Basic Technical Analysis For Forex Trading

By: Marcus Masters

If you are a forex trader, you are probably aware of the monumental profit potential of trading the foreign exchange market. Trading this huge market is really like trading the global economy itself, and the huge profits come from taking advantage of something called 'leverage.'

Let's say that you noticed that the real estate market in a particular area was really booming, so you wanted to work with a bank to acquire as many properties as possible in this area. The bank told you that instead of paying for all the homes yourself, you would only need to pay 1% and the bank would pay the other 99%. Not bad, eh?

This is an example of leveraging money, and your forex broker will allow to do the same thing while you are making trades. The most common leverage level is 100:1 or 1%, meaning that with $1,000 you could potentially trade up to $100,000.

But all of this money is of no use if you do not know how to place profitable trades, so today we will cover the basics of a popular form of picking trade opportunities called 'technical analysis,' as well as cover a few of the most widely used technical indicators.

In technical analysis, we are only concerned with the numbers. We are concerned with only the 'what' of the exchange rate prices and not the 'why.' We do not care about why the currency rate is at a new high or low, but only about the steps that the price fluctuations took to get there.

A good forex technical analyst can look at a chart of price history and see potential trading opportunities, as well as completely separate any emotions such as fear or greed from said trading opportunities. This ability of looking at your money without emotion can be very difficult to learn, but it is really the key to successful technical analysis and making profitable trades.

The three technical indicators we will cover today are Moving Averages overlaid onto price data, the Relative Strength Index, and Moving Average Convergence/Divergence.

First, let's talk about how these indicators will actually look when they are set up on the chart. The moving average itself will be on top of the candlesticks or bars that give the price data, and the MACD and RSI will be below the price data on a small separate graph.

The RSI will give you a good idea of the strength of a certain trend, as well as the current overall volatility of the market. This indicator will show you the 'relative strength' (duh!) of the market at the present moment. In setting your RSI indicator on your chart, two of the most popular periods are 14 and 21.

What this whole 'time period' business means is that the indicator will track back a certain number of bars or candlesticks from the present one (14 or 21 in this case), and the indicator will be based on that data. When the RSI is at a high value (usually above 70), this can indicate high volatility, and a good time to trade is when the RSI is climbing.

Next, we will talk about moving averages, and there are two different types: one that is one top of price data, and one that is separate from price data.

Both indicators, simply called a moving average (on data) or a MACD (off data), really try to tell you the same basic thing, and that is whether or not the current price action is significantly different from recent price action.

If the way the prices have been moving within the last hour is much faster than how they have been moving earlier that day (if you had maybe 30-minute bars or candlesticks), this is definitely a potential trading opportunity.

To identify forex trading opportunities with a regular moving average (you may want to try a period of 10-20 with this), you will see the price data cross over the moving average line and keep going in that same direction. This shows you that this move is different from the way the market has recently been moving, and can be a good chance to make some money.

The MACD uses the same basic concept, but you have a short-period and a long-period moving average instead of a moving average overlaid on price data. The CD in MACD stands for convergence/divergence, and this indicator will show you short-term price action compared with long-term price action.

The periods of each moving average on the MACD are generally 12 and 26, and the same basic concept applies: if short-term action is significantly different from long term action (divergence in the two averages), this can be a profitable trading opportunity.

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