However, as it had been recently stated on Bloomberg, currency volatility could be set for a comeback, due to looming monetary policy shifts. In such an environment, learning the basics of forex trading is important for those that are just getting started.
Trends
One of the first concepts FX traders need to understand is the “trend”. A trending market has a price directional bias, meaning the valuation is moving up or down on a clear path. It is important to note that there are two main types of trends: volatile and nonvolatile.
A volatile trend occurs when there are little pullbacks and one side of the market is dominating the order flow aggressively. In a nonvolatile trend, corrective moves are strong, many times erasing a good portion of the prior gains.
Having the ability to spot such trends is important because based on the market context, traders will decide what are the most suitable strategies. Understanding what is forex is not fixed by its nature but requires a very flexible approach, based on changing market dynamics.
Alt-text: forex trading basic technical analysis
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Support/resistance areas
Support and resistance areas are places where buyers or sellers accumulate a large number of orders, having the ability to generate turning points in the price action. These zones are usually referred to as “areas of interest” and FX traders are trying to spot them each day.
History tends to repeat itself in the financial markets and because of that, traders are treating former support/resistance levels as places where the market could take a turn or break and continue the same trend.
A broad debate can be held on this topic, but the main takeaway should be that both support and resistance should not be viewed as a clear line in the sand. Many times, the market will briefly break below/above a support/resistance only to turn in the other direction impulsively, trapping many participants on the wrong foot.
Moving averages
Another basic topic that needs to be discussed has to do with moving averages. These are popular technical analysis tools in the currency market simply because prices don’t move up or down in a straight line. Corrective moves are natural and many times we’ll see the prices pull back towards averages.
Simple and exponential moving averages are the main types traders should know. Short-term averages are more volatile as compared to longer-term ones since the calculation will account for a larger number of inputs (closing prices, opening prices, etc.).
Oscillators
Oscillators are technical analysis tools generally used to spot overbought or oversold market conditions. The Relative Strength Index (RSI) and Stochastic are still among the most popular ones, yet traders need to know that other more complex oscillators are available as well.
Understanding trends, support/resistance areas, moving averages, and oscillators are just some of the technical analysis basics FX traders need to understand very well. They should be aware that the most important thing is using them in the right price action context. Even with simple indicators, it is possible to develop a consistent strategy.
