Technical Analysis can be considered as the colors on the canvas of Fundamental Analysis. Both need to be there if we wish to have a beautiful painting or in our context success in Forex trading.
Technical Analysis in Forex Trading
Ideally the price movement in the Forex market should be because of health of ecnonomy of the country/region and demand and supply for the currency in concern. But then when the currency pairs are traded as commodity, only the ideal reasons are not sufficient and comes in other factors which 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. For day trading or short term Forex trading psychological aspects and sentiments become very important. Short term Forex trading is not just about the fundamental analysis but the analysis of how various trading floors are thinking and behaving. Technical indicators for technical analysis 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 same technical analysis indicators.
Well, the above statement may look very simple but if hundreds of thousands of traders may be making their buy and sell decisions using the same technical analysis indicators then all should be making profits by buying and selling around the same price levels. But well, that does not happen but why?
Forex Technical Analysis: Combination of Technical Indicators and Time Frames
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 forex chart for that currency pair. An hourly chart analysis may be giving a buy signal but 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 making your analysis. And also in not taking the decision based on a single technical indicator but using a combination of technical analysis indicators and also considering the fundamentals and current major economic releases.
For day trading the short time frame 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.
Technical Analysis in Forex Trading : Chart patterns
My personal experience with some of the commonly occuring Forex chart patterns has always been very successful. The main reason is that I never take Forex trading decisions based on the trading chart of a particular time-frame but always use a long time frame Forex (currency) chart (e.g. daily) and shorter time frame Forex (currency) charts e.g. hourly and 3-hourly. Why, I raised the point of these commonly occuring chart formation or patterns is because always look for those Forex chart patterns while doing technical analysis 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.
Forex Technical Analysis - Combination with other factors
You may find a question on many Forex Discussion forums whether people really make profits out of Forex / currency trading. My answer is always that if no one makes money then no one would have been trading Forex. I, for sure, make money trading forex and that's why I am involved in currency trading for so many years. So the answer is that if one can make profits, and I know many who make, then anyone can have success trading forex. 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 which can make or break a Forex trader.
Technical Analysis v/s Fundamental Analysis in Forex Trading
Another famous question which never seem to go away. Well, analysis 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 analysis and fundamental analysis complement each other and hence never give an option to select one of the two. Use technical analysis 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 Forex charts of a combination of time frames (hourly, daily and so on).
Technical indicators in Technical Analysis help us in analyzing the following:
Identification of the trend:
Whether the trend for the currency pair is bullish (uptrend) or bearish (downtrend). Or the currency pair is running sideways (range movement).
Strength of the trend:
If there is a trend (up or down) then whether it's a strong trend or not.
Resistance and Support levels:
If the currency pair price is falling then at what levels we can expect support and expect a reversal to upward movement. And If the currency pair is having an uptrend then at what levels we can expect resistance and can expect a reversal to downward movement.
Extent to reversal:
Suppose a curreny pair is having a trend (up or down) and the trend slows down. Our analysis says that the trend should continue but a correction in opposite direction may take place... but to what level? Technical analysis indicators like Fibonacci retracements indicates the possible retracement levels during a reversal or price correction during a trend.
There are too many technical analysis indicators available with various online Forex trading platforms. We prefer to use a few popular ones. Let's have an overview of some of those.
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