Essence of Technical Analysis in Forex 

Before moving on to the ways in which you can improve your technical analysis, we need to briefly understand the essence of technical analysis and what it means for forex traders. Technical analysis is done using visual tools like price charts, which give us a complete overview of the market situation and allow us to dig into the details while reviewing the bigger picture. The Japanese candlestick price charts are the most commonly used chart type in forex as they are suitable for detailed analysis. Technical analysis can be conducted for both present and past as you get to choose between real-time price quotes and historical price data on all popular trading platforms (MT4/MT5). Technical analysis can be done a lot better using different indicators. In this regard, MT5 seems to be a better trading app as it has more indicators than its counterpart. 

Here, you can choose a timeframe that is tailored to your strategy, and it ranges from minute charts to monthly charts. The primary goal here would be to read and recognise price patterns and anticipate the possible price movements based on logical interpretations of these patterns. Based on this, you can find ideal trade setups with higher profit potential and proceed with planning your trades. When it comes to technical analysis, there are a lot of tools that you can use in conjunction with price action. Many simple to advanced technical indicators provide critical information using mathematical formulas, and adding some suitable indicators to your analysis will make your job easier and more efficient. 

The crux of technical analysis is supply and demand, which we are trying to detect with the support and resistance levels. Market sentiments do have a role to play in the trading activity, and the effect of fundamentals on trading psychology will also be reflected in the price charts. Many traders completely rely on technical analysis for all their trading decisions as they strongly believe that all the forces and factors that influence currency prices will be revealed through price movements. There is no need to look at them separately. 

However, there are times when technical analysis alone is not enough to decode the price fluctuations, and your predictions can often go wrong when the market direction contradicts your analysis and calculations. Thus, it would be wise to use a combination of technical and fundamental analysis as it allows you to make an informed trading decision with higher chances of success. But technical analysis should be the starting point for spotting market trends as well as for sailing through the sideway movements during consolidation.  

So, this was some surface-level information to get started with technical analysis. Now, let’s move on to the 5 simple steps to follow to improve your skills as a technical analyst. 

• Discover a technique that works and stick to it 

The problem with technical analysis is that it doesn’t have just one method or technique that works for all. Some traders may prefer to follow pure price action without using many indicators, and it yields good results, too, but others may not be able to work with naked charts, and what they need is a bunch of informative indicators to rely on. There are many popular indicators like Moving Averages, RSI, Bollinger Bands, MACD, Fibonacci Retracement levels and more, but finding what works the best might be a daunting task for a complete beginner. 

It is normal to get overwhelmed with the technicalities, but it is not ideal to keep jumping from one technique to another without spending enough time on the first one. So, I will advise you to discover one technique that makes sense and stick with it until you master it. Try that technique in a demo account and backtest your strategy to see how it works. If you don’t see any development for a significant period of time, you can think of switching from it, but if you see it working in your favour, then hold onto it for better results. 

• Choosing your Time Frame

The time frame you choose for technical analysis is very important as it plays a key role in your trading decisions. Beginners are often advised to start with longer timeframes as it allows them to study the market conditions in a comprehensive manner. On the other hand, shorter time frames are used by scalpers and day traders looking for opportunities to make some quick profits in real-time. The profit potential of trades will also change based on the time frame, and you can make use of various trading calculators to determine crucial values to test different trade scenarios.  

Many traders tend to rely on a single time frame for analysis, while some prefer to stay flexible as they switch between multiple time frames, looking for the best trading opportunities. Both approaches have their own pros and cons, and you need to consider all the possibilities while choosing the best technique for yourself. Multi-time frame analysis has many benefits but can also lead to confusion if you become overwhelmed with all the information. Sticking to a single time frame allows you to focus on one thing, but you may remain stuck with just one approach, limiting your growth. 

