Technical Analysis in the Forex Market

forex fundamental and technical analysisForex traders spend the majority of their time analyzing the foreign exchange currency market (FOREX) in an attempt to properly forecast the direction the price of a currency pair will take. There are two main approaches to this analysis: fundamental and technical.

Fundamental analysis is done using a longer time frame and also gives more weight to news events and economic data releases that are expected to have an effect on prices. The effects of weather and political happenings also play a major role.

Technical analysis, on the other hand, maintains that all the events on which fundamental analysis relies are all factored into the direction prices will take, since it is very likely that all these events have happened in the past and will happen again in the future. The outcomes of all these various events are displayed on a price chart, forming patterns that will likely repeat, giving technical traders a reasonable probability of being predictive of future prices.

Most Forex traders will express a preference for one form of analysis over the other, but the reality is that they will generally combine both types to formulate their trading strategies.
Technical analysis is probably better for short term trading, such as scalping and day trading, and it is with this in mind that this brief introduction to technical analysis is offered.

The primary component to Forex technical analysis is the price chart. This is a graphical representation of prices that shows price on the x-axis of a grid chart and time on the y-axis. These charts are highly customizable, allowing the trader to select such aspects as the time frame observed, how prices are depicted and which currency pairs are displayed.

Traders can then further modify the charts with indicators and oscillators from the trading software’s tool box in accordance with their preferences. Some of these tools are called overlays, meaning that they are seen right on top of the time/price chart, while others will be seen in a separate window, usually below the time price/chart.

Most technical traders will use some combination of these indicators and oscillators that they feel give them the highest probability of forecasting future price movements. New traders, and even experienced traders, need to remember that using too many of these tools makes for a chart that is more distracting than helpful. Too many indicators and oscillators often lead to a case of “paralysis by analysis,” where waiting until all trading tools are perfectly aligned and in agreement results in almost no trading opportunities being taken.

The other thing about technical analysis tools and this is offered completely without any intended sarcasm, is that they work perfectly when you look at the left or historical side of the price chart, but frequently seem to fail spectacularly when you use them to enter a trade on the right, or future side of the chart.

Since Forex trading is really more of an art than a science, technical trading is no substitute for experience and practice. Start with one or two indicators and maybe two oscillators, observe how they perform under different trading conditions, and experiment with others to determine which ones give you the best feel for what the market will do. Contact a LucrorFX specialist today for a consultation.

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