Using Technical Analysis in Your Currency Trading System
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A currency trading system using technical analysis is a forex trader’s attempt to bring order out of chaos, to find the patterns hiding within a seemingly random series of numbers. These numbers are the prices of the currencies traded in the forex market. Traders hope that the trends indicated by the price data will repeat themselves in the future, thus providing them with signals as to when to buy or sell particular currency pairs. It should be noted that traders using technical analysis do not discount the effects of fundamental factors such as economic data and political developments on prices; they merely assume that a currency’s price already reflects all these factors. Thus, the only thing left to do is to analyze price movements.
The most important tool traders use in analyzing price data is the chart, which expresses price movements over a particular period of time in a visual manner and allows them to determine the best time to enter into, or exit from, a trade. There are four types of charts used in technical analysis: the bar chart, line chart, candlestick chart and point and figure chart. Of these, the most popularly used in a currency trading system based on technical analysis is the candlestick chart, because of the amount of data presented. Each ‘candlestick’ in the chart shows not just opening and closing prices of a particular currency during a specific trading period, but also the highest and lowest level they reached.
There are two major types of chart patterns – reversal and continuation. A reversal indicates that a trend is about to move in the opposite direction when a pattern is completed; a continuation, on the other hand, means that the trend will continue once a pattern has finished.
There are also several important concepts you need to understand when using technical analysis in a currency trading system. The most basic of these is the trend. A trend indicates the general direction in which a currency is moving, whether it is upwards, downwards or sideways (when there is little movement). Another important pair of concepts is support and resistance. Support means the level above which the price of a particular currency will not move;
resistance, on the other hand, is the level below which it will not fall. The reason such levels develop is market psychology – traders are only willing to buy or sell the currency within this price band. Of course, it is possible for the trend to shift and the price band to be breached, in which case new support and resistance levels will be set.
Using technical analysis in your currency trading system can help bring discipline to your forex trading by minimizing the role of emotion in your trading decisions.
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