Many traders who are accustomed to making entry and exit signals based upon market fundamentals may not understand the basic tenets of technical analysis. One of the main assumptions of the technical analyst is that market data discounts everything that can affect the price, meaning that any data that might affect the value of a currency pair is already incorporated into price data.
Probably the most important aspect and assumption of technical analysis for currency traders is that price values move in cyclical trends. It is the goal of the trader to ride this trend and to capture as much price movement on the right side of the market as possible, and this can take place on a time frame of minutes, hours, or days.
It is indeed very rare that a trader using technical-based analysis methods will keep a position open for more than a week, and most trading strategies focus on capturing smaller price movements in a shorter time frame.
Popular Tools Of Forex Technical Analysis
One of the tried and true charting tools for analyzing price data is called a moving average, which is overlayed on top of existing price data. A moving average will give you a sense of where current prices are relative to the recent past, and a buy or sell signal may be generated if current price values vary greatly from recent values.
Candlestick charting is a popular way of displaying price data, and many traders will track candlestick formations as a way to help predict market movements and confirm entry signals. Candlesticks are often used to track price consolidation, which can likely anticipate a market breakout and confirm a given signal.
When it comes to trading with the trend, drawing trendlines over market data can be very useful for locating buy and sell points. Being an experienced forex trader, I find the number of people who draw trendlines incorrectly quite humorous. In order for a trendline to be valid, there must be at least three points where price touch the line and then retrace. The more times a price rebounds from a trendline, the stronger that line becomes.
This should give you a sense of some of the basic technical analysis strategies that you may incorporate into your forex trading, and using these tools in conjunction with economic analysis can make for a successful trading strategy.
