April 25, 2017 at 7:01 PM #12661
Introduction to Technical Analysis
Technical analysis in forex trading is the practice of determining a currency’s future price movement by analyzing past activity. This process includes in search of specific chart patterns and analyzing other historical data related to volume and price.
Thus, technical analysis is the study of traders’ behavior and its result on the following price action of currency. The most important data that we need to accomplish our studies are the price histories of the selected currency, together with volume data and time.
Understanding Technical Analysis
The idea of technical analysis is based on three general theories:
1. The market ignores everything.
2. Price moves in trends.
3. History tries to repeat itself.
1. The market ignores everything.
A main characteristic of technical analysis is that it only believes price movement, ignoring the fundamental aspects of the currency. Though, technical analysis supposes that, at any given time, a currency’s price reflects everything that has or could influence the market – including fundamental aspects. Technical analysts consider that the market’s fundamentals, along with larger economic issues and market sentiment, are all priced into the currency, ignoring the need to basically consider these things separately.
2. Price Moves in Trends
In technical analysis, price movements are supposed to follow trends. This means, if a trend has been made, the future price progress is more possible to be in the same direction as the trend than to be against it. The majority technical trading strategies are based on this theory.
3. History tries To Repeat Itself
Another key idea in technical analysis is that history acts to repeat itself, mostly in terms of price movement of any currency pair. Technical analysis uses chart patterns to understand trends and analyze market movements. Even though many of these chart patterns have been used for over 100 years, they are still supposed to be significant because they confirm patterns in price movements that regularly repeat themselves.
Technical Analysis vs. Fundamental Analysis
• Fundamental analysis is a process of gauging securities by trying to calculate the fundamental value of a currency. Fundamental analysts analyze everything from the overall economy and industry environments to the market condition.
• On the other hand, Technical analysis is the calculation of securities by means of analyzing statistics generated by market activity, such as history of volume and prices. Technical analyst do not try to measure a security’s fundamental value but instead use currency charts to identify patterns and trends that may hint what a currency will do in the future.
How do I start with technical analysis?
The practice of technical analysis is an enduring learning process. Starting with familiar indicators such as RSI, moving averages and the stochastic oscillators can help you study how these effective tools are used to help traders make trading decisions.
Introduction to Price Action Trading
Price Action explains the characteristics of a currency’s price movements. This actions are fairly often examined following the price changes in the recent history. Basically, price action is a forex trading method that enables a trader to understand the market and make his/her trading decisions following the most recent price movements in the chart, rather than depending only on technical indicators.
So, Price Action Trading basically is the technique of making all of your trading decisions from a ‘naked’ price chart. This means, no using of lagging indicators such as moving averages to facilitate recognizing strong support and resistance levels or trends.
What tools are used for price action trading?
As price action trading depends on recent historical data and previous price movements, any kind of technical analysis tool like trend lines, charts, price bands, technical levels (such as support, resistance and consolidation), high and low swings, etc. are applied into account as per the trader’s preference and strategy fit.
The tools and patterns used by the traders can be plain price bars, price bands, trend-lines, break-outs, or intricate combinations relating candlesticks, channels, volatility, etc.
Who practices price action trading?
While price action trading is a method to price forecast and calculation, the theory is used by retail forex traders, arbitrageurs, speculators and even trading companies who hire traders. It can be utilized on an extensive variety of securities including forex, stocks, equities, commodities, bonds, derivatives, etc.
Steps performed in price action trading:
Nearly all experienced traders who use price action trading technique employ several options for identifying potential trading opportunities, entry and exit areas, stop-losses and necessary observations. Following just one strategy on one or multiple currency pairs may not bring ample trading opportunities. Most situations engage a two-step process:
1) Recognizing a trend: Like a currency pair price touching a bull/bear level, breakout, channel range, etc.
2) Finding trading opportunities: Like once a currency pair is in bullish trend, is it possible to (a) overshoot or (b) retreat. This is a very personal decision and can differ from one trader to the other traders, even with the same identical settings.
The popularity of price action trading
In forex trading market, price action trading is better appropriated for medium term trades, instead of long term trades.
The majority traders consider that the market follows a chaotic pattern and there is no obvious methodical way to define a strategy that will constantly work. Therefore, utilizing the necessary technical analysis tools with the most recent price movements to discover trade opportunities based on the trader’s own analysis, price action trading has much support in the trading industry.
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