Just about anyone new to trading the foreign exchange market would benefit from educating themselves about the various methods of forex technical analysis that are widely used by professional traders. These methods usually involve a careful review of the currency market's price action to obtain information about its future direction.
Furthermore, those who wish to learn technical analysis can explore a variety of techniques which may help them trade more objectively and profitably. The following sections of this tutorial will briefly touch upon how to get started if you wish to learn it in order to help you assess the market's probable future direction from reviewing charts.
Most traders interested in performing forex technical analysis themselves will start off on the right foot by obtaining a reputable charting service that offers charts for a variety of historical time periods. Such essential technical analysis charts should be available for all of the currency pairs that they are seriously considering trading.
Some of the more popular types of technical analysis charts in use among traders include:
- Bar Charts - Candlestick Charts - Line Charts - Tick Charts - Point and Figure Charts
The more sophisticated currency trading platforms - like MetaTrader4, for example - usually offer traders the ability to generate most of these price chart types.
Additional features of a charting service that traders might benefit from include being able to:
- Review high, low, open and close levels by pointing to the chart. - Chart different time frames, such as monthly, weekly, daily and hourly. - Plot important lines that define trends, channels, support and resistance. - Add and read levels for the technical indicators you need. - Save basic chart profiles for later use. - Enter trades directly from the charts being reviewed.
An important aid for those who wish to learn technical analysis can be a good introductory book on the subject like "Technical Analysis of the Financial Markets" by John Murphy. Doing so will help you learn the basics, and you should also start to comprehend the unique jargon commonly used among technical analysts.
Although a detailed discussion of specific methods lies beyond the scope of this article, some broad areas of study that those wishing to learn technical analysis can delve further into might include the following:
Chart and Pattern Analysis - This method involves reviewing charts carefully to discern trends, as well as levels of support and resistance. Traders can also see if classic chart patterns that reflect key market psychological states are occurring that have well established outcomes.
Technical Indicators - A wide variety of computed indicators exist that help technical analysts quantify market conditions and generate trading signals. These indicators are generally calculated from forex market observables like the exchange rate, trading volume and futures contract open interest for the currency pair of interest.
Elliott Wave Theory - This advanced method is based on the idea that markets move in repeatable cycles of trends followed by corrections that respectively consist of five and three waves. A detailed application of this Theory can help develop an improved sense of market timing and better assess the probabilities of a particular outcome that can boost profitability when trading currencies.
As a suggested learning path, a trader new to forex technical analysis can start by plotting technical analysis charts and performing chart pattern analysis, including how to identify support and resistance levels. They might then move on to graphing the various technical indicators to obtain more information about the market’s behavior from an objective, numerical perspective. Finally, they could study the more advanced forms like Elliott Wave Theory that can help them grasp the bigger picture unfolding in the market.
