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A forex beginner’s guide to technical analysis

Learn how to use wave-trading, trendlines and moving averages plus how to manage your level of risk when trading.

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Choosing a strategy can be very difficult when you first start trading forex and CFDs. This guide outlines 3 of the main forex trading technical analysis strategies you could consider, as well as some risk management techniques to help limit your losses.

If you’re looking for an online trading platform, you can compare forex brokers at the end of this guide as well.

Understand how different markets move

Many markets trade differently and move in various cycles. Before you devise a trading strategy, you’ll need to be familiar with how each asset class behaves.

Equity markets tend to trend for longer since an investor in equity markets will likely be looking for long-term returns and retirement income. Currencies tend to be more volatile and dynamic and tend to revert to mean (moving back to a more normal area).

The foreign exchange market, or FX, is a great market to trade but tends to be more sensitive than equities, while commodities run in a more cyclical pattern due to harvesting and mining cycles. For example, grains tend to follow weather and demand patterns. Coffee is used all year round but futures from different markets follow harvesting cycles in their respective regions.

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Trading strategy 1: Technical-based moving average

This strategy can help traders spot long-term price trends by considering the average trend over a period of time rather than focusing on the day-to-day price movements.

This strategy can help you control risk easily and has a strict entry point. You can choose the time frames yourself, but be aware that trading on shorter time frames involves more risk as prices can be more volatile and your stop-loss can cancel you out of your position quickly.

Start with a 4-hour candle chart and add a 30-period moving average (an average of the last 30, 4 hour periods). Now each time the price crosses the moving average in either direction, you take a position. The stop loss should be placed at the previous wave’s low/high.


Image source: Screenshot taken from author’s own trading platform

The chart above highlights the basic premise of the strategy. The long position (Buy) on the left hand side of the chart, the stop loss (risk limit) at the bottom left of the chart and then finally at the top right shows the exit of the trade, where the price crosses back below the moving average. So in essence when the price moves above the line (moving average) in this strategy it’s a buy signal and when it moves back below we sell out and take profits.

Trading strategy 2: Wave trading

Wave trading is when you trade pullbacks in a trending market. A pullback is when there’s a slight dip or drop in the price of an asset that has been trending upward, and often can be a good opportunity to start a position. First of all, you need to establish a trend. You can do this by looking at the closing prices each day over a period of time. If the market you have chosen has made higher highs and higher lows, it’s on an uptrend. If it’s made lower highs and lower lows, it’s in a downtrend.

Once this has been established, the trick is to look for an entry point on the next wave up or down depending on the direction. To some investors, it can be difficult to buy a security at the highs, but to many seasoned investors, this is a common strategy to follow momentum and hold positions for a significant period of time.

Let’s looks at the ASX as an example in the following chart.

Image source: Screenshot taken from author’s own trading platform

In this chart, the highlighted area at the top has to be broken for a position to be added. You can see the ASX index has been trading in an uptrend, and following this trend could be beneficial.

Risk can be determined by the size of your position and where the previous waves begin. In the above example, a stop has been suggested around half way into the trend. This could possibly be sufficient to achieve a decent risk to reward. However, if you have a higher tolerance to risk, you could place the stop lower down to before the waves begin in the uptrend.

To help limit your risk with this trading strategy, you could start with a smaller position, and when each wave high is broken, add more to the position as desired.

Trading strategy 3: Trendlines

Trendlines are an important indicator of the market’s underlying trend. Once a trendline is broken, this can be a reference point to future prices. Determining the trendline and drawing it correctly is the hard part. Similar to wave trading, a trendline can be drawn by looking at the previous closing prices over a set period of time. If each closing price is lower than the previous, it could signal a downtrend. All price action must be under the line (none of the price action must be above the line when drawing a down trendline and vice versa for an uptrend).

Let’s look at this gold daily chart as an example.

Image source: Screenshot taken from author’s own trading platform

As you can see, there is a very steep down trendline plotted in the middle of the chart. The buy signal is triggered on the break of the trendline. Because the trend has been broken, the trader assumed the price would now continue in an upward direction instead, which you can see it did for a short period.

