Technical Analysis and Forex Trading

Beginner’s Guide to Online Forex Trading – Chapter 9: Technical Analysis

As already mentioned, what defines a day trader is that he does not hold on to a stock for more than a day. When the trader is attempting to sell off all his/her stock positions within the closing time of the trading day, it is best to make use of technical analysis.

This analysis is highly recommended for day trading. It observes the stock prices over the past, whether that be a month, a day or even an hour in order to determine the next likely change in the stock price. So by looking at a pattern you can perhaps follow a trend. Technical analysis often comes in the form of charts or graphs. Not every trader is a mathematical engineer meaning that technical analysis needs to be simple to follow and understand. There are of course much more complicated forms of technical analysis and, well, if you feel comfortable using them, then you should.

The most common terms you’ll come across are “Support”, this is the price level from which a stock can rebound up. Usually, demand or the buying pressure surpasses supply or the selling pressure in the stock’s support level thus making the stock rise in value. “Resistance” is the exact opposite. When a stock rises in value, finally it will reach a price level where it gets pushed back. In short, supply surpasses demand here and the stock begins to drop in value.

The best traders will always have various charts open on their computer, one perhaps for a year, one for a month and one for the last hour. This gives you best idea of the long-term and short-term patterns forming. You cannot get a strong idea of a pattern forming just from a 5 minute chart as this really shows you nothing.

Beginner’s Guide to Online Forex Trading - Chapter 9: Technical Analysis

Figure a. shows you the RSI or Resistance Support levels for the chart shown in Figure b.

Figure b. shows you a typical chart a trader might use to detect patterns. It is taken for the EUR/USD currencies over a one hour period. Indicators have been added to this chart: Bollinger bands and the Simple Moving average which take away the “noise” from the chart to show you a clear picture of the pattern. This chart is called a candlestick chart because of the little candle shapes which make up the chart.

There are many other types of indicators available for these charts; you should know how to use most of them before you can consider yourself a professional trader.