Easy Technical Analysis For Beginner Forex Trader

Technical analysis is based on three principles. Understanding them will lead to improved achievement in forex trading.

Technical analysis is based on three principles. Understanding the three principles will lead to improved achievement in forex trading. The three are:

1. The entire cause of price movement has been expressed in the pattern of price movements themselves.
2. Price always move to follow the trend within certain limits.
3. The history of price movement patterns will always repeat itself.

However, that was just basic; there are more things you should note in regard of technical analysis. How to apply technical indicators, when and where to enter and exit, etc. In this article, we are going to explain three shortcuts in the application of technical analysis.

Before we follow through, make sure that you are familiar with the concept of support-resistances, trend continuation, reversal, sideways, and breakouts. We are going to talk about some simple ways of detecting when reversal and breakouts might happen. Each traders usually has his own way of recognizing the signals, therefore the following explanation will only acquaint you with some examples that you could expand to your convenience.

1. Draw Imaginary Lines Along Key Supports And Resistances

Technical analyst took note of key supports and resistances, that is the supports and resistances that have shown biggest influence on the chart. Then they draw lines to connect the aforementioned keys until a trend line is formed. Afterward, they compared it with technical indicators to ascertain the direction of the next price movement. Take a look at the picture and technical analysis below.

The picture was taken from DailyFx's technical analysis of NZDUSD on 5 June 2014. Notice the dotted line from key support to key resistance. Beside of the imaginary line, the analyst was also make use of 50% Fibonacci Retracement (yellow horizontal lines), ATR and RSI (at the bottom of the chart), as well as recognizing an important candlestick pattern (bearish engulfing). Thus, the bright red line functions as a tool to explain the predicted direction of price movement.

That was one way of drawing the imaginary line, but there are various ways to do that. Each trader has his own style, and he might arrange the lines in different ways according to the currency pair he traded or change it in accordance with market condition. Here is one more example for you.

The chart analyzed AUD/USD pair on 5 June 2014. It was also taken from DailyFx technical analysis. However, on the first picture, the analyst only drew one dotted line connecting key support and key resistance. While in this picture, apart from the dotted line, he also connected a string of supports in one line and a string of resistances in another line instead. Now, could you draw such lines on your chart?  

2. Buy Near Key Support, Sell Near Key Resistance

This rule sounds so simple, but it is multifunctional too. In the previous examples, you could see how one would benefit from buying near key support and sell near key resistance. Exit the trades when price comes near upcoming short-term support, or put a trailing stop around that key level. Well, that is if you feel suited to that style of forex trading.

There are other styles, and we will tell you one more to make it clear about the role of support and resistance level in forex market technical analysis. First, open trading platform in M1 or M5 timeframe. The following picture displayed GBPUSD in M5 on 5 June 2014.

There was a sell signal from EMA-20 and EMA-60 crossover. However, note that the cross occured near the last support point (A-B). It is unwise to sell at such low point, because who knows if it is a real or fake signal!? Wait until price moved forward. Voila! it turned back near previous resistance! Now, THAT was what you might call a golden chance. Sold the GBPUSD right away, and never forget to put Trailing Stop along.

3. Memorize The Most Influential Supports And Resistances

From each period, there will always be most influential supports and resistances, they are key support and resistance that marked the highest and lowest point during a certain period. Here is one example from USDJPY in M15 on 3-5 June 2014.

Take note that the first key resistance was at 102.764, and the second on 102.726; while the first key support was at 102.435 and the second on 102.446. The decreasing support and resistance level, as well as EMA-20 and EMA-60 crossing, signals a significant bearish trend was building. Have a peek on the forex trading fundamental calendar if any critical news event is looming on the horizon.

What happened there? oh yeah, there will be Initial Jobless Claims later that day, and NFP release on the day after. US ADP Nonfarm Employment Change the day before have slid lower than analysts expectations and the previous release. We could say that USDJPY is on bearish danger until market closing that week; it might go upward, but is unlikely to pass previous resistances. Additionally, there is a big chance that it will go down and record lower support level. Unless, of course, if the upcoming unemployment data display significant improvement, as opposed to the predicted downfall.

Forex trader that applies technical analysis commonly avoid news time because there lies unexpected surprises that might turn green pips into bright reds. However, there are also trader who said that as long as a good money management is in place, then it is all right to let trades open during news releases. What will you do about that is up to you. The most important thing is to understand the basic first and practice as much as you can. The combination of knowledge and experience could arm you with countless ammunition for countless battles in the forex market.