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Doing the Technical Analysis in Forex

All markets require careful and detailed analysis to result in profitable trades. Technical analysis is one of the ways of analyzing the forex market. It basically involves studying past market trends.

Technical analysts follow certain assumptions for their analysis:

• Price data reflects all market fundamentals, and nothing else needs to be studied.
• The market does follow trends. The key is to figure out the trend. Once a trend is established, it will in all likeliness continue for some time.
• Previous market trends repeat. One just needs to look for the signals, and identify the trend and the repetition.

Technical analysis sticks to stats and stats only. No emotion, no rumours, no news. It deals objectively, and helps you go through with your planned entry and exit without getting distracted. Technical analysis uses various indicators to study the market. They include:

• Moving Averages which are further divided into:
  
  
  • Simple Moving Average
  • Weighted Moving Average
  • Exponential Moving Average

• Stochastics
• Relative Strength Index (RSI)
• Bollinger Bands
• Moving Average Convergence Divergence (MACD – one of the most widely used)
• Fibonacci Retracements

Price charts are also of different types including the common bar charts, candlestick charts and point & figure charts.

Forex trading is a game of odds. If you can trade the odds, you stand a higher chance of winning. Do not bother with what is making the trends. Bother with the trend itself. The price is changing, and that’s it. Why that is happening doesn’t matter as long as you study the price change accurately. Be objective, be disciplined, and follow the rules. If you can’t follow the rules of your system, you cannot be a forex trader. You won’t fail because your methods were wrong, you would fail because your discipline was poor.

You can compare technical analysts with ship captains who study charts to get from their source to their destination through an ocean that can support them, or drown them. Technical analysis if used correctly can provide you unbelievable income in no time. But you need time to satisfy the pre-requisite of using it correctly.

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Technical aspects of Forex made easy

When you read this I will assume you can make out what the following means:

USD/JPY @ 114.55/114.60

I will still summarise in one line: The above says that US Dollars are being traded against Japanese Yen at a rate of 114.55 Yen/Dollar if you’re selling and 114.60 if you’re buying. The difference between the two rates is called the spread and usually values at 5 a pip.

A PIP is the last decimal place in a rate, or in other words the minimum value of increment/decrement in currency rates. Most currencies have a PIP of 0.0001, the Yen being an exception. It trades on a PIP of .01. We will now move on to PIP Values.

Don’t be confused, read on.

Assuming the USD as a constant for reference, consider the above example:

USD/JPY: 0.1 (the pip) divided by the exchange rate gives us the pip value i.e. 0.01/114.55 = 0.0000872

It might look like a complicated and apparently meaningless figure, but we’ll understand it better when you know about lots.

LOTS are simply, lots. When you purchase currency, you don’t purchase say one dollar or 5 dollars. That just sounds stupid. Instead, you purchase in lots of $100,000, as a standard. Nowadays, the smaller investor can purchase in mini-lots of 10,000 as well, something that wasn’t there earlier.

Now comes the interesting part: Calculating your profit or loss. Suppose you buy USD for Japanese Yen and are given the quote as above (refer beginning example). The rate you pay will be 114.60 and NOT 114.55, since you are a buyer. If you had been selling, the rate would’ve been 114.55. As a rule of thumb, remember that you pay more while buying, but get less when selling. So the rate for buying will be the greater value i.e. 114.60. Say you purchase a lot of $100,000 to enter trade. After sometime, you ask for a fresh quote and you’re given a quote of say 114.80/114.85. You’re in luck! The rates are high so if you sell now, you make a profit. You decide to sell and close the trade. The selling rate, or the bid, going by the thumb rule, is now 114.80. The difference between what you paid and what you will get is .20 or 20 Pips.

The profit is calculated as follows:

0.1/114.55 = 0.0000872 (Pip value) X 100,000 (lot) = 8.72 (per pip) X 20 (value changed by 20 pips) = 174.4.

Congratulations! You just made a profit of approximately $175!

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