Technical analysis is favored in forex trading by most forex traders. Even though technical analysis is the favored analytical method by traders, it is still used in complement with fundamental analysis i.e. important news, non-farm payroll, unemployment rate, GDP and etc. Traders usually do not trade 2 hours before and 2 hours after an important news announcements. The charts will usually reflect the news release after 2 hours.
In technical analysis, Japanese candlesticks are the most popular and most used charting method. In order to better understand what the charts are telling us, we use various indicators to help us. Before we go there, we have always heard trader says “The trend is my friend”. In conjunction with knowing the trend, we should understand the concept of supports and resistance. As you see an up-trend on the charts, start to look for the support and resistance. As the market moves upwards, by take note of the lowest point the market reached before it continues with its uptrend; this is known as the support. As the market moves, support and resistance are formed. As the market trends oscillates in an uptrend market and breaks the resistance level (also known as a breakout), it will trend further. Ride this wave for a good profit. Two interesting notes on Support-Resistant point of the currency market, when the market breaks-out from a resistance point; it will become the support and when the market breaks-out from a support point, it will become the resistant.
Next, we take a look at Trend Lines. This are probably a common indicator used in technical analysis; yet this indicator is underutilized as well. When the trend line is drawn correctly, a trader can use this indicator accurately to anticipate the movement of the market. When a second line is drawn in parallel with the trend line, this will be known as a “channel”. When the price reaches the bottom of the channel, it will be a signal to buy and when the price reaches the top of the channel, then it is time to sell.
Fibonacci ratio is used widely by most forex traders. The two favorite ratios are the Fibonacci Retracement and Fibonacci Extension. Fibonacci retracement levels are also used as support and resistance levels. When the support and resistance level matches the Fibonacci Retracement level, we can safely use it as an indicator for our trade. The Fibonacci extension levels are used as profit taking indicator.