Tuesday, 10 February 2009 10:51

Forex Technical Analysis

Picture depicting that the Forex technical analysis is all about the analysis of price action.

Introduction

Forex Technical analysis refers to the analysis of the price action of a currency pair without considering the economic trends and facts. In a speculative market the prices change every moment. These continuously changing prices do not reflect the fundamentals and fundamentals do not change every minute. The change is because of a continuously changing demand and supply. In a very dynamically changing market of Forex, analysis of the price action is a continuous process. We need to analyze the price action before taking  a position about the entry and then about the exit.

In this section, we will discuss the concepts of the 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. Please also check the daily technical analysis update for various curreny pairs, for which hyperlinks are given at the bottom of this page.

Table of Contents

Concept

As mentioned above, technical analysis in the Forex market is basically an analysis of price action for any currency pair. Ideally, the price movement in the Forex market should be driven by the health of the economy of the country/region and demand and supply for the currency in concern. But when the currency pairs are traded as speculative investment, the ideal reasons alone are not sufficient, and hence, many other factors drive the direction of the price movement.

Apart from fundamental factors, the price movement in the Forex market is governed by technical analysis and psychological aspects and sentiments. This is mainly because large volumes are bought and sold because of these factors, and this, 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 about not only the fundamental factors but also 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 the same indicators.

Technical Analysis and Time Frames

Any technical analysis indicator would show a different picture on different time frame charts. The picture of what the hourly Forex chart would show would be completely different from the picture of the daily or weekly chart. The hourly Forex chart may indicate an uptrend and may give a buy signal, but the daily chart may suggest a downtrend and a sell signal around the same price level.

One of the very important factors for success is to analyze the charts of different time frames and then make a decision about the entry and exit. A bigger time frame chart may be used for understanding the overall trend, and a shorter-term time frame chart may be used to decide the entry and exit levels. The success also depends on making the decision based on not a single technical indicator but on a combination of complementing technical analysis indicators. One indicator may be used to judge the trend situation, and another to decide on the entry, exit, stop-loss level, and take-profit targets. 

While we mentioned a combination of indicators, please note that we indicated “complementing” indicators. It’s always advisable to avoid the use of multiple indicators for reconfirmation purposes. More indicators will only create confusion and make the decisions complicated. Keeping it simple always pays off better. We have a detailed page about it, but we do not wish to miss mentioning that the Ichimoku Cloud is one indicator itself that serves the purpose of a combination.

For day trading, short time frame Forex charts (e.g., thirty minutes or one hour) are very important, but the same should not be ignored even for long-term trading. A daily chart (one-day chart) may give a signal to buy, but an hourly chart may give the signal that the prices may go down. In such situations, we can wait a bit more for the prices to go down before buying that currency pair to maximize our pip profits.

Analyzing The Common Chart patterns

Technical analysis is not only about the indicators, but chart patterns also play a very important role. It is always better to keep an eye on the commonly occurring Forex chart patterns while analyzing the price movement based on your chosen analysis indicators. The reason is simple—that you would find these chart patterns working miraculously most of the time. If your indicators are suggesting one trading move but the chart pattern is suggesting otherwise, then you may prefer to follow the advice of the chart patterns or the combination of indicators and moves suggested by the chart patterns

Technical Versus Fundamental Analysis

One famous question that never seems to go away is about the comparison of fundamental and technical analyses. Technical analysis versus Fundamental analysis - which is better for trading? The simple answer is that technical analysis does work for short-term trades, but we should not ignore important economic releases. We should also never ignore the pure price action and the history and patterns of supports and resistances. Using the combination seems to be complicated, but it brings better results

Other Important Factors

Knowledge and application of technical analysis, fundamental analysis, price action concepts, and chart patterns help us get better results. But the success in trading depends a lot on psychological factors, trading discipline, and money management. These factors are so critical that these alone can make or break a trader. Please read our trading psychology and discipline and common trading mistakes sections also.

Technical Indicators

Please visit the technical indicators page for details on important and commonly used indicators for the analysis of price action. This page also discusses in detail other tools that help in analyzing the market technically. For the ready reference the list of common technical indicators is as follows:

Check our Forex forecast Page for the forecasts of major currency pairs . You may also check the Forex analysis section of the bolgs and also the Forex Technical Analysis thread on forex forum.

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