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Technical Analysis for Currency Trading
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Technical Analysis Currency Trading
There are many different methods and tools utilized in technical
analysis, but they all rely on the same principles: That price
patterns and price trends exist in the market and that they
can be identified and turned into profit opportunities.
Technical Analysis in currency trading is based on three
core principles:
Markets Discount
The actual price is a reflection of everything known to
the market that could possibly have an affect on price movement
and includes supply and demand, political factors, and the market
sentiment.
Prices Move in Trends
Prices can move in three directions - they can move up,
down or sideways - once a trend in any of these directions is
in effect it usually, will persist and create a trend.
History Tends to Repeat Itself
To a technical analyst in currency trading, the trader psychology
that affects prices is extremely important, as human nature
is repetitive and this shows up in repetitive price patterns.
Technical Indicators
While the logic of technical analysis for currency trading
is universally accepted, there are numerous ways to execute
technical trading systems.
There are huge amounts of indictors available, to be used
alone, or in combination.
Trend Indicators
A trend is a term used to describe the persistence of price
movement in one direction over time. The easiest way to spot
trends is via trend lines, drawn below price lows or above price
highs.
Support/Resistance Indicators
Support and resistance describes the price levels where
markets repeatedly rise or fall and then reverse. This phenomenon
is basic supply and demand, and when prices break above or below
significant support or resistance, a big move can follow very
quickly.
We believe that trend lines should be the basis on which
ANY technical analysis of currencies should be based on - and
the indicators below are for confirmation:
Volatility Indicators
Volatility is a general term used to describe the magnitude,
or size, of day-to-day price fluctuations independent of their
direction. Generally, changes in volatility tend to lead changes
in prices.
Cycle Indicators
A cycle is a term to indicate repeating patterns of market
movement, specific to recurrent events, such as elections, year-end
monetary repatriation etc.
Cycle indicators determine the timing of a particular market
patterns. A good example would be Elliott Wave theory. Cycle
indicators however in our view are of little or no use, in the
technical analysis of currencies.
Momentum Indicators
Momentum is a general term used to describe the speed at
which prices move over given time periods.
Momentum indicators determine the strength or weakness of
a trend as it progresses over time. Momentum is generally highest
at the start of a trend and lowest at market turning points.
Sentiment Indicators
These indicators attempt to gauge the general attitude of
the investment community, to determine whether investors are
bearish or bullish.
These indicators are only to be used when extremes of sentiment
are reached, either bullish or bearish.
Putting it all Together
Traders make money from the technical analysis of currency
markets in many different ways, however we believe that trend
lines backed up by just a few additional indicators (to help
time market entry exit and stop levels) can be very effective.
The best way to succeed in technical analysis of currency
trading is to use a simple robust system based on trend lines
and just a few filter indicators such as the ones above and
you will soon find yourself catching the big trends that yield
the big profits.
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