Submitted by Cesar Zambrano of forexfraud.com
Disclaimer: The author’s views are entirely his or her own and may not reflect the views of innerfx.com
If fundamental analysis explains why currencies move in a particular direction, then technical analysis is the tool that answers the “when” part of the question. For many investors that are not analytically inclined, technical analysis represents a formidable hurdle that can only be cleared with hours of instruction and years of practice. Technical skills can take years to perfect, and experience is required to develop consistent interpretative abilities, but the basics of the art do not require a graduate degree in order to be proficient. Although there are many levels of complexity to technical analysis, one can benefit from focusing on a few key pointers.
Beginners are always advised that they must have a detailed step-by-step trading plan before they ever open a forex position. The steps relate to risk and money management techniques to decide lot size and stop-loss order placement, but the majority of other steps relate specifically to inputs derived from tried and true technical applications. The chart below illustrates a number of key points that, once grasped, can make you a more effective trader from the outset and can guide your effort to fine-tune further your technical skills:
The objective of technical analysis is to pinpoint optimal entry and exit points in a market. Plain and simple to understand, but students of the art can easily be swamped by the wealth of technical material that has been developed over the ages. This simple objective becomes lost. The chart above shows a few key points to absorb, each worthy of further research before practicing them on a forex demo account. An aspiring trader may also want to study candlestick formations, Bollinger Bands, and pattern recognition at a later date when time is available. Additional insights can be gleaned from these structures, which lead to that all-important advantage that a trader seeks in every market.
As retail forex traders, we are in the speculation business. Our goal is simply to buy low and sell high, which can be harder than it sounds in the currency markets. With trading plan in hand and mind, market entry becomes our first task. After following our chart’s pricing behavior, it reflects the development of a potential entry point as depicted in the first week of the chart. The “Slow Stochastic” indicator, the oscillator favored by most forex traders due to its accuracy, generates a “Buy” signal that is confirmed by the “MACD” (Moving Average Convergence-Divergence), a lagging indicator.
Your trading plan would instruct you to issue a buy-order for 2% of your account and place a stop-loss order at 20 “pips” below your entry price. Now is the time to ride this winner for all it is worth. The steepness of the rise might suggest exiting the position at the first sign of trouble, and then re-entering to ride the trend to completion. Some traders accomplish this task by using a trailing stop-loss order, another lesson for further study. However, the Stochastic does signal a final exit point as noted by the green circle.
A period of “sideways” action follows where the market cannot make up its mind. Adept traders would ride each of these curves up and down, entering and exiting based on indicator readings along the way. Obvious support and resistance boundaries formed about this pricing behavior, but an astute trader would have also noted that a “double-top” transitioned into a “triple-top” formation, a sure sign that a downward drop in prices was imminent. The last two weeks confirmed this anticipated drop.
Technical analysis need not be a stumbling block in your training regimen. Focus on the basic objectives and move on from there. Keep in mind that Forex trading is risky and never speculate with funds you cannot afford to lose.