Forex charts show a trend when we look back at them – but predicting which way prices will go in the future by studying Forex charts is a different matter!
Charting is an art more than a science. Use the right tools in the right way, and you'll win – and if you do not you'll lose – it really is that simple.
This article is all about using technical analysis the RIGHT way – and using Forex charts to make big consistent profits.
Let's start with the basics of why technical analysis is so effective in Forex trading.
The market prices all known fundamentals
Using technical analysis means you can see not only the affect of the fundamentals – but also human psychology, to give you the WHOLE picture. The simple equation for this is:
Fundamentals + Human Perception = Price.
The great advantage of technical analysis is that investors determine the price of anything (in Forex trading or any other market) – as human nature is constant, human psychology shows up in repetitive price patterns.
How do you spot which way human psychology is going to take prices next?
Here we are going to look at some PROVEN methods and indicators, you can use to generate trading signals – and turn your trades into low risk high profit opportunities.
1. The Basics – Trend Lines
You need to start and learn to draw basic trend lines to spot opportunities. Many traders do not use trend lines, but trend lines are essential when looking at Forex charts.
2. Support and Resistance
Any chartist must be familiar with this concept.
If you understand support and resistance correctly, it can be the basis of a very successful Forex trading strategy.
Let's define it:
It describes the levels where prices move to and then reverse.
In a bull market prices rise to resistance levels and fall – in a bear market prices fall to support and then rise.
When prices break above or below significant support or resistance, a big move can follow – especially if the resistance or support is valid.
So how do you know if support or resistance is valid?
Look for many tests – and look for how many different time periods tests have occurred in – by looking back at your Forex charts.
3. Watch for the Breakout
If prices punch through important support or resistance, then the odds are that the supply and demand position is changing – and the break will indicate a new trend.
Going with breakouts, and trading in the direction of the break is simple and logical – but most traders can not do it. Why? Because most traders like to buy low and sell high – so they wait for a pullback – and this does not come, and they miss the move.
By going with the break, you miss the start of the move – but the odds of it continuing are high.
It's a fact that most major currency trends start from new market highs – NOT market lows. To catch the trend you need to go with the break, though not breakout works – and some fail.
So how do you decide if a break is going to continue? The key is to watch price changes in terms of momentum and volatility.
Volatility is a term used to describe the magnitude, or size, of day-to-day price fluctuations – regardless of their direction.
Generally, changes in volatility lead to changes in prices – and a breakout that is accommodated by high volatility, is the ideal set up.
An indicator you should look at to determine volatility is the Bollinger band. Bollinger bands can also help you identify support, resistance and targets for the move.
Momentum is a general term used to describe the speed at which prices move over given time-periods. Momentum indicators can therefore determine the strength or weakness of a trend by looking at changes in price.
If price momentum accelerates on a break, then the odds are that the break will continue.
There are two fantastic indicators for looking at changes in momentum and they are:
The Stochastic and the Relative Strength Index (RSI). Both give you a highly visual picture of changes in price momentum.
A Simple but Very Effective Way to Trade
If you can spot valid support, watch for breakouts, and then confirm them on your Forex charts, using volatility and momentum indicators – you then have a system that can make big profits in Forex trading.