 day moving average, and don’t get caught up with smooth or exponential there is no significant difference or magic in any of them.
Overall, understanding price action is an important aspect of successful trading. By studying historical price movements and identifying key patterns and trends in price changes, traders can gain valuable insights into market trends and make more informed decisions.
Technical Traders Charting and Patterns
Technical analysis in Forex involves the use of charts to identify patterns and trends that can help predict future price movements. Charts are a visual representation of price over a period of time, and they can be used to analyze market behavior and identify potential trading opportunities.
There are several different types of charts that traders use, including line charts, bar charts, and candlestick charts. Each type of chart has its own advantages and disadvantages, and traders often use a combination of different chart types to get a more complete picture of market behavior. I personally have only used bar charts and no indicators at all.
In addition to using charting tools, technical analysts also use patterns to identify potential trading opportunities. Chart patterns are recurring patterns that can be seen on price charts, and they can help traders predict future price movements. Some of the most commonly used chart patterns in Forex include head and shoulders, double tops and bottoms, and triangles. It’s also important for traders to be aware of certain market tells, or unwritten market laws.
Traders also use indicators to help identify patterns and trends in the market. Indicators are mathematical calculations based on price and/or volume info, and they can help traders get a better understanding of market behavior. Some of the most commonly used indicators in trading include moving averages, relative strength index (RSI), and stochastic oscillators.
Overall, charting and patterns are an important part of technical analysis in trading. By analyzing price charts and identifying recurring patterns, traders can gain valuable insights into market behavior and make more informed choices.
Technical Indicators and Their Significance
Technical indicators are mathematical calculations based on the price movement, volume, or open interest numbers. These indicators are used by traders to gain additional insights into market conditions and confirm their trading choices. Technical indicators can be broadly classified into three categories: trend-following indicators and oscillators, the is one other in its own classification which is price action trading.
Trend-following indicators are used to identify the direction of the trend. Moving averages are the most widely used trend-following indicators. Although I find them to be lagging indicators, in the short term they create many whipsaws. The idea is to smooth out price data by creating a constantly updated average price. Traders use moving averages to identify the direction of the trend and to determine S/R levels.
Oscillators are used to identify overbought and oversold conditions. These indicators move between two extreme values, indicating when a market is overbought or oversold. The most commonly used oscillators are the RSI and the Stochastic Oscillator. I do not put any weight into these indicators as I don’t buy into the mathematical manipulation of price offers any trading edge.
Traders use technical indicators to identify trading opportunities and to confirm their trading choices. For example, if a trader sees that the price of a currency pair is trending upwards and the RSI is above 70, indicating to technical traders that the market is overbought, the trader may decide to sell the pair, and herein lies the problem. On one hand technical analysis says to trade with the trend, if a price is moving upwards the trend is up, why would you sell it due to a mathematical manipulation of price?
It is important to note that technical indicators should not be used in isolation. Traders should always use them in conjunction with other technical analysis tools, such as S/R levels and chart patterns, to confirm their decisions.
In conclusion, technical indicators are an important tool for traders in the market. They provide additional insights into market conditions and can help traders identify trading opportunities. However, traders should always use them in conjunction with other technical analysis tools to confirm their decisions.
Support and Resistance in Forex
S/R are essential concepts in technical analysis that traders use to identify potential levels of buying and selling in the market.
Support is a price level that an asset has difficulty falling below. It is often seen as a floor that supports or holds up prices. When the price reaches a support level, buyers tend to enter the market, causing the price to bounce back up. Traders can use support levels to identify potential buying opportunities. In bullish markets support will hold and resistance will fail.
Resistance is a price level that an asset has difficulty breaking above. It is often seen as a ceiling that keeps prices from rising higher. When the price reaches a resistance level, sellers tend to enter the market, causing the price to fall back down. Traders can use resistance levels to identify potential selling opportunities. In Bearish markets, resistance levels will hold and support will fail.
Support and Resistance Lines
S/R levels can be plotted on a chart to create chart lines. These lines can help traders identify potential levels of buying and selling in the market.
These lines are not always exact price levels. They can be zones or areas where buying or selling pressure is concentrated. Traders should use other technical analysis tools, such as trend lines and moving averages, to confirm potential S/R levels.
