Wednesday, September 26th, 2007
If you are considering forex trading, you will definitely want to take a close look at Technical Analysis. Technical analysis is a method of forecasting future price movements and market trends primarily through the use of charts. Technical analysis is only concerned with how the market has actually behaved, rather than what should happen, and takes into account the price of instruments and the volume of trading. Charts are then created from that historical data and used as a primary tool for analysis. One major advantage of technical analysis is that experienced analysts can follow many markets and market instruments simultaneously.
Three Principles of Technical Analysis:
Market action discounts everything!
This means that the actual price has already been determined by every bit of information that is known to the market. Hence, fundamental issues such as inflation, interest rates, public sentiment, market supply and demand, political factors will not affect the market prices.
Prices move in trends
Technical analysts believe that prices have to follow a trend, whether upwards, downwards or sideways. The Dow Theory of market price action states that the market cannot be manipulated. Once a pattern is created, there is a high probability of it producing an expected result. There are also recognized patterns that repeat themselves on a consistent basis.
History repeats itself
Technical analysts believe that investors collectively repeat the patterns of investors before them. That is to say, human psychology changes little over time. Since patterns have worked well in the past, it is assumed that they will continue to work well into the future. Because investor behavior repeats itself so often, it is possible to chart recognizable market patterns for analysis.
Disadvantages of Technical Analysis
- Critics of technical analysis include many well know fundamental analysts. Warren Buffet once said, "If past history was all there was to the game, the richest people would be librarians."
- The critics also claim that signals about the changing of a trend appear too late, often after the change had already taken place. Therefore, traders who rely on technical analysis will react too late.
- Technical analysis made in short time intervals may be exposed to noise, and this can result in erroneous reading of market trending.
- The use of most patterns has been widely publicized in the last several years. Many retail traders are quite familiar with these patterns and often act on them like a herd mentality. This creates a self-fulfilling prophecy, as waves of buying or selling are created in response to bullish or bearish patterns.
Advantages of Technical Analysis
- Many traders say that trading in the direction of the trend is the most effective means to be profitable in financial or commodities markets. Many famous traders have each amassed massive fortunes via the use of technical analysis and its concepts. George Lane, a technical analyst, coined one of the most popular phrases on Wall Street, "The trend is your friend!"
- Technical analysis can be used to project movements of any asset (which is priced under demand/supply forces) available for trade in the capital market.
- The technical approach concentrates on prices, which neutralizes external factors. Pure technical analysis is based on objective tools (charts, tables) while disregarding emotions and other factors.
- Signaling indicators can sometimes indicate the imminent end of a trend, before it shows in the actual market. With this, the trader can choose to take profit or cut losses.
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Friday, August 24th, 2007
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Wednesday, August 1st, 2007
Lack of thorough Forex education can be costly.
Some new traders open a mini-account and immediately throw $5,000 at it, jump in and get their feet wet. Within 3 months or less the account is finished.
What happened?
There is a lot of hype surrounding the Forex! The internet is full of claims that you can turn a few hundred dollars into tens of thousands within months or 1 or 2 years.
With the most rudimentary information, new traders are sometimes encouraged to begin trading long before they are qualified.
Regretfully, some get-rich-quick merchants merely teach a little technical analysis and basic concepts in the Forex education they offer and miss what amounts to the most crucial part of Forex education: Mental and emotional discipline.
Aspects Of Forex Education
So in brief, here is how the various aspects of a thorough Forex education could be prioritized in increasing order of importance:
1. Forex terminology and trading mechanics
2. Learning how to read charts
3. Learning how to use the online trading software
4. Learning a variety of technical indicators
5. Learning a handful of proven strategies employing those technical indicators
6. Practicing in a demo account
7. Opening a mini account (still viewed as a practice account)
8. Strict risk management
9. Developing mental discipline and control of emotions through experience
Let’s take a look at this list a little more closely.
Notice the items of lesser importance have to do with the mechanics of trading. Most Forex education packages spend ample time on the mechanics.
But the most crucial aspects, the factors that can make or break a Forex trader are the last two, items 8 and 9.
Risk Management
Forex education must include a detailed explanation of risk management rules to be of any value.
You need to know how to calculate risk reward ratios and which trades your equity will allow and which ones you need to avoid.
Estimates vary as to what is the optimal risk percentage on any one trade. Some very conservative traders may suggest no more than 1%. As a general rule, 2% seems to be a reasonable figure allowing for a series of losing trades without putting the account in jeopardy.
More liberal traders even suggest 5% but in my view that is dangerous. Image the hit on your mental energies if you get 5 or 6 losing trades in a row if you trade with that kind of risk.
An effective Forex education will devote a serious amount of time to discussing risk management.
Mental Discipline
There is a reason why this is the most crucial factor of all. Most traders fail, not because they don’t have a good trading strategy, but because they lack the mental discipline to follow it.
The Forex can take an undisciplined trader on an emotional merry-go-round and empty the account at the same time.
That is why any Forex educational package of value will spend considerable time offering strategies and guidelines on how to keep mental focus and emotions in check.
Some Forex education package are put together by individuals associated with online brokers who don’t actually trade themselves. Avoid them.
Go With Professionals
If you are going to invest in Forex education, go to the professionals. Do a little research and make sure the people teaching you are seasoned traders themselves, preferably with years of experience.
So when contemplating the Forex, don’t be in a rush. Take your time, research, identify a good mentor, and be thorough in your Forex education. Eventually, you may be in the small percentage of traders who make a substantial income from currency trading.
About the Author
If you are looking for a comprehensive Forex education with mentoring from professionals check this:
http://www.vitalstop.com/Forex/forex-education.html
http://www.vitalstop.com/Forex/Candle-Chart-Patterns
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