Since forex traders profit from the movement of currency pairs’ prices, these prices are very important to them. Technical analysis is the best way of predicting price movements and letting an investor know when to put their money in a currency pair.
Understanding Technical Analysis in Forex Trading
Technical analysis in forex trading includes several techniques that all try to predict the price of a currency pair based on past price data and patterns.
Technical analysis works well in forex trading because of some of its unique characteristics. Forex trading has a very high volume, so analysts have a lot of historical data to work with. It also has a massive number of traders, investors, and other players, in addition to being sensitive to long-term trends. Forex market trends happen over a long period, meaning they are fully developed when people start looking at them.
Technical analysis is not only for long-term trading and investing but can also be used to develop short-term trading strategies.
Forms of Technical Analysis
Technical analysis can be automated or done manually. A manual trading system entails a trader looking at and analyzing various technical indicators. They then interpret the data they are looking at and use this to decide whether to sell or buy.
Automated analysis uses software where the trader teaches the system to look at specific patterns in the data to interpret that into a decision to buy or sell. These systems remove bias and other behavioral aspects that make humans less-than-perfect traders. For this reason, such systems are usually much better than humans at trading.
In the last few years, we have seen systems that use artificial intelligence and machine learning. These systems learn independently, and a person only needs to feed them historical forex trading data. They can also execute trades on behalf of a trader if they are given the necessary access and permissions.
Technical Analysis techniques
Forex traders use various techniques to predict the future price of a currency pair.
Wedge Patterns
These are created using two lines that converge just as the price of a currency pair is about to change. They are used alongside candlestick charts, which show price movements in currency pairs. Candlestick charts have been used for a very long time in forex trading and are considered one of the most important technical analysis tools.
Because they show that a trend is about to reverse, wedge patterns are a handy tool for telling traders when to invest or buy currency pairs. For example, a downward-trending wedge pattern could indicate that the price is about to go up, so investing then would be a good idea.
These patterns are either bearing or bullish depending on how the wedge pattern is sloping. They are meant to be used for long-term pattern recognition, typically three to six months or over 50 trading sessions.
Candlestick Charts
We have mentioned them briefly above, but they are so important that they require their own section. Candlestick charts and patterns belong to a class of eastern technical analysis techniques. They are crucial for short-term trading and critical for identifying price trends and when they will change.
Some examples of candlestick patterns include handing man, hammers, morning and evening stars, dojis, and engulfing candles.
Reverse Charting
This is a simple technical analysis technique; just turn the chart upside down. It is an ancient technique from the days of paper charts, and it has become more difficult in the age of computers.
One thing you could do, however, is try reversing the currency pair to see whether that pair is bullish or bearish. Take a pair like CAD/USD. If you reverse the chart and see an upwards trend, open a position that the price of the pair USD/CAD will go down. You can also invest in the price of CAD/USD going up alongside the opposite position.
Bollinger Bands
This technical analysis technique uses two lines drawn two standard deviations above and below the price’s moving average. It is an excellent indicator of volatility because it shows when many people are buying a currency pair if the price gets too close to the line above. On the other hand, the price moving toward the bottom line indicates that the currency pair is oversold so there is more supply than demand, leading to a lower price. Traders can use Bollinger bands for in-trade selections and to set stop-loss levels and price objectives.
Combining These Techniques
These techniques work best when they are used in combination. If two or more technical analysis methods come to the same conclusion, then you can be very sure that what you are seeing is correct.
Conclusion
Forex trading has always been about analysis, whether trading short- or long-term. Computers have made this analysis much easier, with software now even able to predict prices and open or close positions to ensure maximum profitability.
