Technical analysis is a technique used by forex traders to take advantage of general trends in the market. Technical forex traders use a combination of charts and indicators to time their entry and exit points into the market, ensuring they are buying their currencies at the correct time and selling before the market plummets. If you are looking to get into the world of forex trading, technical analysis can be a great starting point. Before you get started, it's important you know the three most important laws of forex trading:
Price Movement is Not Random
One of the cornerstones of technical analysis is that price changes are not random. Whilst small fluctuations can be expected due to short swings in the market, technical analysts agree that large or permanent changes in price move in trends. Without this agreement, technical analysis would be near impossible to carry out, as traders rely on a number of different chart indicators to time their entry and exit points.
As a technical analyst, your goal is to identify where major trends are occurring so that you can take advantage of the various chart indicators to maximize your profit. There are a huge number of different chart indicators the forex traders use to time their entry and exit points, but as a new trader, it's best to limit the number of forex indicators you use until you are more comfortable with the market.
Current Price Conveys All Available Information to Traders
Where fundamental analysts may rely on economic forecasts, political instability, and varying interest rates to make decisions on the forex market, technical analysts believe that all of the salient information governing a currency is contained within its current price. Technical analysts believe this because of the speed at which the market moves; as soon as information is known to traders, the market will start to move in a particular way extremely quickly.
As such, technical analysis can provide a great starting point for new traders looking to learn the ropes of the forex market. The learning curve is steep, but will take much less time to climb than learning about each currency's "trigger points" and the many factors governing its price. Technical analysis also evens the playing field somewhat when it comes to market information. There is no doubt that, regardless of how many newspapers you read or news channels you follow, pertinent information will reach experienced traders quicker than it will reach you. By employing technical analysis, you can take advantage of patterns to ensure you don't get left behind on the market.
Strong Should Always Be Paired with Weak
One of the distinguishing features of forex trading as opposed to stock trading is that currency is always traded in pairs. This means you won't be trading US dollars on its own; rather, you may be trading the exchange rate between US Dollars (USD) and Japanese Yen (JPY) or Great British Pounds (GBP). When trading, you will essentially be buying one currency and shorting another. One of the best ways to maximize your profits on the market is to pair the strong currency with the weak currency and take advantage of any long-term trends that may arise.
Another important thing to note is that currency pairs often move in tandem. Experienced traders call this currency correlation and use this information to make profitable decisions on the market. For example, forex charts may indicate that USD/JPY and JPY/GBP move together a high percentage of the time. Knowing this will allow you to enter the market with both currency pairings, ensuring you take advantage of this strong correlation to boost your earnings. Remember, however, that currency correlations aren't always positive, and you can use negative correlations to avoid investing in currencies that cancel each other out.