Forex Technical Analysis - How to Be a Successful Forex Trader

Last Updated November 20th 2019
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Do you want to be a successful forex trader? If the answer is yes and you do in fact want to become a successful forex trader then you need to educate yourself on technical analysis. Technical analysis in forex trading is one of the most fundamental aspects of the industry. It’s something novices must get to grips with if they want to be successful. But how does one go about it? There are several main aspects you must grasp to become a good technical analyst. Broadly, it’s all about reading information, buying and selling at the right moment. How does one do that? Let’s start exploring and find out!

Basics of Technical Analysis in Day Trading

basics of technical analysis in day trading

The words forex technical analysis may seem incredibly specific to the field of currency trading. However, they employ many fundamental principles you’re actually familiar with already. By reading, we employ pattern recognition. Letters form words, words form sentences, sentences form paragraphs until we have a finished text.

It’s the same with forex technical analysis. The currencies form trends, prices shift and skew, and in the end, we have the forex marketplace. Just like there are many languages and ways of speaking, technical analysis has different methods, approaches, and ways to utilise a strategy and be successful.

Nobody was born knowing a language and that includes the language of forex or how to trade currency. You’ll need time and preparation for becoming fluent. Your first steps can be painful and stumbling, but that’s no reason to quit or get discouraged. And learning how to speak is more difficult than getting into forex. You just need to repeat what you’ve already done.

How to work out data – knowing the candlestick chart

The candlestick chart was invented in Japan prior to the 1860s. Despite being centuries old, this charting method was adopted in the USA stock market in the 1990s, after it was introduced by the book “Japanese Candlestick Charting Techniques” by Steve Nison. There’s obviously something in that technique that’s applicable to many markets – from the pre-industrial Japanese rice market to Wall Street. It's an essential tool for forex technical analysis.

Some inventions outlive their usefulness, others continue serving a purpose. People haven’t stopped using knives or forks ever since they became common. The candlestick chart has stayed relevant for as long as it has for the same reason – it offers accessible and visual information to help you establish a good strategy for trading.

The beauty of the candlestick chart is in the clarity of the information. Prices move up, down, and sideways. Increases are represented in one colour (usually green or blue) while decreases are most often illustrated in red. It’s similar to a traffic light, but one you should interpret correctly. Green doesn’t always mean go and red doesn’t always mean stop. Don’t be reactionary. Forex technical analysis isn't about that. Take a few hits if it means you’ll win the battle.

You might also like: What Are The Most Popular Day Trading Strategies?

Up, Down, or Sideways

Currencies move all the time, often in seemingly chaotic ways. The job of an analyst is to make sense out of that chaos and make the decision to buy or sell. Market patterns form these trends. As a forex trader, you must keep your eyes on the market and identify which movements repeat and form a trend. It may sound easy, and the process is indeed simple in theory, but there are many hurdles you can face.

The best way to visualise those changes in the market is to use charts. You're probably familiar with line charts, but in reality, it’s not so much about what form they take, but how accurate the information is and whether you can interpret it in the correct manner.

Up, down, and sideways are the directions in which a trend moves. Up and down are self-explanatory. Sideways describes a trend continuing without going up or down. Tracking these movements and seeing where they repeat themselves is what forex technical analysis is about in a nutshell.

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Identifying trends in forex

At its core, technical analysis tells you when to buy and when to sell, which is the fundamental basis of any forex trading. The analysis part comes in when you look at the recent trends, pick a pattern and get the best time to buy or sell in order to make the largest amount of money you can. It may sound risky, but you’re already doing betting that every time you look at the weather forecast.

Corporations, armies, and countries operate using technical analysis. Sure, sometimes they fail, but if you can be as stable as the USA military, then that’s a good margin of success. Trading isn’t about absolute certainty, but about safe risks and rewards. As with the market, your personal income may go up, down, and sideways. Apply that thinking to managing your investment.

The difference between a good trader and a bad one isn’t so much in the assets they own, but in what they do with them. And following the market and identifying trends is the best way to make the most out of your decisions.

See also: The Importance of Managing Your Forex Trading Expectations

Limits of technical analysis

limits of forex technical analysis

The forex marketplace isn’t always easy to predict. Since all the conclusions that can be reached through technical analysis are based on past trends, the process remains speculative. Detractors would say that this speculative nature and the measured uncertainty mean that the process isn’t safe, and thus, the forex marketplace is completely chaotic.

While the major points are true, the criticism also misses the point. No true expert guarantees that their predictions will always be 100% right. Whoever does that is simply wrong. You can’t predict absolutely everything, but you can prove it within a safe margin of error.

