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How to use technical analysis when trading forex

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How to use technical analysis when trading forex

The foreign exchange (forex) market is one of the most actively traded, volatile and highly liquid markets in the world. The exchange of currencies is an important part of modern life, facilitating the international trade of goods, products and services. The forex market currently oversees a huge daily trading volume of $5 trillion, with online trading platforms offer 24-hour access to the global market. 

The market’s volatile nature, presents you with potential to make gains on your position, however it can increase the risk of incurring losses. To help minimise the risk of making losses, it’s important to partake in thorough research to understand the factors that can affect your trade, as well as choosing to use either technical or fundamental analysis to help you effectively make informed decisions with regards to your position in the market. 

In this article, we will help you to find out more about forex trading, explaining technical analysis, and how you can use it when trading forex. 

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What is technical analysis?

Technical analysis is a variety of different techniques used to try to forecast future price movements of financial products, based on data from historical price movements and patterns. The forex market is particularly suited to technical analysis, as markets tend to trend over time, and patterns start to develop.

Technical indicators

There are many types of technical indicators that forex traders can analyse as part of their trading strategy, including: 

  1. Moving averages

Moving averages are leading technical indicators that help to identify a break in price actions, as well as gage the general direction of the market. Taking the form of a line drawn on a chart, a moving average is used to find the mean value of a forex pair over a set amount of time, offering the trader an insight into the general movement of the value of the currency pair.

Whilst moving averages are generally more beneficial to traders who are working with longer time frames, such as position traders, they are usually based on historical data, meaning they are slower to respond to fast-evolving market conditions.

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Also Read: 3 of the Best Forex Brokers

  1. Oscillators 

Oscillators can be used to identify the point at which the market reaches a limit, meaning a trend is likely to change. When a currency pair’s price gets soars, it is said to be overbought, meaning that the price is likely to either stay stable or decrease. If the asset’s value fell, new traders would likely open a position, which could in turn, raise the price. 

As one of the most significant forex indicators, oscillators help traders to identify trends ahead of time, helping you to anticipate price movements and maximise your opportunities to profit. It’s important to note however, that whilst they can offer valuable insight into the speed and momentum of the market, oscillators can display false signals, so they can be best used in conjunction with other indicators.

  1. Bollinger Band

Bollinger Bands are relatively straightforward and are widely used by forex traders. They are a volatility channel that indicates the start of a trend if the price of a currency pair surpasses a moving average. Bollinger Bands offer a wide, easy visual representation of volatility in the market. Increased market volatility is reflected by a wider distance between the two outer bands, and a narrowed distance between the bands represents the potential of a price breakout. 

Bollinger Bands are a reflection of past performance, meaning they can become less accurate and tricky to use if you’re hoping to identify trade opportunities ahead of time. Because of this, Bollinger Bands are more useful when paired alongside other technical and fundamental indicators. 

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Also Read: Forex Day Trading for Beginners: How to Get Started and Strategies You Must Learn to Trade Successfully

When forex trading, it is important to take into consideration the variety of factors that can influence the market. You should undertake extensive research and learn about the strength of the economy in the country’s currency you wish to trade, as well as keep up to date with news stories and other events that may influence the value of a currency pair.

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