• Try out some old-school techniques 

We always talk about exploring new methods and experimenting with modern tools and techniques for improvement. But sometimes, the age-old techniques can work wonders for you, and thus, I suggest you try some old-school techniques that new traders often overlook. The forex market has indeed gone through a lot of changes over the years, but some basic methods will always come in handy while navigating the world of currency. 

For instance, a currency converter is a very basic tool that forex traders use, and there is nothing special or innovative about it. Still, it is also necessary in your toolkit, as doing all the conversions manually would be a lot of work. Similarly, price action strategies have been there for a very long time, but they are still just as relevant and effective as they were in the past. You just need to modify it and customise it as per your requirements. So, going back to the roots and using some simple tools can greatly enhance your analytical skills as a trader.    

• Learn more about the market 

The next step for improving your technical analysis is learning more about the market or the instruments you are trading with. When it comes to currency trading, you will be choosing different currency pairs with unique characteristics that need to be considered during analysis. You must select the most suitable indicators and analytical tools that complement the pair you are watching. 

For instance, you might be using one effective method for analysing some major pairs, but the same technique may not work well for trading exotic pairs as they differ vastly. If you want to diversify your portfolio by trading multiple asset classes apart from forex, then you need to find tools that are appropriate for that particular market. 

• Do more research 

Earlier, I advised you to discover one technique that works and stick with it to master it. But once you master that technique, you should not shy away from exploring other techniques; you need to do more research. You will likely find some spare time to read about various techniques, and you will come across something that strikes a chord in you, and it can turn out to be a valuable addition to your trading system. It takes time to develop analytical skills, and you should never stop learning new methods, as it truly helps in enhancing your skills.   

Final Thoughts

Finally, the steps I listed above are just a starting point for beginners, and you have a long way to go, as there is a lot more to learn and understand about the forex market and technical analysis. Technical analysis is an integral part of the trading process; analytical skills are essential to attain trading success. But having a risk management plan and emotional control is just as important.

A beginner has a long way to go before becoming truly successful in trading, and it doesn’t happen without continuous learning and improvement. Reaching your true potential will also enhance your potential profits, leading to a level-up in trading. Always keep track of your profits; for this, a pip calculator will be useful. You can use this https://www.zulutrade.com/trading-tools/pip-calculator to calculate the pips you’ve captured in your account’s base currency.

In this article, you will get to know the best 8 forex tips that you can follow to improve your trading techniques and take your trading to 100% potential.

Stick to longer time frames 

New traders are often in a hurry to realise their first profits from the forex market and hence, they tend to choose lower time frames for trading. Many beginners start out as scalpers or day traders using minute charts or 1-hour charts, which allows them to enter and exit multiple trades within a short span of time, resulting in quick profits. However, this will be a challenging and stressful process as trading a shorter time frame demands professional-level skills and perfect timing. You must be well-versed in various market scenarios and good at making quick decisions to catch up with the constant price fluctuations and volatility.

And all of these come from experience and exposure, which traders lack in the beginning. Trading a longer timeframe would be a much better approach for a newbie, and if you are still not open to the idea of opening overnight positions, I will recommend choosing 4H charts as a starting point. Anything lower than that would only add up to the difficulty level, which becomes a barrier for a complete beginner. Hence, the first tip I can give you for improving your odds of success is trading longer timeframes.

Plan and wait for the perfect setup 

Another aspect that plays a key role in determining your trading performance and profit potential is the trade setups you prefer for entering the market. The entry price, exit price and trade size play a key role in deciding the potential gains of a trade. You can use a profit calculator during the planning phase to compare the potential results with different entry and exit prices. Deciding the optimal entry price and exit point is crucial to making the most out of the opportunities you get; all of these will be outlined in your strategy.

You should always have a solid trading plan, as it acts as your guideline and roadmap throughout the trading process. This plan or strategy will be the core of your trading system, telling you about the direction to be taken or the position you need to open in forex terms. When you are a rookie, you will be excited about the trading opportunities you come across while monitoring the charts and may feel the urge to enter trades as soon as you spot a setup.