However, after a short time, the price quickly went down again, which is when the stop was executed and the position was closed at a loss. For this reason, you can see this particular trade didn't work out. As a trader, you must be prepared to take losses as not all trades go to plan.

Risk management strategies

Risk management is key to all forex trading strategies; you cannot control the future, but you can control your risk! These are some simple risk management techniques you can follow:

  • Limit your capital. Making more frequent trades of less value rather than larger trades less often could be a good way to limit your risk.
  • Diversify your trades. You may want to consider not taking too many trades that are correlated to each other. Take for example, long (buy) EUR/USD and short (sell) gold. If the US dollar appreciates too quickly, EUR and gold could both fall in tandem and take you out of both positions.
  • Consider the size of your positions. Some brokers only offer minimum and maximum trade sizes on different asset classes. For example a EUR/USD position may be able to trade with a $1 per point size (1 decimal movement in price) but a silver position may have a minimum of $4. Even if you are correct with your trade decision, this over-leveraging may make the trade uncomfortable and force unwanted account management.

Having a clear trading plan and strategy in trading is probably the most important, and toughest, aspect for any trader to establish. This could be the difference between success and failure. Once you are confident with the strategy you have chosen, back-test it (run a simulation). There is software that can do this for you, for example tradingview, but you can also do it manually.

Demo trading is also another way to see if you have a handle on executing the plan and controlling the money management. Obviously, you cannot win every trade, but if you control the risk to reward and account management, you will be at least half way in the right direction.

Your personal psychology is also something you need to consider. If you can't stare at your charts all day without messing with your positions, maybe a “set and forget” strategy on a long-term time frame would be better. If you enjoy the adrenaline, then a short-term system would suit you.

Compare forex and CFD trading platforms below.

Compare Australian forex and CFD brokers below to find one that meets your trading level and needs.

Disclaimer: CFDs and forex are complex financial products that come with a high risk of losing money. Most retail client accounts lose money trading CFDs and forex. Consider whether you can afford to lose your money.

Data indicated here is updated regularly
Name Product Minimum Opening Deposit Minimum Opening Deposit Commission - ASX 200 Shares Available markets Platforms
eToro CFD
USD 50
USD 50
No commission
ASX shares, global shares, indices, cryptocurrencies, commodities, ETFs
eToro Trading Platform
Disclaimer: Volatile investment product. Most clients lose money trading with this provider.
Join the largest social trading network in the world.
Plus500 CFD
AUD 100
100
No commission
CFDs on ASX shares, global shares, indices, options, ETFs
Plus500 Web Trader
Disclaimer: Volatile investment product. Most clients lose money trading with this provider.
Finder exclusive offer: Open a new trading account and receive a welcome bonus of AU$110 when you deposit your first $370 and enter the bonus code “Special200”. T&C’s apply.
Trade CFDs on Australian and International shares, indices, cryptocurrencies, commodities and more.
IG Markets CFD
AUD 0
0
0.08% with $7 minimum
Indices, FX, Shares, Commodities, Cryptocurrency, ETPs
MetaTrader 4
ProReal Time
Disclaimer: Volatile investment product. Most clients lose money trading with this provider.
Introductory offer: Build confidence by trading at lower minimum trade sizes for the first six weeks. Plus, receive a reduced commission on Australian shares CFDs. T&C's apply.
Trade from over 15,000 markets with Australia's leading service for CFD trading and forex.
IC Markets CFD (True ECN Account)
$200
$200
0.1% per side
ASX shares, global shares, indices, commodities, forex, cryptocurrencies
MetaTrader 4
MetaTrader 5
cTrader
Disclaimer: Volatile investment product. Most clients lose money trading with this provider.
Trade 230+ different products with fast execution under 40 milliseconds on average.
City Index CFD
AUD 0
0
0.08% with $5 minimum
ASX shares, 4,500 global shares, indices
MetaTrader 4
At Pro
Advantage Web
Disclaimer: Volatile investment product. Most clients lose money trading with this provider.
Trade CFDs on indices, FX, global & Australian shares and commodities, plus access other markets such as metals, bonds and interest rates.
Blueberry Markets CFD Trading
$100
$100
$20 per month subscription plus 2% of trade size
Indices, ASX200 Shares, Commodities, Cryptocurrency
MetaTrader 5
Disclaimer: Volatile investment product. Most clients lose money trading with this provider.
Bottom of the market fees on forex, CFDs and commodities with 24/7 quality customer service.
Pepperstone CFD
USD 200
200
No commission
ASX shares, global shares, indices, cryptocurrencies, commodities
MetaTrader 4
MetaTrader 5
cTrader
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 76.5% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
Trade stock indices on the global market, via Pepperstone's MetaTrader 4 and cTrader client terminals.
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Compare up to 4 providers