There’s also another reason for forex technical analysis to work. While the markets are indeed chaotic, cold, and soulless, the people that run them are not. Human nature can be quite predictable. When things get heated, we retreat. All of us like a quick buck and are prone to making hasty decisions. A lot of day traders embrace that reality. Nobody is immune to those emotions, and that includes you. Good forex technical analysis depends on knowing that.

The thought process of a true forex trader

Even if the analytical method was perfect, it would still be wielded by imperfect human beings who make mistakes, have egos, and simply fail to take data into account. A good forex trader not only studies the methods of technical analysis, but also learns about their owns strengths, weaknesses, and thought processes. That way we can control ourselves and make the best possible decision for our financial future.

Make sure to base your analysis on trends and movements rather than on your personal feelings, desire for a good return, or luck. Wishing that you’ve made a good investment doesn’t change anything outside your head, and even then, that change is rarely good for you or the investments you’re about to make with your money.

Money is important, but it’s just a means to an end. Don’t form an emotional attachment to your forex assets. And better yet, start projecting faults of judgment on your investments. One should always own up to the decision made, both good and bad. Since few have a problem with accepting good things, focus on your ability to deal with the bad.

People also read: 8 Things Successful Forex Traders Won't Say

Psychological traps you can fall into

Confirmation bias is an enemy in all walks of human life, but it’s especially bad when present in technical analysis. Trends may start popping up in your view not because they exist, but because that potential scenario would be perfect for your investment. You should remind yourself that a perceived good outcome is often more common than an actual, real positive outcome.

Going straight into a high-risk, high-reward is a good way to lose your money. It’s true that we often hear of people that strike it big, but these exceptions can only stand out in a field of failure. You should start slow, take measured risks, and keep the high-risk, high-reward deals for times when you can afford to lose.

Being too sheepish with your investments can also be equally bad for your finance, as there’s always a limited window to buy or sell. The market shifts and changes constantly and you must follow the current instead of pretending it doesn’t exist or even fight it. You’ll lose either way. Instead, focus on winning.

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Technical analysis of the past, present, into the future

Sometimes success can be blinding. You get a good deal and move on. While you should reap the rewards of a job-well-done, you should go back and examine what went right and why it worked. Learning from failure is important, as you often knowledge is the only thing that’s left in the rubble. Learning from your success is just as crucial, and much more difficult.

Go back to the deals that worked out. Look at the points that made it all possible and see what mistakes you could’ve made. Look at where you could’ve sold too early, or too late. See if your gains could’ve been maximised. Adjust your future in accordance. Use it as the basis of your future forex trading success.

At the same time, keep an eye to the future. Like President John F. Kennedy once said: “Change is the law of all life. Those that look only to the past or the present are certain to miss the future.” The ideal approach to be to cover the entire trifecta, with all aspects of past, present, and future having an equally important standing.

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Devising a strategy for technical analysis

devising a strategy for forex technical analysis

Following the currency values themselves is must, but there are other aspects that make a good forex trader. You may have grasped the principles of how to make an analysis, but you still need the right tools and good data to make it all work. It’s good to always keep an eye on world events that influence the forex markets. The best way to keep up to date is to follow an economic calendar.

You’ll also need to keep up with the news. The forex market reflects world events. A good trader is an informed trader. Keep your eyes open to developments on the world stage. All tools traders use are details of a larger picture. The wise investor is similar to an artist-constructing an image of something that doesn’t exist yet.

In the end, after you take all the essential forex education courses, have all the tools and got the hang of the technical analysis process, you’re going to need to go out into the world and start trading. Don’t stop learning even after you hit your first goals. Continue on and soon you’ll have an extra source of income, maybe even an additional career option. It’s up to you.

Find your own way

Education merely provides a skeleton you should build around. That may sound like a bad thing, but it's really not. Being able to develop and go in a new direction is a strength. Nothing stays stationary. They don’t call it market liquidity for no reason. As all freedom, the ability to trade comes with its own responsibilities.

That’s another aspect you should embrace if you want to succeed. Everything that has value also has weight, and you must be strong enough to lift it. The pressure will grow on you the more you grow, but one can’t become stronger without that. All human abilities, even mental ones, are like muscles that need conditioning.

Just like you can’t get stronger without lifting some weights and doing exercises, you won’t be able to become a better trader without going out into the field and standing under the pressure. Take the challenges as something to strive towards rather than attempt to avoid. Own up to your success and for your failure. In the end, that’s what freedom is.

And that’s the whole reason to trade in the first place – to take matters into your own hands, take on the responsibilities, and reap the benefits in the end. It’s both simple and complex at the same time. Remember:

  • Learn how to read the charts.
  • Keep things rational.
  • Don’t forget the value of trading education.

Accept that relationship of simplicity and complexity and apply it to your trading career. If you succeed in doing that, you’ll succeed in forex.

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