3 Forex Technical Analysis Tips

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Forex Technical Analysis Tips

It is difficult to find tips about Forex trading that really work. This might be because many Forex trading news websites and self-appointed gurus have varying and contradictory recommendations that they parade around. So, how do you know which work and which do not?

That is the aim of this guide. The following are three solid Forex Technical Analysis Tips (centered around technical analysis) that, if properly learned and internalized, can make a hugely positive impact on your trades. Read on!

Pay attention to price action

“Price is all there is. Price is all that is there.”

Price action is an underrated trading strategy. Although it is one of the most widely used strategies by traders, the full extent of its usefulness is hard to grasp by most. No matter your trading style, you can use price action to have an edge in any of the world’s financial market.

To put simply, price action is the analysis of historical price data to predict the next market move. This is done using specific tools such as candlestick chart patterns. Candlestick chart patterns are an extremely popular tool of analysing price because, among others, they offer a graphic display of the open, high, low, and close (OHLC) price for each trading period. 

©ForexBoat

Candles are of two types: bullish and bearish. A bullish candlestick indicates that buyers are in charge. Hence, the close price is higher than the open. For bearish candlesticks, the converse is the case.

Forex Technical Analysis

Support and Resistance. Master them

“Although the market is unpredictable, there are support and resistance.”

The market is always changing. It is neither logical nor predictable. However, there are support and resistance.

The support and resistance are predetermined levels that indicate the points where the price meets with temporary barriers. Consequently, the price has the tendency of reversing at those points, making them one of the most powerful tools of analysing price action.

The support level is formed when the price is on a downtrend. The candlesticks are forming lower highs and lower lows, a pattern that continues to the level, the support level, beyond which the price seems unable to go. This level is usually confirmed with the formation of different types of bullish reversal candlesticks. At this point, buyers are beginning to take over the trend.

When the price is on an uptrend, candlesticks with higher highs and higher lows are formed. This continues until the price gets to a zone, the resistance level, in which it stalls. Then, usually, there is the formation of bearish reversal candlesticks which signify that the buyers responsible for the uptrend are losing steam, and the price will soon fall. 

Support and resistance are essential in that they respectively provide the levels at which most traders buy and sell. Traditionally, they have provided reliable signals for entering and exiting the market. However, they have their own limitations. 

Learn to trade breakouts

“Even support and resistance are broken some of the time.”

Although rarely talked about, breakouts could be an invaluable strategy to include in your trading arsenal. When you trade breakouts, your goal is to leverage changes in the supply and demand of a currency pair until its volatility in that particular direction dries. 

©ChartSchool

You might be wondering: what are breakouts? In Forex trading, a breakout is said to occur when the price of a currency pair goes beyond a resistance zone or goes below a level of support. When a breakout forms, a support or resistance is said to be broken.  Usually, price tends to continue to move in the direction of the breakout.  

So, how do you discover potential breakouts? There are many methods. However, most, if not all, are volatility-based. Those methods seek to measure the fluctuations in price over a certain time, that is the volatility of the price. Technical indicators such as moving averages and average true range (ATR) can be used to measure volatility. To spot breakouts, you can then use patterns such as channels, trend lines, and triangles. And build-ups, regions of tight consolidation, indicate contractions in volatility and therefore where they occur, breakouts usually follow.

Still, as a risk management tool, you should use stop-loss orders as a hedge against breakout failures. For instance, when you buy on a breakout above the resistance level, you should consider placing a stop-loss order a little below the resistance level. For a breakout (breakdown!) below the support, you should put a stop loss just above it. 

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