What is technical analysis? Technical analysis is perhaps one of the most interesting topics for traders all around the world. That’s why I want to write an article about technical analysis as I mentioned before. Technical analysis will provide you a better understanding of forex market and make you a better trader overall if you learn and use it appropriately. So, how to do technical analysis in forex?
What is Technical Analysis?
Technical analysis is the analysis method for predicting the future prices of pairs and other investment instruments by examining past price movements in the market with various statistical indicators and formations.
To become a successful and profitable forex trader, you need to know how to do fundamental analysis and technical analysis and utilize them both together. In a different article, I have talked about fundamental analysis and relationship between fundamental & technical analysis. I strongly recommend you to check that article as well.
There is a constant comparison between fundamental and technical analysis among the traders. Some traders favor technical analysis while some others are strong believers in fundamental analysis. However, there is no need to take one side because like I said, they are based on different approaches and successful traders make use of both technical and fundamental analysis.
By analyzing past price movements, using statistical indicators such as RSI, Moving Average, MACD and technical formations such as Double Top, Double Bottom, Head and Shoulders, technical analysis will help forex traders to find best time and level to buy or sell pairs.
Do Technical Analysis Methods Work?
This is a very controversial topic. Both traders and economists always argue on this. Many years ago some economists were thinking technical analysis is useless and waste of time but I think their numbers are very low these days. Because, technical analysis has become very popular and you can use on almost every instrument and other markets in addition to forex such as stocks, cryptocurrencies and bonds.
Technical analysis is based on a theory that history repeats itself when similar conditions are in place. Technical analysts watch price action, use statistical indicators, oscillators, and formations. Some technical analysts combine both technical and fundamental analysis, on the other hand some of them study only technical analysis. By the way, you can read my article about RSI which is one of the most popular technical indicators used by traders.
In order to do technical analysis, you need to know how to read graphics and learn to find correct support-resistance levels, channels, and trends. I should tell you that technical indicators or formations won’t give you %100 successful results but you can use those tools to increase the likelihood of profitable trades. Besides, I do not recommend you to make a trade decision solely based on one indicator. Before you open a trade, make sure that at least more than two indicators are giving the same signal. You also need to consider fundamental factors such as economic data and central banker speeches.
I can say the best and most used indicators are Moving Averages, MACD, RSI, Stochastic, Ichimoku Cloud and Bollinger Bands. And the best technical formations are triangle formations, double top & double bottom formations, head and shoulders formations, flag and pennant formations and rectangle formations. Those are my personal favorite indicators and formations. You can find much more of them if you dig in.
Another important factor for the success rate of technical analysis is timeframes. For example, short-term technical analysts such as scalpers and intraday traders usually use one minute to one hour or four hour time frames. On the other hand, long term traders use daily or weekly charts while applying technical analysis.