An introduction to Forex Technical Analysis

An introduction to Forex Technical Analysis

- in Finance

Trading in the forex market is risky, its volatile nature can surprise even the most savvy investors. Technical analysis is an investor’s guide to navigating the market, by studying previous price movements; patterns and trends can be formulated to predict future conditions. Price is the fundamental indicator that influences all information so its analysis will reflect market conditions.

Technical analysis is based upon the mathematical chaos theory, which states that within a state of chaos there are identifiable patterns that tend to repeat. Markets can only move up, down or sideways and price action only has two states. When prices move sideways that is range, when prices move up or down that is trend. Up = Bull, Down = Bear.

Technical analysis transcends forecasting trends, its application can help traders identify when and where to enter or leave the market. Charts are the easiest way to illustrate and analyze data. The analysis, to determine patterns is finding the support and resistance levels. Support levels are when price struggle falling below a specific point and resistance levels are where the price encounters trouble moving higher and breaking above a certain point.

Fibonacci analysis can be used to determine support and resistance levels. Fibonacci retracements highlight areas of support or resistance. Fibonacci arcs forecast areas of support or resistance and areas of ranging. Additionally, Fibonacci fans can be used for further analysis. Fibonacci time zones indicate where major price movements should be anticipated.

Bollinger band analysis is used find potential future high and low prices. It is relative to a moving average, which creates patterns that make it easy to interpret volatility by analysing the distance between the bands. Traders who wish to determine when a trend is beginning or ending will find this analysis particularly useful.

Finally, pivot points are built in indicators that feature on most platforms and are the easiest to analyse. They automatically determine support and resistance levels based on the previous daily high, low or close prices. Individually these various tools are adequate for analysing specific aspects of an instrument but to obtain the full breadth of future price movements these indicators should be used in conjunction.

Forex brokers often offer their clients tools enabling them to carry out analysis on the price action shown on the charts. Vantage Fx is one such broker. This award winning Australian broker offers its clients the possibility to carry out technical analysis through the world renowned MT4 trading platform. Vantage FX also offers its clients a comprehensive educational programme through which its clients can learn more about these different trading techniques. In addition to its superb offering, this leading global ECN broker also has some if the tightest spreads in the industry.

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