The forex trading market is an exciting and intriguing one; however it can be laborious and tiring as well. While the trades themselves can cause exhilaration, it is the analysis that leads up to the trade which can be dull and dreary. Yet, this is a necessary task which must be undertaken in order to develop a working profitable trading strategy.
There are two general methods in which the trader analyses the foreign currency exchange: fundamental analysis and technical analysis. The fundamental method reviews economic and political news and examines how it will affect the forex market. Technical analysis reviews current and prior chart patterns to determine the movement of the market. Although technical analysis is the more popular option, the wiser traders combine it with fundamental analysis to achieve a sound trading strategy. In this article we will explore the different ways the foreign currency exchange market can be analysed using the technical analysis method.
Technical Analysis and the Foreign Currency Exchange
Technical analysis is the most well-known and frequently used method of analysis in the forex industry. Many traders will use this as their primary method to determine the markets movements. Other traders will use it as a determinant of entry and exit points of their trade once speculation has been conducted. These traders choose fundamental analysis as a method of determining the markets movements and trend patterns.
Traders who choose technical analysis as a base for their trading strategies need to have knowledge of forex charts and analysis tools including Bollinger Bands and Pivot Points. It is important one understands these aspects as they will be used in developing your trading strategy, ultimately determining your success in the forex market.
The Use of Moving Averages
The moving average is a financial term referring to the averages which comprise the base of all technical indicators in technical analysis. It can be used in conjunction with several technical tools, but one must have an understanding of how it works on its own – as well as with the different tools. To determine this average you will require two features: the set of prices and a timeframe.
The majority of traders employ simple moving averages that look at previous prices over a chosen timeframe. One may have a short-term or long-term average dependent on both the trader’s needs and use of the relevant data. It is advised to have the moving average detailed on a bar or candlestick chart. By recording the data on a chart you are able to note the potential correlations between price movements and the moving average.
One may also use the moving average as a determinant of the support and resistance levels of a currency pairing within a particular timeframe. If you choose to do this you need to remember that moving averages are not always accurate as they are lagging indicators. It is imperative the beginner trader learn about the moving average if they are to gain a deeper understanding of the workings behind forex trading.