In summary, S/R are important concepts in technical analysis that traders use to identify potential levels of buying and selling in forex. Support is a price level that an asset has difficulty falling below, while resistance is a price level that an asset has difficulty breaking above. Traders can plot S/R lines on a chart to identify potential levels of buying and selling in the market.
Identifying Trends and Reversals
Technical analysis is a popular method of analyzing financial markets, including forex. One of the key aspects of is identifying trends and reversals.
Trends refer to the general direction of the market. In forex, there are three types of trends: uptrend, downtrend, and sideways trend. An uptrend is characterized by a series of higher highs and higher lows, while a downtrend is characterized by a series of lower highs and lower lows. A sideways trend, also known as a range-bound market, is when the price moves within a horizontal range.
Reversals, on the other hand, refer to a change in the direction of the market trend. This can be a change from an uptrend to a downtrend, or vice versa. Identifying a reversal can be challenging, but there are several technical tools that traders can use to help identify potential reversals.
One popular tool for identifying trends and reversals is moving averages. Moving averages are calculated by taking the average price of a pair over a specified period of time. Traders can use moving averages to identify the direction of the trend. For example, if the price is above the 200-day moving average, it is generally considered to be in an uptrend.
Another tool for identifying trends and reversals is the Relative Strength Index (RSI). The RSI is a momentum oscillator that measures the speed and change of price movements. Traders can use the RSI to identify overbought and oversold conditions, which can be an indication of a potential reversal.
In addition to moving averages and the RSI, traders can also use trend lines to identify trends and potential reversals. Trend lines are drawn by connecting two or more points on a chart. An uptrend line is drawn by connecting two or more low points on a chart, while a downtrend line is drawn by connecting two or more high points. When a trend line is broken, it can be a signal that the current trend itself may be reversing.
Overall, identifying trends and reversals is an important part of analysis in trading. Traders can use a variety of technical tools to help identify potential trends and reversals, but it is important to remember that no tool is foolproof and that trading always involves risk.
Role of Risk and Volatility
When it comes to fx trading, risk and volatility are two of the most important concepts that traders must understand. Risk refers to the potential for loss or damage, while volatility is the degree of variation in the price of a currency pair.
Volatility is an essential component of analysis as it helps traders identify potential trading opportunities. High volatility can indicate a potential trend reversal, while low volatility can suggest a possible consolidation period. However, traders must also be aware that high volatility can also mean increased risk, as sudden price movements can lead to significant losses.
To manage risk effectively, traders must have a solid understanding of risk management techniques. This can include setting stop-loss orders, diversifying their portfolio, and using leverage judiciously. It is also essential to have a clear understanding of a trader’s risk tolerance and to only risk what they can afford to lose.
In summary, understanding the role of risk and volatility is crucial for successful fx trading. Traders must be knowledgeable about the concepts of risk and volatility and use appropriate risk management techniques to protect their investments.
Trading Opportunities and Strategies
Technical analysis forex provides traders with numerous trading opportunities and strategies. By analyzing market numbers, traders can identify potential trade ideas and execute profitable trades. Here are some popular strategies used by traders:
Moving averages are one of the most commonly used technical indicators in trading. They help traders identify trends and potential reversal points. A simple moving average (SMA) is calculated by adding the closing prices of a currency pair over a specific period and dividing the sum by the number of periods. The resulting value is plotted on a chart, creating a line that shows the average price over that time frame.
Traders use moving averages to identify S/R levels, as well as to confirm trend direction. When the price crosses above the moving average, it may signal a bullish trend, while a cross below the moving average may signal a bearish trend.
Bollinger Bands are another popular technical indicator used by traders. They consist of three lines: a simple moving average (SMA) in the middle, and two standard deviation lines above and below the SMA. The standard deviation lines widen and narrow depending on market volatility.
Traders use Bollinger Bands to identify overbought and oversold conditions in the market. When the price reaches the upper band, it may signal an overbought condition, while a price below the lower band may signal an oversold condition.
Fibonacci retracement is a tool used to identify potential S/R levels. It is based on the idea that markets will retrace a predictable portion of a move, after which they will continue in the original direction.
Traders use Fibonacci retracement levels to identify potential entry and exit points for trades. The most commonly used retracement levels are 38.2%, 50%, and 61.8%.
Candlestick patterns are a visual representation of price movements in the market. They provide traders with information about the strength of a trend, potential reversal points, and market sentiment.
