Technical Analysis In Forex
Finally, you might be thinking – we are on to the good stuff!
Technical analysis when it comes to trading the market is the lifeblood of your entry and exiting the markets.
Without utilising this skill, you will reduce your odds-on profiting.
Technical analysis is charting an asset on a graph and reading the price in real time.
Analysis can be done through price action or through using indicators that have been programmed to help identify trading opportunities with a glance of an eye.
Technical analysis is an art and a skill that can unlock the optimal timing when it comes to trading an asset.
Technical Analysis is not the holy grail and is interpreted differently from trader to trader.
Technical analysis uses many charts that show the price in the course of time.
We can apply technical analysis to any asset. Such as stocks, currencies, treasuries, and commodities.
In this section, we will cover the how to trade the forex markets using technical indicators that can be used together to give you both the foundation and better actionable knowledge to go out and apply the indicators on your own.
Strengths of Technical Analysis
Focus on the price
If the objective is to predict the future price, then it makes sense to focus on the movements of prices.
Price movements generally precede fundamental developments. By focusing on the action of the price, technicians focus automatically on the future.
It is considered that the market is a leading indicator and generally leads the economy between 6 and 9 months. To keep pace with the market, it makes sense to look directly at price movements.
Supply, demand and price action
Many technical analysts use the open, high, low and close to analysing the price action of a security.
There is information that can be obtained from each bit of information. Separately, these cannot say much. However, in general, open, high, low and close forces reflect supply and demand.
Pictorial history of prices
The graphics are much easier to read than a table of numbers. In most action boxes, the volume bars are shown at the bottom. With this historical image, it is easy to identify the following:
Reactions before and after important events.
Volatility past and present.
Help with the entry point
The beauty of technical analysis is that it can help to time an entry point. One of the most important factors with investing is timing, it doesn’t matter how good the asset is – if you jump the gun and time it wrong, a good analysis can quickly become a poor investment.
Weaknesses of Technical Analysis
Technical analysis isn’t set in stone and therefore is subjective to each analyst, in addition, you could have your own personal bias towards the asset.
You could be going through a bad period of losing and your personal bias is that one of these stocks must go up and make all your losses back, or you could simply love the stock.
Open to Interpretation
Encouraging the argument of bias is the fact that technical analysis is open to interpretation.
Although there are standards, many times two technicians will observe the same diagram and will paint two different scenarios or see different patterns.
Both can offer logical levels of support and resistance, as well as key pauses to justify their position.
Technical analysis has been criticised for being too late.
The asset could have made its move by the time your indicators have confirmed it’s a buy/sell. After such a large move, the reward to risk ratio is not great.
Not all technical signals and patterns work. Or traders see a pattern emerge and never execute the trade, miss the opportunity and then try to force a trade.
In the next section, we will show you how we combine these indicators to filter out high-probability trading setups on any time frame.
Let’s get started…