Discussion of article "Technical Analysis: How Do We Analyze?"
Forum on trading, automated trading systems and testing trading strategies
newdigital, 2014.02.13 15:46
3 Types of Forex Analysis (based on dailyfx article)
Fundamental
Forex fundamental centers mostly around the currency’s interest rate.
Other fundamental factors are included such as Gross Domestic Product,
inflation, manufacturing, economic growth activity. However, whether
those other fundamental releases are good or bad is of less importance
than how those releases affect that country’s interest rate.
As you review the fundamental releases, keep in mind how it might affect
the future movement of the interest rates. When investors are in a risk
seeking mode, money follows yield and higher rates could mean more
investment. When investors are in a risk adverse mentality, then money
leaves yield for safe haven currencies.
Technical
Forex technical analysis involves looking at patterns in price history
to determine the higher probability time and place to enter and exit a
trade. As a result, forex technical analysis is one of the most widely
used types of analysis.
Since FX is one of the largest and most liquid markets, the movements on
a chart from the price action generally gives clues about hidden levels
of supply and demand. Other patterned behavior such as which currencies
are trending the strongest can be obtained by reviewing the price
chart.
Other technical studies can be conducted through the use of indicators.
Many traders prefer using indicators because the signals are easy to
read and it makes forex trading simple.
Sentiment
Forex sentiment is another widely popular form of analysis. When you see
sentiment overwhelmingly positioned to one direction that means the
vast majority of traders are already committed to that position.
Since we know there is a large pool of traders who have already BOUGHT,
then these buyers become a future supply of sellers. We know that
because eventually, they are going to want to close out the trade. That
makes the EUR to USD vulnerable to a sharp pull back if these buyers
turn around and sell to close out there trades.
Forum on trading, automated trading systems and testing trading strategies
newdigital, 2014.02.15 06:58
Trader Styles and Flavors (based on dailyfx article)
Technical vs. Fundamental
Technical analysis is the art of studying past price behavior and
attempting to anticipate price moves in the future. These are traders
that focus solely on price charts and often times incorporate indicators
and tools to assist them. They look at price action, support and
resistance levels, and chart patterns to create trading strategies that
hopefully will turn a profit.
Fundamental analysis looks at the underlying economic conditions
of each currency. Traders will turn to the Economic Calendar and Central
Bank Announcements. They attempt to predict where price might be headed
based on interest rates, jobless claims, treasury yields and more. This
can be done by looking at patterns in past economic news releases or by
understanding a country’s economic situation.
Short-Term vs. Medium-Term vs. Long-Term
Deciding what time frame we should use is mostly decided by how much
time you have to devote to the market on a day-to-day basis. The more
time you have each day to trade, the smaller the time frame you could
trade, but the choice is ultimately yours.
Short-Term trading generally means placing trades with the intention of closing out the position within the same day, also referred to as
“Day Trading” or “Scalping” if trades are opened and closed very
rapidly. Due to the speed at which trades are opened and closed,
short-term traders use small time-frame charts (Hourly, 30min, 15min,
5min, 1min).
Medium-Term trades or “Swing Trades” typically are left open for a
few hours up to a few days. Common time frames used for this type of
trading are Daily, 4-hour and hourly charts.
Long-Term trading involves keeping trades open for days, weeks,
months and possibly years. Weekly and Daily charts are popular choices
for long term traders. If you are a part-time trader, it might be
suitable to begin by trading long term trades that require less of your
time.
Discretionary vs. Automated
Discretionary trading means a trader is opening and closing
trades by using their own discretion. They can use any of the trading
styles listed above to create a strategy and then implement that
strategy by placing each individual trade.
The first challenge is creating a winning strategy to follow, but the
second (and possibly more difficult) challenge is diligently following
the strategy through thick and thin. The psychology of trading can wreak
havoc on an otherwise profitable strategy if you break your own rules
during crunch time.
Automated trading or algorithmic trading requires the same time
and dedication to create a trading strategy as a discretionary trader,
but then the trader automates the actual trading process. In other
words, computer software opens and closes the trades on its own without
needing the trader’s assistance. This has three main benefits. First, it
saves the trader quite a bit of time since they no longer have to
monitor the market as closely to input trades. Second, it takes the
emotions out of trading by letting a computer open and close trades on
your behalf. This means you are following your strategy to the letter
and are not able to deviate. And third, automated strategies can trade
24 hours a day, 5 days a week giving your account the ability to take
advantage of any opportunity that comes its way no matter the time of
day.
Technical analysis is considered one of the easiest ways to analyze the foreign exchange market. It involves the analysis of charts and graphs to ascertain future currency price movements, and differs massively from fundamental analysis in that it does not require the analysis of forex news, reports or other economic releases to establish future price movements.
Becoming a Technical Analyst
The first step in becoming a successful technical analyst is to learn how to read forex charts. Outlined below are some simple steps that every trader should take when first starting out with technical analysis:
When analyzing a currency pair you will need to look out for a prevailing trend. Start off with charts that provide long-term data (for example days, weeks and months) and go back over the course of a number of years. Such charts contain an exhaustive amount of data, thus providing a much clearer picture of exactly what the currency pair is doing than if using short-term charts (5 minutes, 15 minutes, 30 minutes or one hour). This extra data also makes the technical indicators much more steadfast and reliable.
How to Identify a Trend
To identify a trend simply look at the graph presented before you and decide whether it is rising more than it is falling, or vice versa. Trends can be shallow or sharp, weeks short or years long. Practice identifying trends and locating the moment where the trends change direction.
Even if you are a short-term scalper or day trader who wishes to place a trade for no longer than an hour, it is still important to identify trends. Identifying a trend is one of the best steps a trader can take in executing more accurate, profitable trades.
Upon identifying a trend in a long-term chart you will then be able to compare that trend with the one that you have found in the short-term charts. Within the path set by the prevailing trend you will discover that there are a variety of short-term and intermediate-term trends. Overall the pattern on the graph will follow a particular path as set by the longest-term trend.
Identifying Support and Resistance Levels
After this point you will then need to locate the support and resistance levels. In technical analysis these are regarded as the ‘floor’ and ‘ceiling’ points on a graph and are key locations on a chart where the price continually refuses to break through. The price will reach a peak or a valley, after which point it will not go any further, but will instead alter its direction. The more frequently this occurs, the stronger the support and resistance levels are.
Draw a straight line as you pass through most of the support points. Draw another line as you pass through most of the resistance points. This provides you with a lucid picture of the price channel, or the path that the currency pair’s trend is following. This is a highly powerful yet incredibly simply tool for determining a currency’s future pathway.
What is a Range- Bound?
In the event that ‘range bound’ occurs, this simply means that the support and resistance levels are so strong that the graph’s movements appear to ‘bounce’ in a sideways pattern. Nevertheless this generally occurs 80% of the time and many traders prefer to trade within the channels.
Breaking out of a Price Channel
In the event that a currency pair
becomes released from a price channel, in some instances it falls back
into the channel, and in others it gains momentum and continues to move.
The latter movement is better known as a ‘momentum market’, and is an
alternative way to trade the range: by setting an entry order for the
price to break out, either below or above the channel.
With what I read in your articles, I feel less ignorant. I hope it's true . Anyway thanks
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New article Technical Analysis: How Do We Analyze? is published:
Author: Victor