- Price movements are a result of combined market forces. Political events, economic conditions, seasonal fluctuations, supply and demand are all things that can effect currency prices. Technical analysts do not concern themselves with why the market moves, they are only interested in the movements themselves.
- Currency prices on the FOREX market follow trends. Predictable consequences have been linked with many recognized market patterns.
- Historical trends can be used to predict current price movements. Data on the FOREX market has been collected for the last 100 years, over that time certain patterns have become emergent. Human psychology and the way people react to certain circumstances are the basis of these patterns.
Most traders consider technical analysis to be of critical importance even though they may also use fundamental analysis to support and confirm the strategy suggested by technical analysis. Unlike fundamental analysis technical analysis can be applied to many different currencies and markets at the same time. Since fundamental analysis requires detailed knowledge of the economic and political conditions of a certain country it is nearly impossible for any single trader to perform proper fundamental analysis on more than a few countries.
For the beginning trader the complexities of technical analysis may seem overwhelming and they may even wonder if it is actually necessary. If you wish to be successful at FOREX trading you must have a strategy. Any strategy can work but technical analysis has been proven as a reliable and effective method of predicting market changes. Many forces can effect currency prices though so technical analysis is no guarantee, most successful traders utilize a combination of technical and fundamental analysis.
Any quality online FOREX broker should be able to supply you with a large variety of online charts for technical analysis. You can purchase in-depth professional charts, there is usually a monthly fee involved in gaining access to this information. There is also free software available to help you with charting. Charts provide different snapshots of timeframes and usually can also have analytical overlays. These charts will provide a broad over view and can also be zoomed into the tick level. Good charts are updated in real time. These may be available on your brokers site or could be part of their software.
You should learn the market and study trends before for a period of time before you begin actively trading. Most brokers will provide you with a practice account where you can place “paper trades”. Paper trades are just practice trades where no real money is made or lost. They act just like a real trade though so you can see exactly how your trade would have turned out if you had placed it for real. This allows you to become familiar with your brokers system and software as well as learning about the market and how it moves without risking any money while you learn.
The second part of this article will explore the various charts and technical indicators.
READING FOREX CHARTS
Price charts can be simple line graphs, bar graphs or even candlestick graphs. These are graphs that show prices during specified time frames. These time frames can be anywhere from minutes to years or any time interval in between.
Line charts are the easiest to read, they will show you the broad overview of price movement. They only show the closing price for the specified interval, they make it very easy to pick out patterns and trends but do not provide the fine detail of a bar or candlestick chart.
With a bar chart the length of a line displays the price spread during that time interval. The larger the bar is the greater the price difference between the high and low price during the interval. It is easy to tell at a glance if the price rose or fell because the left tab shows the opening price and the right tab the closing price. Then the bar will give you the price variation. When printed bar charts can be difficult to read but most software charts have a zoom function so you can easily read even closely spaced bars.
Originally developed in Japan for analyzing candlestick contracts candlestick charts are very useful for analyzing FOREX prices. Candlestick charts are very similar to bar charts they both show the high, the low, open and close price for the indicated time. However the color coding makes it much easier to read a candlestick chart, normally a green candlestick indicates a rising price and a red one indicates a falling price.
The actual candlestick shape in reference to the candlesticks around it will tell you a lot about the price movement and will greatly aid your analysis. Depending on the price spread various patterns will be formed by the candlesticks. Many of the shapes have some rather exotic names, but once you learn the patterns they are easy to pick out and analyze.
Price charts are not usually used by themselves to get the full affect you need to supplement them with some technical indicators. Technical indicators are normally grouped into some pretty broad categories. Some of the more common ones used to monitor and track the market movement are: trend indicators, strength indicators, volatility indicators, and cycle indicators.
Here is a list of some of the more commonly used indicators as well as a brief description.
- Average Directional Movement Index (ADX) – This index will help indicate if the market is moving in a trend in either direction and how strong the trend is. If a trend has readings in excess of 25 then this is considered a stronger trend.
- Moving Average Convergence/Divergence (MACD) – This shows the relationship between the moving averages which allows you to determine the momentum of the market. Any time that the signal line is crossed by the MACD it is considered to be a strong market.
- Stochastic Oscillator – This compares the closing price to the price range over a specific time frame to determine the strength or weakness of the market. If a currency has a stochastic of greater than 80 it is considered overbought. However if the stochastic is under 20 then the currency is considered undersold.
- Relative Strength Indicator (RSI) – This is a scale from 1 to 100 to compare the high and low prices over time. If the RSI rises above 70 it is considered overbought where as anything below 30 is considered oversold.
- Moving Average – This is created by comparing the average price for a time period to the average price of other time periods.