To succeed in forex trading, one should know how to use technical analysis. It can provide insight into the general market direction and momentum and help the trader implement a well-defined strategy. Here we will explain:
How it differs from fundamental analysis
Fundamental analysis is used in traditional stock and commodity markets and is based on macroeconomic theories such as demand and supply for goods, inflation; interest rates; GDP growth, unemployment levels etc. It uses these indicators to assess whether an economy is healthy or not, which affects the value of its currency (Pring 2011).
There are many different versions of this method, but they all believe that financial instruments have intrinsic values. This supports the principle “buy low and sell high.”
How to use Fibonacci Retracement and Extensions in technical analysis
The Fibonacci sequence was devised by its namesake mathematician Leonardo Bonacci and has been used for generations in financial markets and trading, and is based on the idea that market movements follow a “golden ratio” – e.g. 1.618 – found throughout nature.
Consequently, this number may also be applied to the movement of financial markets. The ratios can be viewed as a trend-following, relative strength index (RSI) or momentum indicator because it oscillates around a central value and rises when the price pulls away from it.
How to use Elliot Wave theory in technical analysis
First identified by Ralph Nelson Elliott in the 1930s, this method uses waves of different lengths to analyse how investor sentiment affects market prices. A bullish wave occurs when optimism is dominant, which pushes prices higher. A bearish wave relates to pessimism and lower prices.
Wave patterns are seen as having three distinct stages:
- An impulsive stage marked by longer price swings
- A corrective stage consisting of sideways movement
- A final stage when optimism or pessimism is exhausted, and the trend resumes.
How to use candlestick analysis in technical trading
Candlesticks are visual tools that show the high, low, open and close prices of a security for a specific period. They are displayed graphically using rectangular bars with an open/close price at the bottom and top of each bar, respectively (it should be noted that most forex charts only show-closing prices).
This information can help traders determine whether the session’s price action was dominated by bullish or bearish sentiment.
For instance, if prices opened near the low, closed near the high and appeared relatively flat throughout the day, it suggests there was little interest in buying or selling. On the other hand, if prices opened near the high, closed near the low and had a gap between the open and close, it shows that there was high market volatility.
How to use candlestick patterns in technical analysis
There are hundreds of candlestick patterns, but we will focus on a few of the most common ones:
- The engulfing pattern suggests a potential reversal if the security’s price does not move back into its previous trend. For example, an “Forex Trading” bullish candle is formed when a bearish session is followed by a sizeable bullish session that completely covers or “engulfs” the previous bearish one
- A piercing line candle indicates potential for strong future gains as prices pierce through a key resistance or support levels.
Technical analysis can be an important tool for investors and traders in Asia looking to profit from the forex market. The use of technical analysis can help identify entry and exit points, trends and chart patterns.
Furthermore, it can be used with other forms of analysis such as fundamental to generate a more well-rounded perspective before executing a trade. The various technical analysis techniques covered in this article provide a practical framework for any investor or trader seeking success through technical trading in Asia.
New traders interested in forex trading are advised to use an experienced and reputable online broker from Saxo Bank.