Using Technical Analysis to Trade Major Currency Pairs

Market sentiment, which can be measured by technical analysis, helps determine the ebbs and flows of the major currency pairs. Over time, the fundamentals of the currency markets which include interest rate differentials and economic forces will generate the path of currency pairs. Medium term and short-term movements of the major currency pairs are generally driven by technical patterns. There are several important technical analysis techniques you should be aware of which can help you determine the futures movements of major currency pairs.

What is a Major Currency Pair?

A major currency pair includes 6-different currencies versus the US dollar. If a major currency pair does not include the dollar it is referred to as a cross currency pair. The 6-currencies include the Euro, the yen, the British pound, the Swiss Franc, the Australian dollar and the Canadian dollar. These are the most liquid currency pairs and make up approximately 70% of all the trading within the currency markets that occur daily.

What is Technical Analysis

Technical Analysis is the study of past price movements to determine the future direction of a currency pair. Past price action can provide key information such as levels of support and resistance. Support is a level where a currency finds demand where resistance is a level where the market finds robust supply. In addition to support and resistance levels, technical analysis includes, patterns, as well as studies such as trend following.

What are Patterns?

A trading patternis a price formation created by the movements of a currency pair on a chart. A pattern is identified by a line that connects price points, such as closing prices or highs or lows. Chartists who trade the major currency pairs look to identify patterns to anticipate the future direction of a currency pair. There are two different types of patterns. Continuation patterns and reversal patterns. A continuation pattern is a pause that refreshes. This would include bull and bear flags. A reversal pattern, such as a double top or a head and shoulders pattern, alerts a trader that a major currency pair is poised to reverse.

What are Trends?

A trend is the movement of an exchange rate that can be used in USD/JPY currency trading. A trend is a change that perpetuates in the same direction. A major currency pair will only trend 30% of the time, which provides only a small window to catch a large move in the change in an exchange rate. One of the best ways to identify a trend is to use moving averages.

A moving average is the average of an exchange rate, which moves over time. For example, a 5-day moving average is the average of the past 5-days. On day six, the first day of the average is dropped from the calculation. Traders will often use a moving average crossover to determine if a trend is in place. For example, when the 10-day moving average crosses above or below the 50-day moving average, a short-term trend is in place. In the chart of the USD/JPY the green arrows show a crossover buy signal and the red arrows show a crossover sell signal.

By using technical analysis on currency pairs, you can identify patterns, determine trends and track support and resistance levels that can help you determine the future direction of a major currency pair.