Now that you have the basics to trade, it is time to start practicing! To assist you in decision making when you trade, two different types of analysis are available. Technical Analysis and Fundamental Analysis. In order to be successful in trading, you will have to manage the two types of analysis.
Technical analysis is solely based on chart study and is intended to identify trends, patterns, reversals and pivot points.
The charts you can find on your platform represent the evolution of prices over time. By simply sketching lines on a chart, a trader can obtain a great deal of very valuable information such as resistance and support levels, which will help him make trading decisions.
On the chart, you have the option to choose a time interval: 1 minute, 5 minutes, one day ... This will set the time period represented by each candle stick.
Note: By choosing a small interval such as 1 or 5 minutes, all the candles displayed on the entire chart will represent a few days at most. Conversely, a 4 hour or one day interval you will give you a much longer term overview.
Each candle in itself gives you information on four key data’s; the opening price, closing price, the highest price and the lowest price for the specified time interval. Obviously, if the candle is green, the closing price is higher than the opening price and the overall trend is upwards. If the candlestick is red, the opposite is true. The opening price is higher than the closing price and the trend is bearish.
Reading the charts using only candle sticks can sometimes be slightly confusing. In order to provide added clarity, traders can rely on indicators that are the product of in depth mathematical formulas. Albeit these formulas can sometimes be incredibly complex, there are very simple and effective techniques that can provide valuable information.
A moving average is designed to "smooth" the candle sticks to facilitate a clearer view of the trend. To calculate a moving average over 5 candles, simply take the average closing price of five candles. If you repeat this calculation by shifting one candle every time, you will end up with a curve known as MA5.
You can do the same by averaging the close price from 10 candles; the result will be MA10. Obviously, MA10 will be much flatter than MA5 as it aggregates more data.
It goes without saying that you will not have to do this fastidious work manually; every platform has the capability to display moving averages on their charts.
Traders use moving averages to detect trend shifts by overlaying an MA5 and an MA15. At the points where the curves cross each other, the current trend is expected to shift, and a position can be taken on the market.
THIS TECHNIQUE IS VERY SIMPLE AND EXTREMELY EFFECTIVE !
A support level indicates a precise price level that the currency will have difficulty falling below. If the price repeatedly fails to move below this particular point, a straight-line pattern will appear.
When a strong support is reached, it usually translates into a buy signal for the traders. You will also notice that very often, supports, as well as resistances, tend to be approximately round numbers. This serves to remind us that psychology has a large influence on the mind of a trader. This is precisely why for the most part, traders will buy or sell at round prices like 1.400 or 1.5000 on the EUR/USD.
On the other hand, resistance levels indicate a specific price level that the currency will have difficulties crossing above. Recurring failure for the price to move above this point will produce a straight-line pattern.