Traders use candlestick patterns to identify potential trade ideas and to confirm trend direction. Some popular candlestick patterns include the doji, hammer, and engulfing pattern.
By using these strategies, traders can identify potential trading opportunities and execute profitable trades. It is important to note that technical forex analysis is not a guarantee of success, and traders should always use proper risk management techniques.
Pivot Points and Fibonacci
Pivot points and Fibonacci retracements are two commonly used tech. analysis tools in forex. A pivot point is a level at which the market price is expected to reverse, while Fibonacci retracements are used to identify potential levels of S/R.
Traders use pivot points to identify key levels of S/R, which can be used to make trading choices. Pivot points are calculated using the previous day’s high, low, and closing prices. There are several different types of pivot points, including standard, Fibonacci, and Camarilla pivot points.
Fibonacci retracements, on the other hand, are based on the Fibonacci sequence and are used to identify potential levels of S/R. Traders use Fibonacci retracements to identify potential entry and exit points, as well as to set stop-loss levels.
When used together, pivot points and Fibonacci retracements can be a powerful combination for forex traders. By identifying key levels of S/R using pivot points, traders can then use Fibonacci retracements to identify potential entry and exit points.
It is important to note that while pivot points and Fibonacci retracements can be useful tools for forex traders, they should not be relied on exclusively. Traders should always use multiple indicators and analysis techniques to make informed decisions.
Comparing Technical and Fundamental Analysis
When it comes to analyzing the market, traders often use two main approaches: technical analysis and fundamental. While both methods aim to help traders make informed decisions, they differ in their focus and methodology.
Technical analysis involves studying past market facts, such as price and volume, to identify patterns and trends. Traders who use this believe that historical info can help predict future market movements. They use various tools and indicators, such as moving averages, S/R levels, and chart patterns, to identify potential entry and exit points.
One of the advantages is that it can be used to analyze any tradable asset, including currencies, stocks, and commodities. It also provides traders with a clear set of rules and guidelines to follow, which can help remove emotions from decisions.
However, it has its limitations. It does not take into account the underlying factors that drive market movements, such as economic facts, news events, and geopolitical developments. As a result, it may miss important market-moving events that can significantly impact currency prices.
Fundamental, on the other hand, focuses on the underlying economic and financial factors that affect currency prices. Traders who use fundamental strategies examine various indicators, such as GDP growth rates, inflation, interest rates, and political developments, to determine the intrinsic value of a currency.
One of the advantages of this is that it provides traders with a broader understanding of the market. By analyzing economic and financial info, traders can gain insights into the long-term trends and drivers of currency movements. This can help traders make more informed decisions and identify potential opportunities.
However, it also has its limitations. It can be time-consuming and complex, as traders need to analyze a wide range of economic and financial and historical numbers first. It can also be difficult to quantify the impact of fundamental factors on currency prices, as different factors may have varying degrees of influence depending on the market conditions.
In conclusion, both have their strengths and weaknesses. Traders should consider using a combination of both approaches to gain a comprehensive understanding of the market and make informed choices.
Financial Instruments in Forex
Forex, or foreign exchange, trade, is a decentralized global market where currencies are traded. It is the largest and most liquid financial market in the world, with a daily trading volume of over $5 trillion. Fx trading involves buying and selling currencies in pairs, with the aim of making a profit from the exchange rate fluctuations.
There are several financial instruments that can be traded in Forex, including:
- Currencies: The most common financial instrument in Forex is currency pairs, which are the exchange rates between two currencies. For example, the EUR/USD pair represents the exchange rate between the euro and the US dollar. Currency pairs are traded in lots, with each lot representing a standard unit size of the base currency.
- Stocks: Although stocks are not a primary financial instrument in Forex, some Forex brokers offer trading in stocks of companies listed on major stock exchanges. Trading stocks in Forex usually involves trading contracts for difference (CFDs), which are derivatives that allow traders to speculate on the price movements of the underlying asset without owning it.
- Bonds: Bonds are debt securities issued by governments or corporations to raise capital. Forex traders can trade bonds through CFDs, just like stocks. Bond prices are affected by interest rates and inflation, among other factors.
Forex trading involves a high level of risk, and traders should be aware of the potential losses before entering the market. It is important for investors to have a solid understanding of the financial instruments being traded, as well as the fundamental and technical factors that affect their prices. With proper risk management and a sound trading strategy, Fx trading can be a profitable venture.
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