How to Plan Forex Trades With Technical Analysis

Many investors in the foreign exchange market (forex) use technical analysis to plan their investment strategies. Technical analysis requires an investor to examine and interpret reports of economic trends. These technical details must be fully understood by the forex trader before he can use them for maximum profit potential.

This guide will help you understand two of the most basic concepts of technical analysis.

Parabolic Stop and Reversal

Successful trading on the forex market relies upon trends in the world economy. It is essential for a forex trader to recognize those trends and be able to pinpoint an upward or downward shift. The best time to buy a currency is when it is low in value. By the same token, the best time to sell is when a currency has high value. Therefore, recognizing (and even predicting) these shifts is vital.

A method of technical analysis called Parabolic Stop and Reversal (SAR) will help a forex investor to find these shifts in a country's economic situation. Parabolic SAR shows investors signs to watch for that will help predict economic changes. Using this method is not complicated, but plotting the trends using a computer program will make it even more simple.

A data sheet for Parabolic SAR will show bars of various lengths with an upward trend. The bars represents signs or indicators, and the dots accompanying them will help the investor decide which course to take--whether to sell or buy. When the dots appear above the bars, it indicates that the price has risen and the currency should be sold. When the dots appear below the bars, the currency's price is decreasing and should be bought.

Bollinger Bands

Another method of analyzing the forex market is called Bollinger bands and is similar to Parabolic SAR. This method was developed in the 1980s by John Bollinger and, to put it simply, lets an investor know when a currency's price is high or low compared to the normal world market. A certain value of "low" can never be applied to all currency. In other words, one can never say, "Any currency that drops to x amount is low." Low will be a different value for nearly every world currency. To compensate for this, Bollinger bands will identify when a currency is approaching its own low and, therefore, desirable for an investor to buy.

Bollinger bands data is shown in a line graph format. The data sheet will show one line, called a 'moving average,' along with two other lines above and below the moving average. Since successful investors buy when the price is low and sell when the price is high, Bollinger bands tell an investor to buy when the upper line drops closer to the moving average or when the upper and lower lines seem to move toward one another. Both these occurrences mean that the currency's value is decreasing.

Having a thorough understanding of many methods of technical analysis is necessary for any investor who wishes to frequently use technical analysis to plan his trades. If a forex investor educates himself about the many varied methods available and then takes the data into account when making decisions, he will soon find himself making profitable trades. You can do it too!