So you have decided that you're going to trade the Forex markets. To get started with your trading you have to ask yourself what type of tools to use to aid in making trading decisions. When making a trading decision most traders will rely on two basic forms of analysis, technical analysis and fundamental analysis. In this first article we will look at an introduction to technical analysis and in later articles we will be discussing fundamental analysis.

Now that you've decided to make a trade, you need to find the tools that can help you make profitable trades. There are two basic types of analysis that traders will use as the starting point to forecast a market direction, technical analysis, which is primarily the study of price movement and fundamental analysis which relies primarily on economics and supply and demand factors. Many forex traders favor technical analysis because it is extremely difficult to digest all the fundamental news that could impact the market. Technical analysis assumes that the chart reflects all the fundamental news.


The primary tool of technical analysis is the price chart. A chart is a roadmap of where the market has been and is used to try to determine where market may be heading. The starting point for making a trading decision is to look at a chart. The chart is an important trading tool because the chart price activity represents all known public and nonpublic information about the market. Charts are used to try and predict the future of market price direction. You may be asking yourself if charts are so important to trading where do I find forex charts. All major forex platforms provide some form charting package and you will have free access to the Easy Forex charting package when you open your account.


Why is the chart such an important tool? Markets tend to trend and history of price action tends to repeat. Your main goal in using a chart is to try to identify trends. You may have heard that the trend is your friend, and what this means is trading with the trend can help you make profitable trades. If you can identify trends and trade with the trend you can make money. To identify trends you have to see them. Price charts are used to identify trend. A trend is basically the direction of market is headed.



In the chart above we see that there are three main types of trends that a trader will look to identify using a chart. The long-term trend line is important for determining whether the market is trending higher or lower. The medium and short term trend lines are looked to for identifying price direction within the long-term trend. You can use chart analysis to find and identify trends. (We will discuss the basic charts used in technical analysis in the next article.) When looking at a chart you are trying to determine whether the market is in an uptrend, a downtrend or sideways pattern. The chart above shows the market in a long-term uptrend. If price on the chart is rising from the left axis to the right you are looking at an uptrend. If price is falling from left axis to right axis you are looking at a downtrend. Sideways means prices are confined to a range.


Once you identify the trend of the market you need to know about a basic tool that a technical trader uses to help determine when to buy or sell a market. A basic tool used to determine an entry or exit price in the market is support and resistance. Support and resistance levels are a key to timing of your trading decision.



Support and resistance can also play a key role in risk management. A trader can look to a chart to determine a given support level and use that level to place a stop loss order. A support level may also be used as a buy entry point. A resistance level as a selling level.


Another technical tool is the use of channel lines. You can have an upward or downward channel. A trader will look for the market to trade between the two levels of support and resistance of the channel until price breaks beyond one of the levels. Once the channel line is broken the market can be expected to move in the direction of that break. The graph below illustrates a downtrend channel.



Once you have identified a market trend and established support and resistance there are some additional technical tools that are used to try and determine how strong a trend is and how likely the trend will continue. You want to use these tools to get a sense of how long to stay with your trade and to maximize the trades profit potential.


The first of these technical tools is market sentiment. Bullish consensus is one of the key types of investor sentiment surveys used to determine strength of the market. If there is an overwhelming indication of bullish sentiment in the market it may be a sign that the market is getting overbought and may be subject to a downside correction. Same can be said for having overwhelming bearish sentiment in the market. Overwhelming bearish consensus in the market could set up for potential countertrend move. By monitoring market sentiment the trader can look for confirmation of trend or the possibility that extremes in the market sentiment could set up for opportunities to trade against the trend.


A second technical tool used to determine the strength of a trend is volume. Volume is used to confirm trend by determining the amount of activity in an investment .Stronger the volume more likely the trend will continue. If volume is low the trend may be weak and this could be a signal trend could be short-lived. Remember you will use these tools to help make a decision buy sell or hold on to you trade.

Does technical analysis really work? Academics have debated for years whether technical analysis works and the debate is unresolved. Two individuals may look at the same chart and come up with completely different interpretations of which way the market is headed. The key for you to know is the chart may be used as a starting point for determining entry and exit of trade. You will at a chart to find trading opportunities.

Summary
What I would like you to take away from the introduction to technical analysis is that the chart is the primary tool for technical analysis, and the chart is used to try to determine trend in the market. Markets tend to trend and price history tends to repeat .Support and resistance can be used for determining buy and sell levels and market sentiment and volume can be used to determine the strength of a trend. Channel and trendlines are used to help track a trend. The lines and prices on a chart are simply tools to help you make better trading decisions.