Using Technical Analysis in Forex Markets

Technical analysis has practical uses for investors in all types of asset classes and markets, regardless of whether the investor’s focus is stocks, commodities or foreign exchange. Indeed, many of the technical and analytical tools commonly relied on by investors can be applied and understood in the context of different investments even if the investor is unfamiliar with that particular type of trading: simply put, if you have trained yourself to rely on your analysis of charts, for example, and have learned to spot certain chart patterns and respond to them when making your stock trading decisions, then you already have the skills needed to analyze Forex charts and apply the exact same methodology, responding to the same patterns, regardless of whether you have Forex trading experience.

Forex currency pairs move in trends, experiencing highs, lows and breakouts for any given time period in the exact same manner as do stocks. Similarly, the concepts of resistance and support so fundamental to stock analysis also apply to forex, where resistance is the upper price level and support is the lower level below which a currency pair most likely will not trade.  A forex trader who understands this fundamental dynamic is well on his way to being able to utilize technical analysis to predict market movements and maximize his forex gains.

Your level of fluency in charting and in the use of related technical tools—or lack thereof—should not be a deterrent. Simple line charts describing the movement of a currency pair over the charted time period can be useful in spotting general trends, and trend lines (which connect highs and lows) drawn on your line chart can highlight this historical movement. Candlestick charts, with their bodies and wicks, describe not only opening and closing prices, but also highs (resistance) and lows (support), providing a more thorough understanding of trends and movement. Even bar charts can be useful in indicating a range of opening and closing prices over time. Patterns which emerge within all the various chart types can be interpreted for their meaning as well, confirming the trader’s analysis and allowing him to position himself for his next trade.

Traders seeking further confirmation of their hunches prior to entering or exiting any position can rely on a wide range of additional indicators to support their analysis. Some of the more common indicators used in Forex trading are Fibonacci retracement (also known as Fibonacci levels), which seek to predict resistance and support levels based on the ratios between price levels within a given range, and stochastics, an indicator borrowed from stock trading which measures closing price against price range as an indicator of trend movement. The concept of moving averages so familiar to stock traders also applies to Forex. The combined use of such indicators and charting coupled with an ability to read and interpret chart patterns is a powerful recipe for making a formidable Forex trader, and is easily accomplished; complicated as it may first appear, the key to success in implementing technical analysis is to recognize, quite simply, that regardless of which type of chart(s) you choose to rely on, or which type of indicator(s) you choose to confirm your inclination, all technical analysis is based on the fundamental concepts of support and resistance, and in trying to identify and predict those two crucial points. If you utilize technical analysis, the trends should easily lead you toward making these predictions.

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