Technical Analysis in Forex Trading
Learning and using technical analysis is a given for any Forex trader. It is usually one of the first things a new trader will know after understanding how the Forex market operates.
Technical analysis usually includes Japanese Candlesticks, support and resistance, price patterns, and technical indicators, such as moving averages, the MACD, and Bollinger Bands.
Analysing price charts is fun and addictive, but is it worth using?
Does Technical Analysis actually work?
Many traders that use technical analysis or price action will not see positive results. This does not mean technical analysis is unreliable; the trader must do something differently.
A combination of time-frames, price patterns, support and resistance, and indicators can help a trader determine market direction and potential reversal areas. Knowing these things helps a trader to be profitable.
However, most retail traders who rely heavily on technical analysis can relate to the following.
My technical analysis is often wrong
My win rate is too low
The market usually goes against me
I hop from trading strategy to trading strategy as I don't see results
Do these points sound familiar?
This is WHY your Technical Analysis is not Working
#1 Your Analysis is not Refined enough
Your TA should include multiple time-frames and a combination of reasons to enter a trade. Trading a setup at support and resistance is often not enough but itself.
My trading strategies use multiple time-frame analysis, price patterns, moving averages, the RSI, and price action setups. This should give you an idea of how detailed a strategy based on TA should be.
Many failing traders try to trade engulfing candles at support, resistance, etc. This is too simplified and will not give you an edge.
#2 Technical Analysis should encompass Direction, Entry, & Exit
Break down each potential trade into three segments: direction, entry, and exit. Traders should use TA for each stage. There should always be logical TA reasons for why you are bullish or bearish, why you entered the trade when and where you did, and why you exited the trade when and where you did.
Plan each trade from beginning to end before you have even entered the trade. Traders should use TA for each of these steps.
Many failing traders focus on TA for entry only. This is great for entry but is only one part of the trade.
#3 You're trying to day trade
Day trading is tough and risky. Especially day trading Forex with a leveraged trading account. Try to focus on longer-term trades with wider stop-losses and take profits.
Swing trading not only gives you more time to analyse and plan your trades, but it also reduces trading emotion.
#4 You're trading with emotion
You may have identified the trend successfully and seen a technical reason to enter a trade, but your trading emotions influence your trading decisions. This often involves risking too much, over-trading, or closing a trade down too early.
Learn more about overcoming your trading emotions.
#5 Trading against the Trend
The trend is your friend, so don't trade against it.
Many failing traders try to pick tops and bottoms of trends rather than joining a trend. This is much harder to do and usually results in a lower win rate.
#6 Fundamental Analysis is being ignored
This is a BIG one. This is why most retail traders fail.
Your trades need a combination of both technical and fundamental analysis. If more traders did this, there would be fewer losing trades, less overtrading, and more profitable retail traders.
Forex fundamental analysis usually consists of forecasting interest rates and reviewing economic figures and political events.
The economic figures I suggest you track are inflation rates, GDP growth, PMI, trade balance, and unemployment rates.
Political events that can impact the markets are trade deals, trade wars, elections, referendums, war declarations, and escalating tensions between economies.
Learn more in my free Forex Fundamental Analysis Course.
Now watch the video
Video Graphics and Notes
Below are the graphics and some notes from the video.
1. You can measure the space between swing highs and swing lows to gauge market momentum
2. You can also use moving averages to gauge market momentum
3. Safe-haven currencies include the USD, CHF, JPY, and emerging market currencies.
4. Forex pairs have swap rates
5. Technical analysis should be used to determine price direction, entry, and exit
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