Disclaimer: CFDs and forex are complex financial products that come with a high risk of losing money. Most retail client accounts lose money trading CFDs and forex. Consider whether you can afford to lose your money.

Data indicated here is updated regularly
Name Product Standard brokerage fee Inactivity fee Markets International
IG Share Trading
Finder Award
IG Share Trading
AUD 8
AUD 50 per quarter if you make fewer than three trades in that period
ASX shares, Global shares, Forex, CFDs, Margin trading
Yes
Brokerage discount: $5 on Australian shares for active traders & $0 commission on US and global shares
Enjoy some of the lowest brokerage fees on the market when trading Australian shares, international shares, forex and CFDs, plus get access to 24-hour customer support.
eToro Share Trading (US stocks)
USD 0
USD 10 per month if there’s been no login for 12 months
Forex, CFDs, US shares
Yes
Zero brokerage share trading on US stocks with trades as low as $50.
Note: This broker offers CFDs which are volatile investment products and most clients lose money trading CFDs with this provider.
Join the world’s biggest social trading network when you trade stocks, commodities and forex from the one account.
Superhero share trading
AUD 5
No
ASX shares
No
Pay zero brokerage on all Australian ETFs.
Trade ASX stocks with a flat $5 commission fee and a low minimum investment of just $100.
Saxo Capital Markets (Classic account)
AUD 6.99
AUD 0
ASX shares, Global shares, Forex, CFDs, Margin trading, Options trading
Yes
High quality, low-cost brokerage on global share trading.
Access up to 19,000 global stocks on 36 of the world’s major stock exchanges and enjoy some of the most competitive FX rates on the the market when you trade with Saxo Capital Markets.
CMC Markets Stockbroking
AUD 11
No
ASX shares, Global shares, Forex, CFDs, Margin trading, Options trading, mFunds
Yes
$0 brokerage on global shares including US, UK and Japan markets.
Trade up to 9,000 products, including shares, managed funds, forex, commodities and cryptocurrencies, plus access up to 15 major global and Australian stock exchanges.
ANZ Share Investing
AUD 19.95
No
ASX shares, Global shares, Margin trading, Options trading
Yes
Earn 1 Qantas Point per AU$3 spent on brokerage fees on certain instruments.
Access Morningstar reports, company announcements and and live pricing via ANZ’s share investing platform. Available for desktop and mobile.
Westpac Online Investing Account
AUD 19.95
AUD 63.50 per year on the global markets account
ASX shares, Global shares, Options trading, US shares
Yes
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Important: Share trading can be financially risky and the value of your investment can go down as well as up. Standard brokerage fee is the cost to trade $1,000 or less of ASX-listed shares and ETFs without any qualifications or special eligibility. If ASX shares aren’t available, the fee shown is for US shares.

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2 Responses

  1. Default Gravatar
    chrisMarch 1, 2019

    Does it cost $100 per day to leave a trade open longer than a 24hr period?

    • Avatarfinder Customer Care
      JoshuaMarch 6, 2019Staff

      Hi Chris,

      Thanks for getting in touch with Finder. I hope all is well with you. 😃

      Regarding your question, that you would depend on the trading platform you are using. Thus, it would be a good idea to check your trading platform for any fees that may apply if you leave a trade open for longer than 24 hours.

      I hope this helps. Should you have further questions, please don’t hesitate to reach us out again.

      Have a wonderful day!

      Cheers,
      Joshua

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