This article is all about
using technical analysis the RIGHT way - and using Forex
charts to make big consistent profits. Letís start with the basics
of why technical analysis is so effective in Forex trading.
The market prices all known
fundamentals. Using technical analysis means you
can see not only the affect of the fundamentals - but also human
psychology, to give you the WHOLE picture. The simple equation for
Fundamentals + Human Perception =
The great advantage of technical
analysis is that investors determine the price of anything (in Forex
trading or any other market) - as human nature is constant, human
psychology shows up in repetitive price patterns. How do you spot which way human
psychology is going to take prices next? Here we are going to look at some
PROVEN methods and indicators, you can use to generate trading
signals - and turn your trades into low risk high profit
1. The Basics Ė Trend Lines
You need to start and learn to draw
basic trend lines to spot opportunities. Many traders donít use
trend lines, but trend lines are essential when looking at Forex
2. Support and Resistance
Any chartist must be familiar with
this concept. If you understand support and
resistance correctly, it can be the basis of a very successful Forex
Letís define it: It describes the levels where prices
move to and then reverse.
In a bull market prices rise to
resistance levels and fall - in a bear market prices fall to support
and then rise. When prices break above or below
significant support or resistance, a big move can follow -
especially if the resistance or support is valid.
So how do you know if support or
resistance is valid?
Look for many tests - and look for
how many different time periods tests have occurred in - by looking
back at your Forex charts.
3. Watch for the Breakout
If prices punch
through important support or resistance, then the odds are that the
supply and demand position is changing - and the break will indicate
a new trend. Going with breakouts,
and trading in the direction of the break is simple and logical -
but most traders canít do it. Why? Because most traders like to buy
low and sell high - so they wait for a pullback - and this doesnít
come, and they miss the move.
By going with the
break, you miss the start of the move - but the odds of it
continuing are high. Itís a fact that most
major currency trends start from new market highs - NOT market lows.
To catch the trend you need to go with the break, however not every
breakout works - and some fail. So how do you decide
if a break is going to continue? The key is to watch price changes
in terms of momentum and volatility.
Volatility is a term
used to describe the magnitude, or size, of day-to-day price
fluctuations - regardless of their direction. Generally, changes in
volatility lead to changes in prices - and a breakout that is
accompanied by high volatility, is the ideal set up. An indicator you
should look at to determine volatility is the Bollinger band.
Bollinger bands can also help you identify support, resistance and
targets for the move.
Momentum is a general
term used to describe the speed at which prices move over given
time-periods. Momentum indicators can therefore determine the
strength or weakness of a trend by looking at changes in price. If price momentum
accelerates on a break, then the odds are that the break will
continue. There are two
fantastic indicators for looking at changes in momentum and they
The Stochastic and
the Relative Strength Index (RSI). Both give you a highly visual
picture of changes in price momentum.
A Simple but Very
Effective Way to Trade
If you can spot valid
support, watch for breakouts, and then confirm them on your Forex
charts, using volatility and momentum indicators - you then have a
system that can make big profits in Forex trading.
by Stephen Todd