Learn Technical Analysis in Forex Trading - Best Tips for Technical Analysis

Technical Analysis Tips

Now that you have gone through how to apply trend-following and momentum indicators to your charts, how do you make sense of all this information so that you are able to utilize these technical tools to their fullest advantage?

 1. Identify Trend Direction

·       Uptrend - Price data shows higher highs and higher lows; up trend line can be drawn; moving averages sloping upward

·       Downtrend - Price data shows lower highs and lower lows; a downtrend line can be drawn; moving averages sloping downward

·       Sideways - Price data is confined in a range; a rectangle can be drawn with the upper line as resistance and the lower line as support; moving averages tend to be flat

 2. Going with Market Flow

·       If prices are in an uptrend and the market sentiment is bullish - go long. Enter the uptrend when prices have retraced to an appropriate entry point such as a Fibonacci retracement level or moving average or trend line. Could also join the uptrend when the price breaks above a previous high.

·       If prices are in a downtrend and the market sentiment is bearish - go short. Enter the downtrend when prices have retraced to an appropriate entry point such as a Fibonacci retracement level or moving average or trend line. Could also join the downtrend when the price breaks below a previous low.

·       If prices are consolidating in a trading range, it is best to short the upper boundary and long the lower boundary of the channel/rectangle. Keep in mind that bounces may not occur exactly on the boundaries, so give enough allowance.

 3. Going against Trend?

·       You may go against the trend if you have reversal signals from the divergence of oscillators and price and if the prevailing market sentiment supports the conditions for a trend reversal. I usually only trade divergence if it shows up on daily or longer-term charts, not 60 min or less charts.

 4. Beware of Technical Obstructions

·       The disadvantage of monitoring just a single time frame is that if you trade a breakout in that time frame, you may not be aware that the breakout may not have happened yet on another longer time frame, and hence your entry point would become inappropriate. If you want to trade a trend line breakout, say, from a 60 min chart, always double-check with the daily chart to make sure that the breakout in the daily chart coincides with your entry price that is based on the 60 min chart. For example, don't trade a downside breakout from an uptrend line in the 60 min chart if the price is still above the trend line in the daily chart. Your entry point could still be 20-30 pips above the trend line break in the daily chart, and that trend line support would certainly obstruct your trade and might cause you to be stopped out because of expected bounces off the daily trend line. The reverse applies to trading an upside breakout from a down-trend line.

·       It is always better to be second than first in a trade if the second entry point is safer. For example, you might want to think twice about shorting from the neckline break of a chart pattern if a Fibonacci retracement level or moving average lies not far below from that level. In that case, it would be much better and safer to short only when the price breaks below this obstruction, and not during the first break. Many times, the price would reverse at this obstruction level and stop out your entry point at the first break. It certainly pays to be second than first in the Forex market.

·       Technical obstructions may appear on another currency pair that you are not trading. This frequently occurs between EUR/USD and USD/CHF. Monitor the price movements of both pairs, and see which pair is leading the other. However, being the leading pair does not mean that it is the more influential pair of the two at the moment. For example, the price movements of USD/CHF may be ahead of EUR/USD, and it has just broken above a resistance level. It may turn out that the true sustainability of this USD/CHF breakout would depend on whether EUR/USD is able to break below its own support level, especially if it is a very critical and significant level. If EUR/USD fails to break below its support, then chances for a failed upside breakout in USD/CHF are very high. It takes a lot of skills, experience and some guesswork to predict which levels are the ones that most traders are eyeing and defending. You might be able to take a few clues from what the impending economic releases are about and which country they are relating to.

 5. Breakouts - Trade or Fade?

Breakouts are notorious for being false many times in currency charts. There are no hard and fast rules regarding whether to trade them or to fade (go against) them. But there are several points you can take note of:

·       If a breakout from a significant level occurs hours or even 1-2 days before a very important and widely anticipated economic data release, then most likely that breakout will have no sustained demand/supply, and hence would have a higher likelihood of failure. It may be better to fade them under these circumstances.

·       If a currency pair is approaching a new high or low for the year based on the daily chart, the breakout is very likely to fail if the support or resistance is extremely strong. In such cases, it may be better to fade the breakout of this pair.

·       After failing to penetrate strong resistance or support in the daily chart, the currency pair tends to retrace around 100 pips from that failed level as many traders are caught on the wrong side of the market.

Bonus Tips for Technical Analysis

·       Big moves occur when the majority of the market is positioned on the wrong side. So, for example, if you are going long together with the majority of the market on a pair, and suddenly the market reverses due to some news or comments, it may be wise to liquidate your positions and take your losses or profits quickly, and do a flip by taking a net short position on the new way down.

·       Don't give in to fear or greed when it seems that everyone is selling or everyone is buying. Emotions have no part in your trading decisions. If you want to sell when everyone is selling or buy when everyone is buying, do so based on technical or fundamental reasons, not your emotions!

·       The best trades are the ones that seem the most 'risky', that is, buying at the bottom when everyone is scared to buy or selling at the top when everyone is consumed by greed. The best places to do so are when the prices approach trend line support or resistance, and when market conditions do not support a sustained breakout.

·       One of my precious trading rules is never to open any new positions before an important economic data release on the day itself. You may have very strong technical reasons to do so, but if the news go against your way, your trade is dead. It is just not worth the risk to me.

·       Too much too fast rule: If the price has moved by a lot, say, 100 pips, within a short time (in less than 3 hours) without any retracement or consolidation, don't try to join the trend unless there is a strong violation of a significant technical level. If you have already missed the previous entry signals, stay out!

·       Whatever goes up must come down! Prices don't go up forever or fall forever. Keep this in mind when you are gripped by fear or greed.