How To Use Technical Analysis in Forex Trading

We have already seen that the fundamental principles of technical analysis in forex trading are:

- markets discount everything. All of the relevant information is already incorporated in the price and only knowledge of price movements is necessary to successfully predict the future trend of prices.

- prices move in patterns or trends. Prices can only move upwards, downwards or sideways and once a movement begins, it will persist and create a trend. The trend is merely a movement of the market in a particular direction. In theory the best way to identify the trend is to use a chart. The chart will consist of a series of peaks and troughs and the direction will determine whether the market is bullish or bearish.

- history repeats itself. Because human nature is repetitive and market psychology reacts in the same fashion to market trends, past patterns will recur in the future.

Now let us take a look at some technical indicators that have proved successful in actual trading and are recommended by many of the  best forex brokers There are a very large number of indicators to choose from and you should pick the ones that give you the maximum information for your style of trading.

Trend indicators: the trend is a term used to describe the persistent movement of prices in a particular direction over a period of time. The best way to spot trends is to create trend lines on the chart. Trend lines are drawn below the lows and above the highs and an easy way to see the direction of trends. For instance if the trend lines slope upwards, it means that both the highs and lows are getting higher and that the market is in bullish mood. The opposite would indicate a bearish market.

Support and resistance indicators: once again, trend lines are the easiest way of establishing support and resistance levels. Support and resistance levels occur when prices are testing lows or highs and then rebound. When prices look likely to break through support or resistance levels, it means that the market is ready to make a big move.

Volatility indicators: volatility simply means the tendency for prices to go up or down and the greater the frequency of change, the more volatile the markets are. Volatility is what provides opportunities for profits and losses. The most commonly used indicators are Bollinger Bands which are useful not only for spotting trends but also for timing exit and entry.

Momentum indicators: the speed at which prices move in a given timeframe is called the momentum. You can determine the strength or weakness of a trend over time by the momentum. The momentum will tend to be strongest at the beginning of a trend and weakest at the end. If extreme highs or lows occur with weak momentum, if there is a good chance that the trend is about to reverse. However, if momentum is strong but prices are flat, it is a good indication that prices are about to move. The most common momentum indicators are Stochastic, MACD and RSI.

Sentiment indicators: since market sentiment is a powerful mover of market prices, many traders will attempt to gauge whether the sentiment is bullish or bearish. These indicators are generally used only at market extremes but can be used to great profitability if markets turn.