Technical Analysis

by Stephan Smith on January 7, 2012

In the realm of Forex trading (also known as currency trading), there are two philosophies currency traders use to justify trades. Those two philosophies are fundamental analysis and technical analysis. I know both terms can seem intimidating, but it isn’t as difficult to understand as you may think. On this page, I will be covering technical analysis.

If you are wondering what technical analysis is as it pertains to currency trading, you’re in luck. If you continue to read on, you will learn just what technical analysis is as it pertains to currency trading and why currency traders use it. Once you have finished reading this article, you should have a basic understanding of technical analysis as it pertains to currency trading.

What is Technical Analysis?

Technical analysis as it pertains to currency trading is the study of current and past currency pair trading prices for the purpose of trying to accurately determine future currency pair price valuation. That’s all there is to it. Currency traders use technical analysis as a means to try and predict future currency trading prices based on current and past valuations for the purpose of profiting or hedging. Technical analysis has resulted in huge profits for a small percentage of trades and thus proven it could be used to make money in the Currency Market.

There are virtually endless ways a currency trader can “study” current and past currency pair trading prices in order to determine potential future price movement. Though I am not familiar with all the seemingly limitless ways of performing technical analysis, I will share with you what I believe is the two most used techniques implemented by currency traders around the world.

One way to perform technical analysis of currency pairs is to study currency pair trading prices using Chinese Candlestick charts. Chinese Candlestick charts is one popular way to illustrate past and current currency pair trading prices because of how that information is illustrated. Currency traders can easily assess trading price data by simply looking at Chinese Candlestick charts. Take a look below.

Chinese Candlestick Chart

Chinese Candlestick Chart - One Chinese candlestick can tell you the high, the low, the open and the close price for one period of time.

Another popular way to perform technical analysis is to use a strategy called Simple Moving Average (or Moving Average). Countless currency traders all over the world use this strategy as a form of technical analysis because it allows traders to easily determine the overall trend of a currency pair’s trading price or a lack thereof based on the average of past trading prices.

If you didn’t know, Simple Moving Average does just what its name implies. It takes multiple close prices (or open, high or low prices) of whatever time frame you’re using the strategy on and illustrates the average on a chart. Just how many close prices are used or how the information is illustrated depends on the individual currency trader’s preferences. Below is how a Simple Moving Average usually appears on a chart.

Forex chart with 200 period simple moving average

The chart above is a daily Chinese candlestick chart with a 200 period simple moving average. The 200 period simple moving average is represented as the green line.

 
Because we are looking at a daily chart, the simple moving average is a 200 day moving average. This simple moving average (SMA) is taking 200 end of day trading prices, also known as close prices, and is representing that data as the green line. Based on what I'm seeing, it looks like the trend is slowly turning toward the upside.

Those are the two very popular strategies currency traders use to perform technical analysis. One is the Chinese Candlesticks chart and the other is Simple Moving Averages. There are way more than these two strategies available to currency traders wanting to perform technical analysis. But I will end it here.



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