5 Easy Steps to Perform Forex Technical Analysis
“Technical analysis is difficult!”
Have you ever heard a sentence like that? Often? OK. On this occasion let me confirm; typed in bold capital letters: IT’S GOOD!
Technical analysis is not as complicated as it appears. Do not believe?
Let’s make it like this. Look at the following picture and say where the price movement is in general. Up or down?
What is your answer? Down? Hey, you just did a technical analysis and your answer is TRUE. So, it’s not difficult right ?
What you have just done is the basic application of technical analysis, which is determining direction or TREND. You have done well. That is, you already have a strong enough foundation to be able to carry out more sophisticated technical analysis. What do you need? One of the most important is: PATIENCE. Second: the right learning resource.
Now, you might just be impatient to know what steps to do technical analysis. Previously, you had to know three important things in technical analysis, namely the basic concepts of technical analysis, the concept of trends, and the concepts of support and resistance.
Then, then you can do the following five simple steps to do technical analysis well. Let’s peel them one by one.
1. Open the chart and recognize the current trend
The first step you have to do of course is to open the chart, then see the ongoing trend. You can choose which trend you want to follow and use.Get to know the trends that are going on, starting from the long-term trend, then back to the medium or short-term trend.
Although you can choose which trend you will use, it is advisable to look for long-term trends (major trends) and follow them. Remember, “the trend is your friend”.
If you have recognized the trend, the best strategy for you is to take a position in the direction of the current trend. If the current trend is up (uptrend), then you should look for “buy” opportunities. Conversely, if the trend is down (downtrend), then look for opportunities “sell”.
2. Determine support and resistance
Once you can recognize the ongoing trend, the next step is to determine where the support and resistance levels are. You can look for opportunities to “buy” in the support or “sell” area at the resistance area. Of course you must not forget the first step above, which is taking a position in line with the trend.
In other words, if you see the current trend is an uptrend, then look for a “buy” position in the support area, and vice versa.
You can also use support and resistance levels as a “warning” if it turns out the price does not move as you expected. If for example a breakout support even though you have previously opened a “buy” position, then a break of the support should be a warning to cut-loss.
3. Take advantage of Moving Average
You can also take advantage of the moving average (MA) indicator to recognize the current trend. If it’s difficult to draw a trendline, you can see the MA movement to help you identify trends. Simply put, if you see MA moving down and prices moving below MA, then the trend is downtrend. Conversely, if you see MA moving up and prices moving above MA, then the trend at that time is an uptrend.
In addition, MA can also function as support and resistance. If the MA is above price movements, it functions as resistance. If the MA is under price movements, its function is as support.
4. Filter with an oscillator indicator
Oscillator indicators can give an idea of whether the market is overbought or oversold. Overbought condition means a situation when the price is considered high enough at that time. This condition is often followed by a decrease in prices. Conversely, oversold conditions mean that prices are considered to be low enough at that time, and often followed by rising prices.
When the oscillator indicator shows overbought indications, all you have to do is wait for the sell signal confirmation. Conversely, if the oscillator shows an oversold indication, wait for buy signal confirmation.
But you need to note that it is not always an overbought or oversold condition followed by a reversal of the direction of price movements.There are times when indicators continue to be in the overbought or oversold area for some time but the price continues to move in the previous direction. To work around this, you must adjust the signal provided by the indicator with the ongoing trend. In an uptrend, just look for a buy signal, on the contrary in the downtrend condition just look for sell signals. This method is relatively safer.
Indicators that you can use include stochastic and CCI. Oh yes, there are important things you need to remember: DO NOT TOO MUCH USE INDICATORS, because it is precisely “error” that makes technical analysis complicated. Use only one or two technical indicators, a maximum of three. In this blog, there are articles that discuss simple analysis techniques using only trendlines, stochastic and CCI.
5. Determine the stop loss and profit target
The final step, determine the stop loss level and the profit target of the transaction you are doing. In determining stop loss and profit targets, you should not forget the risk-reward-ratio rule, where stop loss (risk of loss) cannot be greater than the profit target. This is a rule that cannot be violated.
You also have to determine how much volume of transactions you make.Adjust to your trading plan, so that if you experience a loss then the risk you receive does not exceed your risk tolerance. More complete about this, please read about capital management on our education page.
Now, after you follow the five easy steps above, hopefully you will no longer think that technical analysis is difficult. In fact, traders themselves make the analysis more complicated, because it does not follow five easy steps as described in this article.