Technical analysis is the analysis of the price action without considering the economic trends and facts. In a very dynamically changing market of Forex, analysis of the the price action is a continuous process. Analyzing the price movement before deciding about the trade to decide about the entry levels and after entering a trade to decide about the exit level is a must .
In this section we will discuss about Forex price action's technical analysis but while reading about the overview, you may wish to have some detailed overview about some of the important technical analysis indicators and chart patterns etc. Please click on the following technical indicators to check these in detail. Please also check daily technical analysis update for various current pairs for which the hyperlinks are given at the bootom of this page.
Forex technical analysis is basically an analysis of price action for any currency pair. Ideally the price movement in the Forex market should be because of health of economy of the country/region and demand and supply for the currency in concern. But then when the currency pairs are traded as speculative investment, only the ideal reasons are not sufficient and hence many other factors drive the direction of the price movement.
Apart from Fundamental factors the price movement in Forex market is governed by technical Analysis, psychological aspects and sentiments. This is mainly because large volumes are bought and sold because of these factors and that, in turn, pushes the prices in the direction of the positions taken. For day trading or short term trading psychological aspects and sentiments become very important. Short term Forex trading is not just about the fundamental factors but the analysis of how various trading floors are thinking and behaving. Technical indicators help us in analyzing the market-mood by analyzing how the market is moving. Technical analysis indicators also become very important as the Forex traders around the globe make their trading decisions taking into consideration the signals generated by same indicators.
Well, the above statement may look very simple but if hundreds of thousands of Forex traders may be making their buy and sell decisions using the same technical indicators then all should be making profits by buying and selling around the same price levels. But well, that does not happen but why?
Well, any technical analysis indicator would show a different picture if you are using different time frame charts. The picture what an hourly Forex chart would show would be completely different from the picture of daily or weekly chart for that currency pair. An hourly Forex chart may be giving a buy signal but the daily chart may be suggesting a downtrend and a sell signal around that price level.
The success in trading lies in comparing charts of different time periods (e.g. hourly chart, 3 or 4 hourly chart, daily chart etc) and then placing your trade. A bigger time frame chart may be used for the understanding of the overall trend and a shorter-term time frame chart may be used to decide the entry and exit levels. The success also depends in not taking the decision based on a single technical indicator but using a combination of complementing technical analysis indicators i.e. one indicator to judge the trend situation and another to decide on the entry and exit points and also stop-loss orders and take-profit targets. We should also keep an eye on the the fundamentals and current major news releases. The market does not move only based on the economic releases but major political and other changes as economy depends of the combination of all these factors. The economy of a country, in general, may be doing great, there may also not be any political disturbances and even the charts may be prompting you to go ahead and buy but a major natural disaster can change all this and may prompt you to sell everything you hold or even what you do not hold. Trading is not a game but a business and a multi-dimensional analysis and eyes and ears on every factor which may affect the price movement are required.
For day trading the short time frame Forex charts e.g. hourly or 30 minutes are very important but the same should not be ignored even for long-term trading. A daily chart (1-day chart) may be giving a signal to buy but an hourly chart may give the signal that the prices may go down. In such situations we may wait for the prices to go down a bit more before buying that currency pair to maximize our pip profits.
My personal experience with some of the commonly occurring Forex chart patterns has generally been very successful. The main reason is that I never take trading decisions based on the trading chart of a particular time-frame but always use a long time frame chart (e.g. daily) and shorter time frame charts e.g. hourly and 3-hourly. Why, I raised the point of these commonly occurring chart formation or patterns is because always look for those Forex chart patterns while analyzing the price movement based on your chosen technical analysis indicators. The reason is simple that you would find these chart patterns working miraculously most of the times and if your technical indicators are suggesting one trading move for a currency pair but the chart pattern is suggesting otherwise then you may prefer to follow the advice of the chart patterns or the combination of the technical indicators and moves suggested by the chart patterns for the short-term moves.
You may find a question on many Forex forums whether people really make profits out of currency trading. My answer is always that if no one makes money then no one would be trading Forex as speculative investment. So the answer is that if one can make profits, and I know many who make, then anyone can have success if they learn and maintain the trading discipline. What it needs to be successful is taking your trading decisions considering a combination of technical analysis indicators while not ignoring market fundamentals and economic releases and also keeping the eyes open for emerging chart patterns. And well, did I forgot the trading discipline and money management? If I did while typing this, please don't forget while you trade.
Repeating: With all the technical and fundamental analysis correct and in place please do not forget the psychological factors and trading discipline/money management which can make or break a Forex trader. Please read our trading psychology section also.
Another famous question which never seem to go away and that is the comparision of Fundamental and Technical analysis. Technical analysis Vs. Fundamental analysis and which is better for trading? Well, analysis tools cannot be compared with girlfriend or wife where we have the moral issue about having more than one. Oooops!!! My apologies to fellow ladies traders. Well, I include husbands and boyfriends also. In a relationship if you have more than one then you are in a big problem but in the trading if you are having only one then you are in a very big problem. Technical and fundamental analysis complement each other and hence never give an option to select one of the two. Analyze the market technically while considering the fundamental factors as mentioned above. And yes, if you trade with only technical analysis then please use a combination of technical analysis indicators and that too on the charts of a combination of time frames (hourly, daily and so on).
Please visit Technical Analysis Indicators page for the details of important and commonly used indicators for analysis of price action, This page also details other tools which help in analyzing the market technically.