If you look at any Forex chart, you'll see trends. If you use technical analysis as a cornerstone of your Forex trading strategy, you'll be able to spot these trends and trade them for big profits.
There are however many misconceptions about using Forex charts, so here we'll explain how it works and provide some tips on using technical analysis for bigger FX profits.
What is Technical Analysis?
In essence, it's the study of price action to identify trends – spotting repetitive chart patterns that can be traded for profits.
FOREX chart patterns repeat themselves – as they reflect human psychology, which is constant.
Many traders think that simply studying Forex charts can't work – because it doesn't take into account the supply and demand situation – but it does actually work.
A simple equation will explain why.
Market Perception (trader psychology) + Fundamentals (supply & demand) = Price
Price action reflects all the fundamentals – and more importantly, how the participants perceive them.
In today's world of instant communications, the fundamentals instantly show up in price action – so technical analysis simply assumes that all known fundamentals show up in price action instantly.
Some of the largest price moves in history have occurred with little or no change in the fundamentals.
These price moves were caused by human psychology – and currency technical analysis is able to study this. This gives you a huge advantage – when you accept that ultimately, it's people that determine the price of anything.
The right price is the market price – so you see the reality, rather than listening to the opinions of others.
Let's review the three assumptions technical analysis is based on – currency technical analysis makes the following assumptions:
1. Markets Discount
As we have explained, all fundamentals show up quickly in the price. You are therefore seeing the impact of the fundamentals – and seeing how humans perceive them at the same time.
2. Trends Persist
In currency trading, you get great trends. Simply look at any currency chart and you'll see long-term trends – lasting weeks, months or years.
History Repeats Itself
The basis of currency technical analysis is that what has happened in the past will happen again – as human psychology never changes.
As chart patterns reflect shifts in human psychology, certain patterns and trends will repeat themselves repeatedly.
However, keep in mind that charting is an art, rather than a science.
While human behavior does repeat itself, humans can be unpredictable as well – so you're trading the odds, not certainties.
The good news is that by using technical analysis of currencies, you can get the odds in your favor – and make big long-term profits.
Now, lets look at some tips on using technical analysis for bigger profits:
1. Focus on the longer term trends
Currencies tend to reflect the underlying health of the economy. This creates longer-term trends that last for months or years – so focus on the longer-term trends, rather than the short term “market noise”.
2. Use a simple system
If you want to develop an effective Forex trading system, keep it simple – support and resistance, and a few confirming indicators are all you need.
In online currency trading, it's a fact that simple systems work best – as there are fewer elements to break, in the real and brutal world of trading.
3. Trade in isolation
This is a key factor that you must learn as part of your Forex trading education.
Don't be influenced by the opinions of others, or the news – you'll hear convincing stories, but that's all they are – and remember journalists are not traders!
If you follow the news, or let your emotions get involved, you'll end up in the company of the majority of traders – losers!
4. Be patient and be disciplined
Don't trade all the time – only trade when your system generates trading signals – and then follow the trade with discipline.
A Simple way to make Big Online Profits
Using Forex charts, the right way can be very lucrative – as they represent the most time efficient and powerful way of building big profits in online Forex trading.