Basics of Forex Trading – Technical Analysis

Understanding Technical Analysis

Technical analysis is one of the popular approaches to forex trading today. The analysis helps you to predict the market, making it possible to draw the right decisions and trade profitably. But for novice traders, understanding the technical analysis can be really challenging. In this post, we take a closer look at technical analysis to determine how it works and identify the best indicators.

Demystifying Technical Analysis

Technical analysis is the evaluation of price movement in the forex market and using the patterns to make future predictions. Simply put, it is a form of visual presentation, capturing the past and present performance of a market so that you can make the right decision on entering or closing trades.

The analysis uses charts that are primarily based on price and volume, allowing the trader to note common patterns in the market. It relies on different indicators to help a trader determine the best entry and exit points, optimizing returns and for risk management.

While fundamental analysis focuses on identifying the market’s intrinsic value, technical analysis targets the trends driven by underlying fundamentals. By using technical analysis, you get to enjoy the following benefits:

  • You can use it on any market with different timeframe.
  • The analysis can also be applied as standalone strategies.
  • Makes it pretty easy to identify the latest trends in the market.
  • Technical analysis works for both short and long trades.
  • The analysis is very helpful in perfecting your timing, which is very important in forex trading.

Technical Indicators

Technical indicators are used by forex traders when looking for trading opportunities in the market. Although there are many indicators, most traders only use a few of them. The indicators are broadly grouped onto four:

1.     Trend Indicators

These indicators are used to measure the strength and direction of a trend by using price averaging. When the price goes above average, it is considered bullish. However, it will be considered bearish if it edges below the average. Common types of trend indicators include:

  • Moving averages.
  • Moving average convergence divergence (MACD).
  • Parabolic stop and reverse (parabolic SAR).

2.     Momentum indicators

These indicators are used to identify the speed of price movement through comparison of speed over a specific period. The indicator can also be used to analyze volume. The analysis works by comparing the latest closing prices to the previous closing prices. Common momentum indicators include:

  • Stochastic oscillator.
  • Commodity channel index.
  • Relative strength index.

3.     Volatility Indicators

These technical indicators are used to measure the movement of price irrespective of the direction. The indicators are premised on the changes between the highest and lowest prices. Traders use the volatility indicators to try and establish the points where the market may change. Common volatility indicators include:

  • Bollinger bands.
  • Standard deviation.
  • Average true range.

4.     Volume Indicators

This is another regularly used category of indicators in forex trading. The indicators are used to measure the strength of a trend based on averaging. Note that the strongest trends happen when volumes go up. Some common volume indicators are:

  • Volume rate of change.
  • On-balance volume.
  • Chaikin oscillators

Working with the Best Forex Brokers

In addition to understanding technical analysis, you also need to identify and work with the right forex broker. The broker provides you with the perfect platform, such as MT4 and MT5, which allow you to access the market and run the analysis highlighted in this post. While it is true that there are many brokers out there, ZFX has won the admiration of traders all over the globe. Here are some reasons why you should consider using the broker.

  • They have a remarkable bonus scheme. The ZFX’s USPs or promotions include the currently running “Welcome Bonus” that rewards new members with up to 5,000 USD on top of their initial deposit funds.
  • ZFX’s platform is backed by superior proprietary technology that helps to make trading smooth, easy, and fun.

If you are new to forex trading, technical analysis education is very important in helping you understand the market, and identifying the best trading opportunities. Remember to also work with experienced and trusted forex brokers for smooth operations.

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