Over the last two lessons we’ve had a considerable focus on fundamental analysis, first by looking at some of the key players and then by looking at some of the key events.
Now we’re moving into my favorite aspect of analysis, and that’s the chart.
Fundamental analysis is what helps to shape the future. Stronger growth in an economy will often bring on higher levels of inflation. Those higher levels of inflation demand higher interest rates to prevent instability, and accordingly central banks often look to raise rates. The premise of rates going higher, as we learned in the carry trade strategy, can bring more buyers into a market to capture those new higher rates which can in turn create higher demand that leads to higher prices and an upward trend.
It’s an ideal scenario when it works, especially when prices begin moving higher because that is where the opportunity lies for traders.
While fundamentals help to shape the future, technical analysis helps to explain the past. It’s an examination of the chart, and what’s happened recently, to devise what might happen in the future. This is an important point because many new traders learn one indicator and then walk away saying ‘this doesn’t work!’
Remember this: Technical analysis is simply a way of analyzing a market. Whether or not it ‘works’ is more dependent on who is employing the analytical approach. Many professionals see technical analysis as pertinent to risk management, as a way to voice those opinions on the fundamental juxtaposition of an economy at a point in time. It is simply an additional tool that traders can use to try to get the odds on their side.
It is important to note that the past does not predict the future. New things happen, and markets, like life, remains unpredictable. This is a good thing! This is what makes life interesting and fun, and sometimes hard, just like trading. To get started, navigate to our Basics of Technical Analysis article, which covers the big picture behind this wide field of analysis.
The Basics of Technical Analysis
After a new trader learns some basic technical analysis, the next question is often ‘what’s the best time frame?’ There isn’t one. Time frames are simply a different way of looking at the same thing and, like many other purchasing decisions, traders should try to get varying vantage points before making a decision. This brings up the topic of ‘multiple time frame analysis,’ which basically means systematizing the charts to be used in the trader’s strategy in order to find a comfortable balance. To get started, we suggest first reading our introductory article on the topic linked below:
The Time Frames of Forex, a Beginners Guide
And after that, you can navigate to the below article to gain a little more depth on the topic:
A Guide to Multiple Time Frame Analysis
Real World Application
To put this to use you’re going to need a chart, and a demo account with a charting package. Try out a daily chart to grade trends and the four-hour chart to appropriate entry. Attempt to find a trend on the daily chart, and then use the four-hour chart to enter a position in the direction of that trend. From the four-hour chart, you can use some subjectivity in that entry, attempting to ‘buy low, sell high’ while still adhering to the longer-term trend.
Attempt to set up five trades on the demo account in this manner.
