subject: The Forex Market - Technical Analysis [print this page] The Forex Market - Technical Analysis The Forex Market - Technical Analysis
Former equity traders and futures traders have chosen to trade in the forex markets. They have learned that the technical analysis works exceptionally well in the foreign exchange markets. But how does this technical analysis work?
Technical analysis is merely the analysis of the movements of the past price to aid predict the movements of the future price. In most instances, the trader, who uses technical analysis, is simply looking for the repetition of past occurrences.
Natalia Osorio Editor of the "Best Forex Trading" website -- http://www.BestForexTradingUsa.com -- pointed out;
"Long-term movements in the forex market are usually related with economic cycles. These cycles tend to repeat themselves and can be predicted with a reasonable degree of preciseness. The key is repetition since the entire premise of technical analysis lies in utilizing historical price movement to foretell future price movement.
Within the environment of the stock market, the fundamentals of one company can change radically in a short period of time. This fact makes past stock prices irrelevant in the prediction of the movement in the future. Moreover, there is no predictable economic cycle in the life of a company of in the life on an individual stock. As a result, the technical analysis becomes a hit-or-miss proposition in the stock market"
On the other hand, within the forex market environment, the traders are trading the economies of entire countries. The rudiments of these countries adjust relatively slow, thus making the boom-bust nature of the economic cycle easier to predict.
The Statistical Survey
Basically, a survey performed in an even-handed and fair manner will produce larger samples of information, which can reveal more accurate results. The larger size and liquidity of the foreign exchange market provides technical analysis a greater sample of data from which to draw. There are also more trades and much money changing hands in forex markets compared to any futures or stock market. The forex market contains several data points, thus making a statistical sampling, like the technical analysis, more accurate.
Additionally, the vast liquidity located in the foreign exchange market makes it much less likely that irrelevant players will upset the market and momentarily skew technical indications, which is common in liquid markets.
The Trend and the Fear of the Unknown
The main reason why traders, who like to follow trends, are drawn to the currency market is due to the trends. Since currency pairs have a tendency to create strong and persistent trends, the forex market is relatively famous for these trends. For instance, the Euro trended constantly superior against the U.S. dollar over a three-year period. This uptrend also occurred during a time when the United States was experiencing an economic weakness.
Knowing the popular trends can help overcome the fear of the unknown. It is normal for an individual to have a fear of the unknown; this is also a typical human behavior. Entering the forex market, at first, can make someone think of several concerns that might be weighing on his or her mind. These concerns are common to traders who desire to experience the advantages of forex, but still reluctant to leave their comfort zone. If you are concerned about the charts, it is important to realize that the charts used for forex exchange rates are not very different from the charts of other vehicles for trading, like commodities or stocks.
The Trading Patterns and the Technical Indicators
The good news for experienced futures and equity traders is that nearly everything that they already know about technical analysis can be applied to the foreign exchange market. Charts used in forex contain familiar patterns, including the head and shoulders, double tops and bottoms and the symmetrical and asymmetrical metrical triangles.
"Traders in forex use Bollinger bands, moving averages and MACD or moving average convergence/divergence, which are the same indicators that futures and equity traders use. There are also similar breakouts and pullbacks, ranges and trends, and retracements and consolidations used.
Forex traders also use resistance and support levels in order to determine the best location for entry and stop orders, similar to traders involved in stock and futures markets. Also, the strategies involving trend lines and channels are also popular in the forex markets"N. Osorio added.
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