Do you want to trade forex from analysing charts?
If so, this lesson is for you.
Most chart-based traders are discretionary traders ― they trade what they see.
Chart-based forex traders find patterns and draw lines to analyse price. This is called technical analysis. Some of the most successful forex traders make millions from using technical analysis.
There are more forex trading strategies as well.
Sentiment trading is also big business in the forex world. That’s analysing emotions and positions to predict the next big move. For example, if everyone is buying the USD and it’s looking overbought, a sentiment contrarian trader might sell the USD. If the sentiment trader likes momentum, he/she might buy the USD.
If you’re interested in these forex strategies, read on…
Trading with indicators
Unfortunately, trading with indicators isn’t as simple as you might think. New traders often get confused when using indicators, such as MACD or moving averages, to assist their trading decisions.
Have you heard about the simple moving average (SMA) crossover strategy?
If you haven’t, don’t worry.
The SMA crossover strategy is a momentum strategy. Let’s imagine you have the SMAs for the last 30 and 60 days. A SMA is calculating the average price across a certain time period. In the SMA crossover strategy, people think a buy signal is when the 30–day SMA crosses over the 60–day SMA; a sell signal is the opposite.
How do you think this strategy will go?
If you guessed ‘poorly’, you’re correct.
I have failed numerous times to get the strategy to work.
It works sometimes.
But there are multiple false buy and sell signals, which make the strategy ineffective. Lots of unprofitable traders test every indicator over several months and, eventually, give up on trading forex altogether.
Mind you, some traders find indicators useful.
Moving averages, for example, are very useful for showing the trend’s direction. Countless other indicators are useful as well. The question is: How many indicators should you have on your chart?
Less is more in this case.
I prefer clean charts.
Indicators are visual aids to help your trading. If you have indicators everywhere on your chart, it would quickly become a very messy and confusing situation. It’s easy to see why most forex traders fail, especially when they have lots of indictors on their charts. The multiple indicators might contradict one another and make the trader feel overwhelmed.
Professional traders tend to avoid most indicators.
In fact, noting this is a forex site, most professional stock traders only use VWAP on their charts. I know of some traders/investors who also use RSI, MACD and slow moving stochastics. Professional forex traders tend to use Heiken–Ashi or moving averages, such as the Hull Moving Average, to simplify their charts. This can be seen in the following chart:
Look at how clean that forex chart looks!
Make your life ― and charts ― simple for more effective decision making.
Technical analysis is analysing trends, price movements, lines or indicators on charts. Technical analysis helps forex traders make better decisions.
Most forex traders tend to use only technical or fundamental analysis. But, like us, some prefer using both technical and fundamental analysis.
Some technical traders search for the following patterns on charts:
- Head & shoulders;
- Double tops or bottoms;
- Cup & handle;
- Bullish or bearish pennant or triangle.
A few chart patterns are shown at the bottom of this section.
Note, while many traders seek out these patterns, trading them is a different beast. Similar to using indicators, forex traders who try to trade chart patterns often fail. That’s because there are many false signals and the traders fail to use effective risk management.
You’ll save lots of time not trading chart patterns.
Sometimes patterns work, but most fail.
If you’re going to trade chart patterns, use excellent risk and money management plans. I’ll get into risk and money management in a future lesson.
Here are the most common indicators used to perform technical analysis:
- Moving averages ― hull (the best), exponential (more common) or simple;
- Average true range (ATR);
- Relative strength index (RSI).
There are many indicators used in technical trading.
But keep it simple.
I’ll cop lots of criticism for saying trading forex is simple. But it’s not hard to make money in forex, if you keep things simple and focus on trading only price. For example, trading with the trend, rather than against it.
Most forex traders ― especially newbies ― make their life difficult by trading chart patterns or indicators, and then overwhelm themselves trying to figure out the ‘secret sauce’. Here’s the real ‘secret sauce’ to successful forex trading: Simple is always better!
Sentimental analysis can be one of the best ways to profit in forex. But it shouldn’t be used alone when making your trading decisions. Sentimental analysis is better as a complementary tool, which can help improve your trading analysis dramatically.
Sentiment analysis is trying to understand the overall market mood. These kinds of forex traders attempt to understand the mindsets and expectations of other traders, such as analysing Facebook and Twitter traders, to determine the overall sentiment.
For example, you can access Twitter and look up certain forex pairs, commodities or indices. You then read the various opinions of other users. If lots of people are saying the same thing or agreeing with one another, the sentiment is likely hot.
Social forums are also great for doing this type of analysis.
Why’s this important?
Eventually, most traders tend to enter the same positions in the forex market, especially when something is hot. So, it’s useful to understand traders’ opinions to see whether they have similar ideas.
Remember, it’s rumoured that 95% of forex traders lose money. If most forex traders agree on a certain trend, the market trend tends to do the opposite soon after. Markets move up and down ― no trend stays in motion forever. For that reason, sentimental analysis can sometimes be used as a contrary indicator.
Lots of forex brokers provide sentiment statistics for open positions. Let’s say 80% of forex traders have opened long positions in the USD/EUR. That could signal the USD/EUR is overbought and could swing the other way. But if you sell the USD/EUR too soon, against the primary trend, you could lose money ― especially if the long sentiment increases to 90%.
Just because something seems overbought, doesn’t mean it’s going to fall.
Your ‘Start With Forex’ takeaway
There’s no one strategy that fits all.
Fundamental and technical analysis both work.
In this case, while fundamental trading is used by some of the most successful traders in the world, technical analysis is the most common technique used to trade forex. That’s because it helps these traders with timing; when to buy and sell.
Technical analysis has been around for centuries.
You should know that forex traders who make the most money trade simple strategies. For example, only buying and selling when the market is bullish or bearish. The best of the best forex traders know when ― and when not ― to be in the market.
One more thing: Fundamental analysis and technical analysis pretty much do the same thing. Both strategies try to work out the money flow, as well as the behaviors of traders, to gain a competitive advantage over the market.
For this reason, sentiment analysis is an extra tool for trading forex. If you’re a momentum trader, and using sentiment analysis, you’ll want to buy what’s hot. Likewise, if you’re a contrarian trader, you’ll want to buy what’s not hot.
Momentum and contrarian forex traders can make millions.
I hope you have gained more confidence in the forex markets, after this lesson. But there’s still more to learn. In the next lesson, you will learn how you to build a forex trading edge. If you’re ready to learn how to do that, click here.
To your trading success,
Start With Forex
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