Technical analysis can be a very rewarding style of trading to those who understand the basics and have a clear understanding of what you are looking for. If you are new to technical trading, it can be a daunting task not to mention the charts can be like a foreign language to you. Believe it or not, getting started in technical analysis is not all that difficult if you break it down. Now there are different types of technical analysis that you can trade off of: patterns and trends. This article focuses primarily on trends but I urge you to look into patterns to determine if that style fits you better.
What is trend trading? According to Investopedia, trend trading “assumes that the present direction of the stock will continue into the future. It can be used by short-, intermediate- or long-term traders. Regardless of their chosen time frame, traders will remain in their position until they believe the trend has reversed – but reversal may occur at different times for each time frame”.
To put it in simpler terms, you are using indicators such as moving averages, MACD, etc along with support and resistance to determine where the price of the forex pair could be heading.
First lets go over support and resistance. Support is a level on the chart where the underlying price can not drop further. Similarly, you can use support levels to base long trades or “buying”. However, you must make sure that in the past when the price has hit that level, it was supported and eventually the forex pair rose back up to the middle range or resistance. Resistance is a point of the chart where the price has a difficult time breaking out above. You may also use strong resistance levels as a basis to place “short” trades. The picture below will be able to help you visualize support and resistance levels on a chart.
As I stated above, you can use support and resistance point to then enter long or short trades. That is where indicators such as moving averages and MACD come in; they help tell you the opportune time to place a trade.
On most charts, there are two underlying moving averages. The most popular are the 50 day moving average and 200 day moving average. Of course, the timeframe can be changed to fit a more short term trader but the popular averages mostly focus on intermediate to longer term trends. Unfortunately, there is a lot about moving averages that I can say but to stay brief, moving averages offer trade signals when they cross each other. Meaning, if the 50 day MA is below the 200 day MA and the 50 day crosses above the 200 day, that is a buy signal. Conversely, if the 50 day crosses below the 200 day, that is a sell signal. If you are “long” in a trade meaning you bought a forex pair, it is ideal to have the 50 day above the 200 day. The shorter timeframe should be above the longer timeframe if you are a buyer. If you are a seller of a currency pair, you want the 50 day moving below the 200 day. Here is an example of the 50 day and 200 day moving averages using the US Dollar:
The bottom line here is that there are different ways you can trade using technical analysis. Trend following is the act of using support and resistance in relation to your indicators such as moving averages. This is a introduction to trend following and it is meant to expose you to different styles of trading. If trend trading interests you, I recommend doing more research and getting a better feel for it.