Technical analysis is one of the most significant forex trading basics that you must know if you want to succeed as a trader. In contrast to fundamental analysis, technical analysis relies on using past price movements to predict future ones on which you can base your trading decisions. There are a number of methods used by technical analysts to predict currency price movements, but they all rely on knowing how to read forex charts. While this method of forecasting is somewhat controversial since not every trader believes in its effectiveness, combining it with fundamental analysis gives you two valuable tools that can greatly help you in your trading.
Forex Trading Basics – Understanding Forex Charts
Forex charts track price movements of currencies in a visual manner in order to make it easier for you to detect patterns that could provide trading signals. There are a number of ways that price data can be tracked on a chart. The most common one, of course, is by using a single line that tracks the closing price of the currency for each period. Another simple method is using bars, which allows you to track more data. A bar chart shows you not only the opening and closing prices but also the highest and lowest price reached.
The most popular method of displaying the price among technical analysts, however, is Japanese candlesticks. They are called ‘candlesticks’ because the bars resemble candles that have wicks on either end. One end of the candle represents the opening price, the other end the closing price and the wicks show the highest and lowest price. The body of the candlestick is also colored in order to indicate if the price movement is rising or falling.
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Forex Trading Basics – Support and Resistance Levels
The concept of support and resistance when applied to forex trading is simple: the support level represents the lowest price the currency can fall to before it bounces back up again while the resistance level is the highest price before it falls back down. When a currency movement breaks through a resistance or support level, this point then becomes the new support level. Knowing where these levels are is most useful when you are doing trend trading or following a price trend. When the price trend is upward, you “go long” or place a buy order on a currency pair when it reaches the support level and close your trade at the resistance level. On the other hand, when the trend goes down you place a sell order at the resistance level and take profit when it hits support.
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Forex Trading Basics – Moving Averages
Moving averages are another popular indicator in the forex trading basics used by technical analysts as a way of determining trend of a currency’s price movements over a particular period. There are two types of moving averages – simple moving averages track basic price data as it happens and shows the average direction of the price over a chosen timeframe. Weighted moving averages on the other hand, gives more weight to recent price movements rather than older ones. Using moving averages in conjunction with other indicators can give you a clearer picture of the trend of price movements so you can make better trading decisions.
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