The Only Things Forex Traders Should Know About Technical Analysis

Forex traders face a myriad of issues to consider before trading.

Traders look to articles like this one, hoping to gain insights into how to profit.

Unfortunately, no article can make you rich.

But with this article, you WILL come away with a solid set of tips, written by an experienced trader with more than 20 years experience trading financial markets.

Technical Indicators: There's no Holy Grail

Traders use technical indicators mostly to get a feel for market supply/demand, and market psychology.

There are hundreds if not thousands of indicators out there.

Some are generic such as moving average (MA) lines, stochastics, RSI, etc.

Some are proprietary, commonly marketed as generating "accurate" or "profitable" trading signals.

Most newbies are tempted to think there's an evergreen Holy Grail indicator that'll "work" (i.e. make money) in any market condition, regardless of the end-user's skill level.

No such unicorn exists.

Indicators only give you "information."

Without the skill of interpreting such information, indicators don't give you perpetually reliable signals.

Why I don't use trading robots, EAs, etc.

Trading "robots" are software algorithms based on preset indicator values that supposedly generate trading "signals," and may sometimes be programmed to execute trades.

It doesn't make sense to use trading robots when markets keep evolving.

Even hedge funds using "advanced" software would have to tweak their algo when market conditions change.

No robot can keep up with every evolutionary change in markets without having to undergo tweaking of the underlying algorithm.

What influences the forex markets

Bottomline: supply/demand moves markets, dictated by Banks trading with real money.

But supply/demand can't really be applied to forex markets because forex "supply" can technically be infinite (because of how forex swap markets work). This makes any supply/demand analysis worthless.

It's better to use support/resistance levels.

Forex prices are usually quoted two-way i.e. a bid and an offer.

When price goes up, it moves to where there's least resistance. When price goes down, it goes to where there's least support.

Price goes up when bidders keep bidding higher prices, until no one wants to bid. The only price remaining is the offer and no one's offering higher.

In price charts, you'll see this as price moving up until it reaches some "resistance."

Notice how price reacts to support/resistance in the uptrend in the yellow box below.

The last bidder can continue bidding at the same high levels and not bid higher than the current offer, resulting in price ranging sideways at the higher levels.

When there are no more bids, there’s little support to the downside.

Sellers can then continue to offer at lower and lower prices until no one wants to offer. The only price that remains is the bid and no one is bidding lower either.

In price charts, you'll see this as price moving generally down until it reaches some kind of "support."

Notice how price reacts to support/resistance in the downtrend depicted in the yellow box below.

The last seller can continue offering at the same low levels and not offer lower than the current bid resulting in price ranging sideways at lower levels.

In Forex, HOW price moves is NOT a matter of how much money a bank trader has (because FX swap markets allow banks to continue funding their positions).

It’s all due to a combination of individual will, and whose price is or is not impeded by an opposing force.

For example, buyers can easily take price higher on low volume as long as there are no willing sellers.

Likewise, sellers can easily take price lower on low volume for as long as there are no willing buyers.

What about trendlines?

Some traders treat trendlines as support/resistance.

In my years of trading, I've only used trendlines for only one thing: to HIGHLIGHT trends.

Trendlines are commonly drawn diagonally across visible highs/lows as price targets for order-setting.

I don't subscribe to using trendlines because drawing trendlines is even more subjective than drawing horizontal levels.

No two traders draw trendlines the same way, whereas any two traders can usually agree horizontal support/resistance exists at a given price level.

Support/resistance should only be defined by horizontal lines, not diagonal trendlines.

The reason : price has memory. Traders remember old S/R levels which are basically old institutional order levels. When tracked, they'll show as horizontal lines dating as far back into the past as possible.

Check out the following GBPUSD daily chart with history since September 2018.

Notice how all the swing highs/lows "bounce" off historical levels.

Identifying support/resistance

The most basic skill in charting is drawing support/resistance lines.

You can adapt this skill to ANY trading strategy, in ANY timeframe.

But drawing these horizontal lines involve a lot of subjectivity e.g. which high/low price point should I draw the lines from, etc, etc.

It's confusing enough that different traders have different timeframe preferences.

I'll show you how to properly draw support/resistance lines.

As an example, I'll open a EURUSD Daily chart in MetaTrader 5 with enough data from September 2018.

Switch to a line chart.

Identify swing highs/lows. Draw a horizontal line at each level.

Identify zones where there's a lot of price "history". Look for areas that price seemed to "pivot" around.

Again, drawing support/resistance lines can be very subjective. The best way to attack this "problem" is to accept this as unavoidable.

Save the horizontal lines for future use in the chart timeframe you selected.

You'll see price continue to "respect" the lines every time action returns to those levels.

For example, let's say, price has penetrated a known resistance and went straight up. Then later, price reversed course to re-visit that level, which has now turned into a support because there're now clusters of "supporting" buy orders for the time being.

Again, the reason is that markets have "memory." Traders love the comfort of orders at familiar "historical" levels.

If you spend time analyzing support/resistance, you might end up with the following Daily chart showing all the support/resistance levels since 2015.

Notice how most (if not all) the S/R lines have some historical basis that's useful in just about ANY trading strategy.

Trade with the Trend

Retail traders should only really trade WITH the trend, not against it. Retail traders simply don't have the resources of institutional scalpers to be able to trade against trends.

Some daytraders trade against trends. They do this to speculate a trend will change soon and want to get ahead of the pack.

This usually means daytraders have to spend an inordinate amount of time looking at charts.

You can virtually SEE a trend just by looking at any price chart. If price is generally moving higher, then the trend is up.

Another way to pin down a trend: just apply a simple 60 MA and look at the slope of the MA.

If the MA is sloping upwards and price is generally above the line, then the trend is up.

If the MA line is sloping downwards and price is generally below the line, then the trend is down.

Always move your stops

Stop-loss orders (AKA stops) are orders placed to prevent further losses on open positions.

Traders use stops diligently as they tend to not hold their trading positions for longer than necessary.

Traders should also utilize what's known as "trailing stops."

For example, traders start out placing stops at the beginning of a trade and then move (or "trail") their stops to break-even as soon as price moves in their favor. These stops would then be moved further into profit as price continues favorably.

This way, traders always protect the bulk of their open profits in case of sudden price changes.

The best levels to place stop orders are near the support/resistance lines.