As a beginner forex trader, you might think it’s a game of luck. And, you will be so far away from the truth. Forex trading success requires skill. Skill built over years of practice and consistent trading.
One of the critical skills in forex trading success is technical analysis. Technical Analysis refers to thorough historical research on the price of a currency pair to help you predict its future movements.
Many traders have won trades that they have put in sufficient technical analysis. Successful traders use the following technical analysis methods in their trading.
Moving averages are often combined with trendlines to help traders get into a promising trade. They are popular technical analysis tools. They generally help traders to take advantage of the changes in price movement.
Moving averages display as a line on a chart. This line can help you identify how the price of a currency pair is moving over time. You can use the line to check the price back up to a month.
Over this period analyzed, you can identify a trend. Depending on the price movement, you will identify points when the price movement changes.
These points will help you make your profit. Try to identify the next price change to take a position. Or, take advantage of the current movement and take a short term position to where you expect the price change.
Moving averages are best suited for long-term position traders. Many traders view moving avenges as more stable than other technical analysis tools. For short term traders, moving averages are not their best analysis tools.
Like moving averages, forex oscillators indicate the position at which it a trade is likely to turn. Forex traders refer to this turn as an opposite correction. It comes when the current trend on a specific currency pair trade has reached a maximum point.
So, when the price of a currency pair is too high, it is termed as overbought. An opposite correction is expected for the price to start going down. When the price has reached its lowest level, the currency pair is oversold. Expect an opposite correction on the price.
Good forex traders use forex oscillators to identify the best time to get into a trade. It is generally agreed that it is better to get into a currency pair trade when it is oversold. Then exit or take your profit at the overbought position.
Every opposite correction means that there will be more traders taking positions on the currency pair. This is why it is important to know how to use forex oscillators for your technical analysis.
Fibonacci Retracement Lines
Fibonacci Retracement Lines are used to identify points a trader can get into a trade for maximum return. They are also known as Fibonacci retracement levels.
Fibonacci retracement lines are as their name suggests are horizontal lines. They indicate the best support and resistance levels. This is where price movements are likely to take place.
As a technical analysis method, they are based on the concept that a large move in the market leads to a smaller portion of retracement. Further, these retracement portions are predictable. Fibonacci retracement lines are a continuous pattern. As a result, traders can use predictable percentages to predict price movement and to set their take profit and stop-loss levels.
Fibonacci levels have been used in forex for a long time. They are a reliable technical analysis method that many traders can depend on.
Their major disadvantage is that they are not based on any mathematical or economic principle. They are mostly based on how a large number of traders feel about a trade.
Bolinger bands are used together with moving averages. As a trader, you use Bolinger bands to identify how the price of a currency pair is moving alongside the moving average.
Bolinger Bands suggest that a new price trend begins when the price of a currency pair surpasses a moving average. This happens when the moving average is surpassed by at least 2.5 points of standard deviation.
Combined with other analysis methods, Bolinger Bands are highly useful tools to have as a trader. They help you identify volatility in the market quickly and easily.
Technical analysis is an important skill to have if you want to succeed as a forex trader. There are many technical analysis methods. Bolinger Bands, Fibonacci levels, and moving averages are some of the most popularly used technical analysis methods. As a trader, historical data helps you better predict the future. Hence the need for technical analysis.