Forex Technical AnalysisForex technical analysis is the study and interpretation of price charts to help you predict future price action.Almost every active Forex trader uses it, since it can be applied to short-term as well as long-term trading. Learn To Become a Musician No, not literally... I'm not asking you to drop everything, pick up a guitar, and start strumming away. But learning Forex technical analysis is like learning to become a musician. In music, you first learn musical notes, scales, tempo's, rhythm...the foundation. But then it's all up to your individual skill and creativity to create real music...to interpret notes in a way that will generate perfect melodies and harmonies. This is what separates the "Mozarts" from the "Mediocre". Not everyone can be a brilliant musician, and the same is true with Forex trading. In Forex technical analysis, you first learn patterns, indicators, candlesticks, Elliot Wave, and Fibonacci retracements. This is your foundation. But again, it's all up to your individual skill and creativity to interpret these patterns and indicators in a way that will accurately predict future price behavior...not an easy task to say the least. And to do it consistently with every trade is an even harder task! Very few traders have this skill. I'm not here to rain on your parade, but I am here to keep things honest and real for you. If you think you have what it takes to be a good trader, then go for it! If not, don't worry. You have other options in the form of semi-automated systems and fully-automated forex robot systems. These systems allow you to defer some or all of the technical analysis to the experts, allowing you to focus on other aspects of Forex trading, such as money management. Regardless which path you take, never stop learning. Speaking of learning, let's continue with Forex technical analysis. Looking For Price Patterns In Forex technical analysis, you visually analyze price behavior on an online forex chart to identify patterns. For starters, you can view prices on a simple line chart. You can look for classical charting patterns, such as the "Head And Shoulders" pattern.
For example, you can draw a "neck line" by connecting the lows of the Head And Shoulders pattern (the red line in the picture above). When this neck line is broken (ewwww!), it's an indication that the uptrend has lost steam and we're now at the beginning of a downtrend. Many traders prefer this type of price action trading for its simplicity. The "KISS", or "Keep It Simple" approach definitely has its merits. However, other traders prefer to take it a step further and view prices that resemble candlesticks. "Jack Be Nimble, Jack Be Rich" Candlestick charts were created by the Japanese a very long time ago. Incorporating them into modern-day Forex technical analysis has become very popular. In candlestick chart analysis, traders look for special candlestick patterns to help identify either a pending reversal of the previous trend or a continuation of the previous trend. I love the names of these patterns... "Evening Doji Star", "Rising Three Methods", "Three Black Crows" ...to name a few. 
There's a certain poetry to candlestick patterns. And just like in poetry, candlestick patterns lend itself to a strong degree of interpretation. I found it best to complement candlestick chart analysis with Western technical indicators. In the picture above, an "Evening Doji Star" appeared after a long uptrend. I would have more confidence in this pending trend reversal signal if the Relative Strength Index, a Western technical indicator, was in an "overbought" area and turning down. As with any technical pattern, always wait for confirmation before actually placing the trade. In our previous example, I would wait for the price to break the previous bar's low price. This would provide confirmation that the uptrend has reversed and prices are now on the decline. Better to be safe than sorry! Speaking of Western Technical Indicators Contrary to the "KISS" approach, some traders believe complexity in Forex technical analysis is the key to success. They will add a single Forex indicator or several indicators to the price chart. The most common indicators include the Relative Strength Index (RSI), Moving Average Convergence/Divergence (MACD), and Stochastics. There are two types of technical indicators:
These indicators are best applied when prices are trading in a range, not necessarily in a trend. In an uptrend, for example, RSI could be showing prices in "overbought" territory for quite some time before a pullback occurs. So before looking at oscillator indicators, make sure prices are trading in a range, not trending. How does one determine if prices are trending? I'm glad you asked! Trend Identifiers, such as Moving Averages, are technical indicators that help confirm trending prices. Generally, if a moving average is sloping upwards and prices are above the moving average, then it's safe to say that prices are in an uptrend. The opposite is true in a downtrend. In Forex technical analysis, there's a wise saying that goes, "the trend is your friend"...oh, so true! In general, you should buy when prices are in an uptrend, and short (sell) when prices are in a downtrend. 
As you develop your own Forex trading methods, wise sayings such as this will help keep your trading on course. Nature May Have the Answer Answer to what? The Meaning of Life? Well, maybe it does, but that's a whole other topic. In Forex, some traders have looked to nature for answers in predicting price action. For example, in any trading market, prices generally do not move in a straight line. Price pullbacks are bound to happen. Elliott Wave Theory suggests that there's a certain rhythm, or repetitive pattern found in nature... ...specifically, that prices move up in a series of 5 waves and down in a series of 3 waves. If you're an Elliott Wave theorist, you could look for cyclical pullbacks in price trends as key entry points for a trade. It sounds a little "woo-woo", I know, but it is popular enough in Forex technical analysis that it does seem to work. Let's get a little more "woo-woo" and talk about Fibonacci retracement levels... This approach applies special number sequences found in nature to identify support/resistance levels. When a price is in a trend and starts pulling back, or retracing, it may bounce off certain Fibonacci retracement levels and continue on with its previous trend. These retracement levels usually occur at the 23.6%, 38.2%, and 61.8% levels. 
Although technically, it's not a Fibonacci retracement level, prices also retrace at the 50% level.Self-Fullfilling Prophecies In my opinion, Forex technical analysis is full of self-fullfilling prophecies. The more popular the indicator, the more reliable it can be. That's because everyone's looking at the same thing and likely drawing the same conclusion. For example, if most traders see the price pulling back towards its 50-day moving average (another very popular indicator), they will anticipate it bouncing off the moving average and continuing on its previous trend. If enough traders anticipate this, then there may be enough buyers at the 50-day moving average level to make prices actually bounce off and continue the previous trend...a self-fulfilling prophecy! But hey, nothing wrong with that, as long as you're on the right side of the trade! Things Don't Always Go As They Should As you learn Forex technical analysis, you'll find that things that are supposed to happen sometimes don't. The Forex market has a funny way of doing the opposite of what the patterns and indicators tell you. (Actually, this isn't so funny when it's your money that's lost as a result.) I know. I know. I just got finished talking to you about self-fulfilling prophecies. However, there's another group of traders out there known as "contrarians". They bank on the opposite happening from what most traders believe. In other words, if everyone is bullish, then contrarians are bearish. Sometimes, they're right. But then again, sometimes, they're wrong. That's just how it is. The Forex market can be fickle, simply because it represents the activities of so many very human traders... ...and human behavior, as we all know, is not always rational. So in the end, regardless of what technical patterns and indicators are telling you, don't bet the farm! Apply proper money management, set your stop-loss levels, and you'll live to trade another day! Build YOUR Best Forex Trading System
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