The foreign exchange market, also known as simply the Forex or FX market, is one of the most sought-after markets among all the traditional financial markets. With daily trade volumes exceeding well beyond $7.5 trillion, this speaks volumes about the daily participation of retail investors in this market.
Although learning the Forex market is very easy compared to the rest of the traditional financial markets, it can be a daunting task for beginners who are just getting their feet wet in this financial market.
Several novice retail traders jump on the forex bandwagon and quickly lose interest in this market after a series of uninformed decisions. Thus, even those who happen to have a promising future and want to become full-time forex traders give up on their dream of making substantial profits after repeated setbacks and losses of substantial money in the market.
If you are one of those who wish to take a deep dive and survive the harsh waters of this financial market, then go through this article as we point out rookie mistakes and educate you on effective strategies and tips regarding technical analysis for forex trading.
What is the Forex Market?
The forex market is a place where pairs of currencies are traded with the sole aim of making profits due to the price difference of a given currency pair. It is one of the most liquid and volatile markets compared to the rest of the traditional financial markets.
Liquidity means that if you have $100 with you, you go to the market to buy something that costs exactly $100 without waiting for a long time,
As this market is volatile, you are bound to find buyers at the price you sell them. Since buyers and sellers are quite active in this market, the trade is settled very quickly compared to the rest of the traditional financial market.
What is a currency pair?
A currency pair is made up of a base currency and a quote currency. For example, in USD/CHF, USD is the base currency and CHF is the quote currency. You buy in base currency and sell in quote currency. The profit is made with the price difference between two currencies.
How are currency pairs classified?
There are different types of currency pairs available for retail traders to trade. These currency pairs are classified as major, minor, and exotic currency pairs. You need to understand the difference.
As a thumb rule, the stronger the economy of a country, the stronger the price of the currency pair, and the less the price fluctuation of the currency pair. These currency pairs are called major currency pairs.
The same is true: if the currency of a country is less developed, the currency pair is highly volatile, and the chances of making profits are equally high. Thus, an exotic currency can offer more profits compared to a minor currency pair, and a minor can offer more compared to a major currency pair.
However, you must understand that while trading in the forex market, you must be well versed and have enough trading skills and understanding of these highly volatile currency pairs, as they offer an opportunity to make a product, and an uninformed decision can cost you dearly.
Now that we have roughly understood what a forex market is and how currency pairs are traded, we will learn how to trade in the forex market. There are two ways to trade in the forex market: either with the help of fundamental analysis or technical analysis. We will dive into technical analysis of the forex market and learn to effectively strategize the forex trade.
What is technical analysis?
Technical analysis is based on research of the price movement of the currency pairs that are represented usually through charts and graphs. As a retail trader, you research and analyze a currency pair based on their historical data, which is preserved in the form of graphs and charts.
Based on these historical data, you look for a favorable entry and exit point for each position in the forex market with the sole purpose of making profits. Adhering to the mantra buy low and sell high, you anticipate where the next probable price of the currency pair is.
What are technical indicators?
Technical indicators are the market indicators that will allow you to spot the most favorable to the least favorable market conditions that will allow you to either exploit the market conditions to make profits or simply refrain from entering and wait for an appropriate time.
They are as follows:
Moving Averages
Retail traders will look for patterns based on historical data in the form of charts. They will consider a period and try to analyze the market movement of a particular currency pair. The price movement of a currency pair is normally considered for periods ranging from 14 to 200 days. The longer the period, the less volatile the currency pair is, as you get a glimpse of how the market behaved in that specific period.
Pivot Point Level
Another popular means to decipher the price movement of the currency pair’s chart is the pivot point level. Along with identifying the support and resistance of the price movement of a selected currency pair, the direction and the possible reversal trend of the price can be determined. Most novice forex traders follow these indicators.
In the past, the daily, weekly, and monthly price movements of the currency pairs were tracked to calculate pivot points. However, with the use of advanced technology at our disposal, traders can now reduce the time frame while analyzing and strategizing their entry and exit positions based on these analyses.
Opening a long position above the pivot point enables traders to potentially meet resistance (Resistance Level 1), allowing day traders to potentially make profits. Once the initial resistance is met, surging beyond this price range to resistance level 2 or resistance level 3, traders can easily make a good profit.
The reverse is the same for a short position when the price is declining beyond the pivot point level, potentially meeting support level 1, which allows the day trader to potentially make profits if the price range further drops below support level 2 or support level 3.
It is advisable to use risk management tools like take-profit or stop-loss to potentially make a profit or loss in case of unforeseeable volatility in the forex market.
Oscillators
A band of price fluctuation is constructed between the very high and very low price movements of a currency pair. Between these two extreme price bands, the price fluctuation of the currency pairs is closely observed by you as a retail trader.
There are two possibilities: either overbought conditions or oversold conditions.
When the price movement of the oscillator reaches extreme highs, it is termed overbought, and when the oscillator reaches extreme lows, it is oversold. They are generally measured on a scale of zero to 100.
As a thumb rule, it is better to buy an oversold currency pair than an overbought one.
Fibonacci Oscillators
Fibonacci analysis allows forex traders to help improve forex performance for both short-term and long-term positions in a trade by identifying hidden resistance and support in the price of a currency pair.
The forex trader or investor will try to uncover a repetitive pattern by analyzing the price fluctuation of a selected currency pair. While using this method, traders will consider Fibonacci ratios such as 23.6%, 38.6%, 50%, 61.8%, and 100% to either use a risk management tool like stop-loss or a determined price target.
Stochastic Oscillators
One of the most favored technical indicators is the stochastic oscillator, which helps forex traders identify the overbought and oversold conditions of a selected currency pair.
The sensitivity of the oscillator to the market can be reduced by the time period or by taking the moving average of the result.
The recent price of the currency pair is measured on a scale of zero to 100. Anything above 80 is considered overbought, while anything below 20 is considered oversold.
Relative Strength Index
The relative strength index is an indicator that is quite popular amongst retail traders. It is used to measure the speed and magnitude of the price fluctuation of a currency pair. Based on the data, a retail investor or trader can point out the overvalued and undervalued condition of the currency pair.
Based on this indicator, overbought and oversold market conditions can be understood to exploit the given market condition.
Generally, if the RSI reading is 70 or exceeds 70, then the currency pair is overbought, and if the readings are 30 or below 30, then the same currency pair is oversold.
Bollinger Bands
Another technical indicator that is quite popular with retail forex traders and investors is the Bollinger bands. Traders will generally plot lines that are two standard deviations away from the simple moving average price of the selected currency pair.
With the help of Bollinger bands, a retail forex trader will strategize the entry and exit positions of the selected currency pair after identifying the overbought and oversold levels of the price of the currency pair in question.
Final Thoughts
Learning forex trading is quite easy, and making profits is equally rewarding if you know your basics. Since the forex market offers ample opportunities, you should focus more on your research-based trading strategies to minimize your losses.
It is true, and you must understand that you will make losses; however, you need to minimize them. Maintaining a journal and entering every trading strategy and subsequent outcome, whether profit or loss, can help you a lot. a lot. You can refine your trading strategies by repeating the actions that lead to profit while learning from the losses to ensure you don’t commit them in the future.
