As a beginner, technical analysis is likely among the first thing you'll learn in Forex trading. In fact, that's the most basic thing you have to understand to enter and exit the market with a handsome profit.

As a beginner, technical analysis is likely among the first thing you'll learn in Forex trading. In fact, that's the most basic thing you have to understand to enter and exit the market with a handsome profit.

Technical analysis is a method where a trader tries to predict market price direction based on past price movement

Most noteworthy, technical analysis is a method where a trader tries to predict market price direction based on past price movement. For instance, you'll take a look at the price chart and draw some lines to connect the dots when you try to forecast where the price will move later.

Before we dig in deeper, you need to memorize these 3 basic tenets of technical analysis.

  • The price discounts everything. Everything worth telling is already reflected in the price chart itself, so you don't need everything else.
  • History repeats itself. You know, some people won't mind running in circles every single day. Those collectives of investors and traders can and will likely make the same decision over and over again.
  • Price moves in trend. There is no such thing as a total random price movement. Instead, the price will form a trend that will last until it finally reverses.

 

Let's Try Technical Analysis!

Whoa, calm your horses, mate! Making entry with technical analysis at the first try isn't easy and may lead you to loss. My recommendation is to use a demo account so you can learn to your heart content without losing real money.

 

Step one, you have to pick the right price chart display to suit specific technical analysis method

This is very important because certain technical analysis only works in a specific price chart display. Remember, it won't do you much good if you use the wrong pair of shoes to wherever you're heading. Take a look at these following pictures below:

line chart

price chart display: line

bar chart

chart display: bar

candlestick chart

chart display: candlestick

As you can see above, there are three types of price chart display; line, bar, or candlestick. From those three, candlestick display is the most popular one.

 

Step two, identify the current trend with simple technical analysis tools

For example, you can use trend lines or drawing tools to figure out where the trend is heading to, currently.

uptrend market

uptrend market, also known as bullish trend

downtrend market

downtrend market, or known as bearish trend

sideway market

sideway trend

After using the trend line to connect one point of price to another, check one of these criteria below:

  • If the connection goes upward, it's called uptrend or bullish trend. In that market condition, buyers are dominating.
  • If it moves down, then it is a downtrend or bearish trend. Here, the sellers are running the show.
  • If it moves up and down way too fast and leaving zig-zag trails, then you are currently stuck in a sideways market.

Those are the most basic technical analysis method everyone can try. Further ahead, I'll show you what to do with that price display and trend identification.

 

So, What's Next?

As a start, recognizing the current trend doesn't do anything on its own. Later, you'll need to evaluate how long that trend will last until it finally going in the opposite direction or turning sideways. Most noteworthy, it's the point where you'll decide to enter and/or exit the market.

 

You need to evaluate how long a trend will last until it finally going to opposite direction or turning sideways

To benefit from technical analysis, you need to understand these components:

  • Upper and Lower Price Limit, the geeks call it as either resistance/support limit or overbought/oversold condition.
  • Entry or exit signal, signals tell you when to open or close a position.

Let's break down those components into finer details!

 

Raise the Alarm if the Price Hits the Limit

The logic behind this approach is simple; traders react to past price bottom or top-level, and they'll make retrospective decisions. Therefore, you can draw a visual line where this top-most or rock bottom price levels are.

Traders react to past price bottom or top-level, and they'll make retrospective decisions

See, as soon as the price hits the limit, it bounces in the opposite direction. At that moment, you can make a considerable profit as it reverses your predicted direction.technical analysis: upper limit or resistance level

Technical analysis: upper limit or resistance level

In practice, you can open a sell position when the price is about to hit the upper limit. Essentially, you sell at the highest possible price or when the market is in an overbought condition where the path to least resistance is moving down.

technical analysis: lower limit or support level

Technical analysis: lower limit or support level

Or, you may open a buy position when it touches the lower limit. You reap the most profit because you buy at the lowest possible price. Most likely, traders will support the price to move to a higher level.

 

Pinpoint Entry and Exit Mark with Trade Signals

Finding entry and exit points may seem to be tricky for beginners. But, don't worry, technical analysis can help you to locate those points with relative ease! Trade signals mainly come from technical indicators, but that's not all. There are also price action and price pattern. These signals will assist you to make entry and/or exit decisions according to current trend formation and strength. In respect of the current trend, a trade signal can give either of these following signal types:

  • Continuation: this type of signal follows the direction of the current trend. Simply put, go where the flow is, cheers!
  • Reversal: Conversely, this signal will tell you to wait where the current trend is at its weakest. So, be ready for a big reversal.

Yup, that's all for now, friends! We know that you don't like the wall of texts, so, let's just practice technical analysis now with forex demo accounts.