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what are the methods of foreign exchange technical analysis?

2022-01-19

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When a foreign exchange novice first comes into contact with the foreign exchange market, don't be too eager to carry out actual combat operations. If you invest money too early, you may end up in a loss. You need to learn to learn Forex technical analysis first, so why?

Foreign exchange technical analysis is an important content that foreign exchange beginners should learn first in the process of foreign exchange trading. Technical analysis is an important way for investors to judge the trend of the exchange rate. If foreign exchange beginners want to successfully grasp the market trend, they should understand the trading analysis method, so that they can conduct foreign exchange transactions more successfully.

Technical analysis is a method of researching market behavior with charts as the main means for the purpose of predicting the future trend of market price changes. "Market behavior" has three meanings - price, trading volume and interest in holding positions. available sources of information.

Analysis of common indicators in foreign exchange technical analysis

Support and resistance levels

A support level can be a previous low. A resistance level can be the previous day's high, or more colloquially: a peak. If the product you are trading falls again, a lost resistance level will usually become a support level. A new low is made when the instrument falls and breaks support. On the other hand, if the instrument rises and rises above resistance, it will make a new high.

back file

The rollback is expressed as a percentage. On any day the market is tradable, the instrument you are watching or investing in will generally retrace the previous day's trade, whether it was up or down at the time. The most widely used percentage of these is 50%. We also use one-third, 38%, and two-thirds.

Trendline

The easiest way to start trading is to learn and apply trendlines. You first have to draw a straight line connecting the two points on the graph. To draw an uptrend line, connect two consecutive lows. To draw a downtrend line, connect two consecutive highs. You will notice that the market (price) will retrace towards a trend line before resuming a trend. When the price breaks a trend line, the trend ends. The longer the trend line lasts and the more times it is tested, the more important it is. Note that a trendline is valid when the market touches it three times.

moving average

When looking for buy and sell signals, traders watch moving averages. These moving averages will tell you if the current trend is still valid. Note that these moving averages do not predict a change in trend. Traders typically use two moving averages, the 20-day and 40-day moving averages - and it is very common for prices to move around these two moving averages. The 5-day and 20-day moving averages, on the other hand, are very popular with traders who move in and out quickly.

Oscillator

In order to identify the overbought or oversold state of the market, traders often use oscillators. This indicator generally warns traders that the market is either too high or too low and that change is imminent. The most commonly used oscillators in trading are the Relative Strength Index (RSI) and Stochastic, with a scale from 0 to 100. RSI: If the scale exceeds 70, it is overbought; if the scale is below 30, it is oversold. Stochastic has an overbought scale of 80 and an oversold scale of 20.

What are the foreign exchange technical analysis methods?

Technical analysis is a series of techniques used to try and predict future price movements of financial products based on historical price movements and patterns.

The foreign exchange market is particularly suited to the use of technical analysis. High levels of liquidity in terms of trading volume and participation, and sensitivity to large, long-term country-level trends mean that the foreign exchange market, which is prone to change over time and shape, has the opportunity to fully develop.

At the same time, technical analysis in the foreign exchange market can also be effectively used to formulate and execute short-term trading strategies.

Forex chart patterns

Traders in the forex market can use many of the same Western technical analysis techniques as other markets, including patterns such as wedges, triangles, channels, double tops and bottoms, and head and shoulders. Quantitative and combinatorial techniques such as moving averages, Bollinger Bands® and Fibonacci retracements are also common, along with analysis of oscillatory and momentum indicators such as MACD, RSI, and Inferred Statistics. Wedges and Bollinger Bands are examples of two of the most common technical analysis methods.

wedge shape

Wedge patterns are often used to indicate a possible impending trend reversal, so if price is showing a downtrend within a wedge, one might think that when price breaks the top of the pattern, the trend might change to an uptrend. Wedge patterns can be either rising or falling, depending on the current trend shown within the wedge, and these patterns are usually long-term (three to six months).

Bollinger Bands®

Bollinger Bands are a chart overlay created by drawing a line at plus or minus two standard deviations from the Simple Moving Average. This is one of the most used technical analysis tools because it is a good measure of market volatility. The closer the price on the chart is to the upper rail, the closer the market can be considered to be "overbought." The closer the price is to the lower rail, the more likely the market is "oversold."

Forex traders can use these techniques on charts for any investment horizon, from instant or minute charts to weekly or monthly charts. In addition to identifying trends, technical traders use these techniques to determine price targets, stop-loss levels, and options during trades, while often seeking a reward-to-risk ratio of at least 2:1.

Forex candlestick pattern

Forex traders can also use eastern technical analysis techniques such as candlestick patterns, which are especially suitable for short-term trading and identifying key turning points. Some other common candlestick patterns used in forex analysis include doji, hammer, hanging man, morning and evening stars, and engulfing patterns.

Many forex traders find a combination of analytical techniques especially helpful, as the more indicators that meet the requirements for potential trading recommendations, the higher the level of confidence.

Invert the chart

There is one particularly useful technical analysis tool that Forex traders can easily grasp but difficult for traders in other asset classes to use.

There is an old saying about technical analysis that "when in doubt, turn the chart upside down". This is very simple in the age of paper charts, but becomes nearly impossible in the age of computers, although slightly easier for traders who draw on their phones or tablets.

In the foreign exchange market based on currency pair trading, a chart can be easily reversed by swapping which of the two currencies in a currency pair is the base currency.

Traders wondering if USD/CAD has peaked can look at CAD/USD for signs of confirmation or rejection.

Aside from the chart patterns themselves, the USD and CAD are particularly interesting currency pairs when compared in this way, as there are a large number of traders who look at each chart. USD/CAD is an international convention used by traders all over the world.

However, CAD/USD is widely used by the Canadian media and the Canadian public, so a key level on each chart affects analysis and trading and becomes a potential pivot, eg USD/CAD at $1.2500 and CAD/USD at $0.7500 .

In these charts, it's also worth noting how the wedge pattern and the RSI divergence reinforce each other.

Is Forex Trading Technical Analysis Useful?

Technical analysis is neither useless nor omnipotent.

Under normal circumstances, if investors believe in "value investing", they will devalue short-term methods such as "technical analysis" to be useless. In fact, no matter what kind of technical analysis, it will not be useless. Because the fluctuation of the stock market itself is a group movement of people, and the fluctuation of people's emotions is in line with the laws of psychology, and there are traces to follow.

Throughout all stock technical analysis methods on the market, three factors are involved: price, volume, and time. Market traders process all kinds of information every day, and reflect their own market cognition and psychological factors in the transaction. The cognitive changes and emotional fluctuations of market traders are all written in these three factors. Technical analysis is first derived based on a large number of trading statistics. In the process of statistics and research, the group behavior of traders will be "recompiled" intentionally or unintentionally.

Precisely because of statistical significance, there is a general rule in technical analysis, that is, the more participants and the greater the market value of a stock or index, the more individual differences can be eliminated, and the more useful technical analysis can be. At the same time, the shorter the sample time, the greater the randomness of short-term fluctuations; the longer the sample time, the more statistically significant the technical analysis will be, which is why the shorter the trend, the more difficult it is to judge.

The above information is provided by special analysts and is for reference only. CM Trade does not guarantee the accuracy, timeliness and completeness of the information content, so you should not place too much reliance on the information provided. CM Trade is not a company that provides financial advice, and only provides services of the nature of execution of orders. Readers are advised to seek relevant investment advice on their own. Please see our full disclaimer.

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what are the methods of foreign exchange technical analysis?

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