Forex is probably where people use the most use of Technical Analysis.
The basis of this technical analysis is not new since American and Japanese traders have since long ago implemented it in commodities or stocks.
Actually it was the stock market of Wall Street the one that made technical analysis so popular.
This analysis is based in price analysis and all the variations and patterns that can be found with it.
It is true that the price follows some patterns but there are some things that need to be clarified.
Well, the technical analysis uses the price to construct all its indicators.
For example, a Moving Average of 10 periods in a 1 hour candlestick chart.
If we change the duration of the candlesticks to minutes or days we will have very different results.
We can apply this to other indicators and we can see that we have an infinite amount of results possible.
It is in that infinite pool where people try to find their Holy Grail of trading.
Well, it is normal that we have thousands of studies related to it, specially automated ones of which Forex is full of with the powerful metatrader software.
Some time ago I already talked about the fact that the Technical Analysis does not work very well, or at least not as people can think it will and that following the price should be the only factor we should take into account.
The problem with Technical Analysis in Forex is that it is focused in the short-term, especially in the day trading markets, with the majority of traders who enter the market trying to make a living through uncountable trades every day wanting to find the “secret of the markets”.
Unfortunately this is much more complicated that it seems at first glance and that “secret” always seem to evade us.
The true secret is that the majority of those traders lose very quickly and that it is the brokers the ones that make the money.
However, if we use the Technical Analysis for longer-term frames we will find much better opportunities.
I have explained this before with the RSI and the moving averages.
If we forget about the intraday noise and focus in a longer time frame we will find that the quality of the signals we get from indicators become much more reliable.
In other words, we lose quantity and gain quality.
It is there where the best applications of Technical Analysis are for Forex.
Fundamentals of Forex Technical Analysis
Well, before naming what the best indicators for Forex are we should take into account the basic concepts of support, resistance, markets in range, price, and etcetera.
It is a very important factor in trading since that being right about it we will be able to do good trades.
This is easier saying than doing, especially in Forex, where the trends are going to be more complicated that in markets such as stocks.
Here we have the typical cases in trading such as: “head-shoulders”, “triangles”, and etcetera.
Support and resistance
Two very important concepts in trading and Forex.
If we are able to be guess when there is going to be a major break of a price range, we will have a good chance to make serious money.
The bad part of this is that before you get it right you might have had to fail many times.
What are the most important indicators for the Forex market?
The indicators would be the same we would use for trading in general, whether it is futures, stocks or CFDs.
Those indicators are:
- Trend indicators:
- SAR Parabolic
- Moving Averages
- Momentum indicators
- Volume indicators
- Chaiking Money Flow
- Demand indrex
- Volatility indicators
In many websites related to this market you will find the typical mantra that the Forex Technical Analysis is very useful for short-term trading and not so much for long-term.
It is supposed that because it gives us the chance to calculate crosses and trends every day, this analysis is going to provide us with some sort of edge.
Nothing further from the truth, especially in a market like forex with its uncountable problems of spread and variable intraday trading conditions.
The truth is just the opposite.
The indicators of Technical Analysis are in fact much better suited for long-term trading.