Sometimes, these trades don’t even align with your original plan, which puts you at risk of deviating from your strategy. However, you must be patient and wait for the perfect setup before placing your trade. You should let go of the fear of missing out on opportunities and focus on the quality of your trades. So, do not enter a trade until you are sure about its probability of yielding desired results.

Limit your risk to 2-3% of your account

Whenever you enter a trade, you are exposed to market risk, which is not something that a trader can control. The risk cannot be eliminated from the trading process, but you can surely minimise your risk of loss by calculating and limiting the risk. The ideal risk percentage of a trading account is 2% to 3%, as per experts, and you can even go lower based on your risk appetite and trading style. But anything above 3% will put you in a dangerous position as your capital can get wiped out with an increase in drawdown. Proper position sizing is essential for limiting your risk per trade, as the trade size has much to do with your trading results.

Another tip we can connect with this point is trading with a sound risk management plan. Risk management is a key component without which your trading system or strategy will fail to work properly. Your overall trading results will greatly depend on your ability to cope with the uncertainty and risk. So, always use tools like risk/reward ratio, stop loss, and trailing stop loss, which are essential for safeguarding your trading capital.

Keep it simple 

Many new traders have this misconception that their charts must be loaded with many indicators for a detailed analysis. But this does not increase your chances of success; instead, it leads to confusion and information overload. Your strategies need to be straightforward, and making them complex will never be a good idea when you are a beginner. Keeping it simple allows you to navigate the dynamic market with greater ease, and this simplicity alone can add to your efficiency while trading, enhancing your overall performance.  

You should only use 2 to 3 indicators relevant to your strategy, which will be more than enough for an in-depth analysis and interpretation of the market situation. The most commonly used forex indicators include Moving Averages, MACD, RSI, Oscillators, Bollinger Bands and Fibonacci retracement levels. You need to check which of these would blend well with your strategy and add it as per your requirements. 

Always Backest your strategy 

The next tip I want to give for better trading performance is always to backtest your strategy. Whether it is a new strategy or trying to modify the existing strategy for an upgrade, you must be sure about its viability before risking real funds. The best method to assess the success rate of a strategy is backtesting with historical price data. It can be done manually or using trading automation on your preferred trading platform.

Automated backtesting gives you a quick review of the system’s performance, while manual backtesting helps you trade better by polishing your skills and boosting your confidence. It also allows you to gain some experience with different trade scenarios, and this allows you to optimise your strategy further to make it work in the current market situation.   

Pay attention to price action

Price action is the essence of technical analysis for most traders, and using price action strategies is proven to be most effective in the forex market. Hence, price action trading is highly popular among forex traders. You should always pay the most attention to price action, even if indicators are used. Indicators may not always be reliable, but you can always trust the price patterns being formed on the charts. It would be ideal to be a minimalist in the case of indicators and focus more on the price action part while trading. 

Strictly follow the rules and refrain from overtrading 

This is not just a tip but sage advice that needs to be followed to survive in the volatile currency market. A minor mistake can push you towards losses, and all your actions while in the trading space are irreversible. When it comes to trading, there are no rigid rules, but you need to make your own rules for your own good. Being disciplined and professional is important to keep your emotions in control over trading, which should be avoided at all costs. 

Let your winners run for a longer duration and cut the losses right away 

The last tip that needs to be followed for boosting your trading performance and getting better results is letting your winners run while exiting your losing trades early. Most of us are tempted to close a trade as soon as we see some profits, and this habit limits your profit potential and stops you from growing your account to a bigger scale. You need to ensure that your ‘Take Profit’ levels are giving enough room for the trade to breathe and the Stop Loss is tight enough to limit your drawdown.   

Final thoughts

Finally, one thing you need to remember while trading is that it takes time to find your edge and making mistakes is a part of the learning process. You need to start with realistic expectations and allow yourself to experiment and explore this space, as that experience is essential for gaining expertise. This is how you reach your true potential.