Technical Analysis Key to Forex Currency Trading
The unstable global markets of the past few years been a boon to technical analysis. The use of technical analysis is crucial to successfully trade currency.
Technical analysis is the process of identifying price patterns and trends in financial markets. There is a laundry list of indicators that market technicians utilize. However, the most important tool for technical analysis is charts and charting. Investors who are new to following technical patterns are often amazed at how accurate they can be at forecasting future moves.
The mantra of a fundamental investor is "buy low and sell high". The mantra of market technicians is, "buy high, sell higher". This technique can help retail investors build their IRAs and 401ks and retire rich.
Common chart patterns include the head and shoulders, upside-down head and shoulders, pennants, and flags. Technicians also closely scrutinize trading volume, as they believe that volume shows investor conviction. For instance, a large move up on the charts will be viewed skeptically if there isn't significant volume backing it up. High volume typically indicates large hedge funds or mutual funds buying or selling. These funds have the ability to drive the price higher or lower, and tracking volume can show you what the "smart money" is doing.
Technical analysis also includes the use of tools such as the MACD or other moving average computations. Investors using these techniques also look at relative strength, open interest, and the volatility index, or VIX. These mathematical formulations can give a pretty good indication of how a particular financial product or index is trending.
To become a good chartist, or market technician, you must be able to maximize your good trades, and minimize damage from the bad ones. William O'Neill, founder of the Investor's Business Daily, recommends selling all positions once they have lost 7-8% in value. He suggests that you hold on to your winners and let them run.
When it comes to trading currencies, it makes sense that technical analysis has become widely popular. Foreign exchange rates are highly complex. It can be hard to predict exactly what a particular government is going to do with fiscal or monetary policy, and there are numerous other factors that go into a currency's value, such as Gross Domestic Product and net exports.
Follow the charts, and monitor your positions closely, and you will be on your way to reaping large gains in currency trading.
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ABOUT THE AUTHOR
Chris Davis is a financial and global market consultant. He has helped investors retire rich by investing in foreign exchange.