Technical Analysis Basics for the Foreign Currency Trading Market

The most useful and most successful method of the foreign currency trading system is technical analysis. These foreign currency trading techniques will help you make the right decision while trading foreign currencies.

Technical Analysis VS Fundamental Analysis

The difference between technical analysis and fundamental analysis is that technical analysis doesn't factor-in economic information, and utilizes only the price action of the market. If you are contemplating whether using technical analysis or fundamental analysis, you should know that expert traders use both foreign currency trading strategies, so get familiarized with both options.

Why Use Technical Analysis in Foreign Currency Trading

Technical analysis is the best method to predict short term foreign currency changes and has the ability to generate specific information and forecasts about currencies that no other method could. Even though a lot of beginning traders avoid using technical analysis because of its use of mathematics, the traders that learn the basics in technical analysis find it easier to invest later and pick it up in a short time, even if they learn trading foreign currencies by themselves.

What Technical Analysis is Used For Currency Trading Market

Technical analysis focuses on four Foreign Currency Trading options: Open, High, Low and Close. It consists of various charts and indicators that help predict the market direction according to past development. Foreign Currency technical analysis has much in common with other trading markets such as stock market exchange, in the use of charts that are set by different time periods used by the trader. Technical analysis can also give you the headway while you're investing in Foreign Currency Trading margins or leverages, but is also important for regular trades.

Does Technical Analysis Works?

When you use technical analysis, you are predicting the current currency change according to recent year's market behaviors. Patterns that occurred in the past, whether it is head and shoulders tops, or double tops for example, will occur again in certain predicted times, and therefore technical analysis uses this recurrence to predict the next Forex change.

Charting Terms and Indicators

Concepts

Resistance — a price level that may prompt a net increase of selling activity
Support — a price level that may prompt a net increase of buying activity
Breakout — the concept whereby prices forcefully penetrate an area of prior support or resistance, usually, but not always, accompanied by an increase in volume.
Trending — the phenomenon by which price movement tends to persist in one direction for an extended period of time
Average true range — averaged daily trading range, adjusted for price gaps
Chart pattern — distinctive pattern created by the movement of security prices on a chart
Dead cat bounce — the phenomenon whereby a spectacular decline in the price of a stock is immediately followed by a moderate and temporary rise before resuming its downward movement

Elliott wave principle and Golden ratio to calculate successive price movements and retracements

Fibonacci ratios — used as a guide to determine support and resistance

Momentum — the rate of price change

Point and figure analysis — A priced-based analytical approach employing numerical filters which may incorporate time references, though ignores time entirely in its construction.
Cycles - time targets for potential change in price action (price only moves up, down, or sideways)

Types of charts

Open-high-low-close chart — OHLC charts, also known as bar charts, plot the span between the high and low prices of a trading period as a vertical line segment at the trading time, and the open and close prices with horizontal tick marks on the range line, usually a tick to the left for the open price and a tick to the right for the closing price.

Candlestick chart — Of Japanese origin and similar to OHLC, candlesticks widen and fill the interval between the open and close prices to emphasize the open/close relationship. In the West, often black or red candle bodies represent a close lower than the open, while white, green or blue candles represent a close higher than the open price.

Line chart — Connects the closing price values with line segments.

Point and figure chart — a chart type employing numerical filters with only passing references to time, and which ignores time entirely in its construction.

Overlays

Overlays are generally superimposed over the main price chart.

Resistance — a price level that may act as a ceiling above price
Support — a price level that may act as a floor below price
Trend line — a sloping line described by at least two peaks or two troughs
Channel — a pair of parallel trend lines
Moving average — the last n-bars of price divided by "n" -- where "n" is the number of bars specified by the length of the average. A moving average can be thought of as a kind of dynamic trend-line.