Technical Analysis Tools : Your Best Trading Friend?

The trend is your best friend, as the forex saying goes, and if you want to know when a trend is beginning so that you can jump on and profit from it, you will need technical analysis tools.

Of course, many traders will point out that it is fundamental factors, not technical factors, that drive the currency market. Events like a rise in interest rates or an announcement of a major power's Gross Domestic Product will cause an immediate effect and possibly also a longer term movement. So trends in currency price movements always have fundamental factors at the base.

Nevertheless, most of us are not in a position to make predictions of how the next major financial announcement will go and what will be its effect on the market. Forex traders working from home are not, for the most part, economic or financial analysts. So instead, we use technical analysis tools to show us in clear terms what has been happening in the market recently.

Identifying trends is a simple way to create a profitable forex trading system. All we have to do is see which way the price of a certain currency pair is moving and then buy or sell in order to profit from the movement. That assumes, of course, that the recent movement is a genuine trend that will continue. If it turns out to be just a fluctuation that quickly reverses, we will lose money. So how do we tell the difference?

One of the simplest ways is to draw trend lines on a candlestick chart. This means drawing lines through the highest highs and the lowest lows in a price movement that appears clear from the candlesticks. If the two lines are roughly parallel, this indicates a trend.

If they converge, coming together as if to meet at a point in the future, then this indicates that a breakout is likely, other things being equal. If they diverge, the market is probably too unpredictable for most trend traders to want to get involved.

Once a trading signal has been established in this way, we need to cross check the signal. For this purpose we can use the candlestick chart for a different time period. The normal practice here is to use a longer time period for the cross check, for example one hour if the first lines were drawn on a 15 minute chart, or a full day if the lines were drawn on an hourly chart.

We can also use indicators such as the MACD crossover. These are easily consulted in most broker software systems. Checking signals against technical analysis tools like this can help us weed out the profitable from the unprofitable trades and increase our forex trading profits exponentially.