Currency Trading Technical Analysis
If you have read the section How and Why Prices Move you will understand that knowing the fundamentals does not guarantee currency trading success, you need to be able to measure trader psychology as well.
Currency technical analysis helps you see both and gives you the overall picture.
Many traders don't fully understand the advantages of technical analysis and refuse to believe that it works and some think that it's scientific and can predict the future and both views are wrong – technical analysis does work to get the odds in your favour but those who believe its a science are also wrong, you can't predict the future with currency charts but that doesn't mean, you can't make money with them you can. Here we will explore the myth and reality, of how to use charts and the best way to make profits with them.
What is Currency Trading Technical Analysis?
It is simply defined as the study of price action using charts to establish high odds entry points for trading signals to enter trends in a currency pair either up or down and is based on a very simple equation which is:
Fundamentals ( Supply and Demand Factors ) + Traders Views and Opinions (Trader Psychology) = Price
in our world of instant news and communications technical analysis simply assumes that all known fundamentals are immediately discounted in the price of any currency so by using charts not only do you get all the known fundamentals more importantly, you have every traders view of them combined shown on the chart as well so it gives you a complete picture of all the news and trader psychology at the same time.
Prices are moved as much by the greed and fear of traders as they are by the news and fundamentals.
To prove this all you need to do is to look at some the biggest price moves in history which occurred with little or no change in the fundamentals and the 1987 is just one example but there are many more, before this crash and after it as well. The fact is any markets (not just FOREX Markets) are most bullish at market peaks and most bearish at market bottoms.
So Why is This?
Its simply human psychology which causes a market crash and this is because, humans are emotional beings. Humans will push prices to far to the upside, when greed is at work and will push markets to far to the downside, when the emotion of fear is present. Traders don't just push prices to far at big market turning points though, they also do so to a lesser degree in any trend in motion, as prices spike away from the average in any up-trend or down trend and then return to the average.
So you get big trend changes and also smaller reactions, with in any trend. As a chartist you can trade the big trends with a FOREX trend following strategy and smaller reactions within the trend, with a swing trading strategy. In terms of market turning points a contrary trading strategy is used to try and catch the trend change.
Because humans make the price of a currency pair and human nature never changes, the traders psychology is actually reflected in the chart of any currency pair. Certain formations repeat over time and the currency chartist, aims to enter trading signals into the market when he sees the odds in his favour.
Markets Discount All Fundamentals
As we have just seen the chartist assumes all known fundamentals will quickly be discounted by the market and will show up quickly in the price action. You are Not ignoring the impact, of the fundamentals when using charts, you just assuming that they have been factored into the price. In addition the chart reflects the traders views so you are trading the truth without an opinion.
A Trend in Motions is More Likely to Persist than Reverse
This becomes obvious, if you look at any currency chart you will see long trends that move up or down and another assumption, technical traders make is - a trend in motion is more likely to continue than reverse. This means, you should always trade with the trend until, you see signs of a clear reversal and not try and fight a trend.
History Repeats Itself
The core belief of FOREX chartists is that technical analysis works because what has happened in the past, will happen again in the future. Human behaviour will continue to show up in price patterns and trends will repeat themselves, time and time again.
The Advantages of Using FOREX Charts
There are many advantages of using technical analysis and the main ones are list below:
FOREX charting is easy to learn, all need to do is spot the chart formations and there easy to spot and easy to learn quickly.
A currency trading strategy based on charting is very time efficient in terms of learning it and also trading it in the market. You can learn technical analysis in a week or two and if you are following long term trends, you can spend just 30 minutes, to an hour a day trading.
With today's technical analysis software and charting programs, you have all the information you need quickly and in many instances free and with the power of FOREX software you can run tests on rules on any currency pair you wish. There is no big investment in charting software which was the case, before the Internet – you can now get it for free.
Charting is simply looking at the price and nothing else and as the old saying goes -the market price is the right price so you can ignore the news and keep your opinions and emotions out of your trading.
The Limitations of Technical Analysis
There are numerous theories which tell you markets move to scientific equations such as Fibonacci, Gann, and Elliot Wave and in addition, numerous FOREX robots which tell you the same but they all lose money because while human behaviour is constant its not going to repeat exactly the same way in each trade set.
Humans are not logical, their emotional and there is never any certainty, of exactly what they will do but you can trade the odds and win. While you won't get your market timing right every time and will lose some trades, if you trade high odds set ups, you will make a lot of money over the longer term.
Following on from the above points is don't make your charting system to complicated. This is because there is no hidden order or equation to price movement and making a system to complex will simply see it get destroyed by the market. You therefore need to keep your system simplistic and if you do, you will have a far better chance of making money with your trading signals. This can actually be seen as an advantage because a system with very few inputs is easier to learn and apply, although but the nerds who develop complex algorithmic systems, won't agree but that's their choice - simple technical systems work best.
Trading the Odds with Currency Technical Analysis
FOREX technical analysis is not a science its an art but if you want to learn currency trading quickly and have a powerful method of making money in the markets, its a great skill to have, to help you pile up great profits in global currency markets.
If you want to know more about how to make profits with currency technical analysis, you should check out the other sections of our site and look at Currency Price Movement and then, check out how to build a trading strategy based on the best Currency Charting Techniques and you will have the education you need to to make money fast with technical analysis.