Lets first define what Technical Analysis is. Technical Analysis is the study of historical and ongoing price data through charts, price patterns and chart indicators. Charts display price in time intervals using bars and candlesticks.

Technical Analysis is based on the following assumptions. The most important is that all available information is already impounded in the market prices of the currencies. The second assumption says that prices always move in trends or patterns. The third assumption says that history repeats itself meaning you can predict the future market by studying the past market prices.

Studies have shown that once a trend is in motion, it is most likely to continue rather than reverse it. The more one studies chart patterns in technical analysis, the clearer it becomes that reading and interpreting chart patterns and technical analysis are more an art form than a skill.

Two charts are important in technical analysis. Bar charts and Candlesticks charts. Bar charts display price data in vertical lines that represents price action during a given time period. The tip at the bottom of a bar chart is the low for the period. The tip at the top is the high for the period. The open and close are represented by small horizontal dashes called tics. The tic to the left of the vertical line is the open. The tic to the right of the line is the close.

Candlestick charts are similar to bar charts in many ways but different in other ways. Candlestick charts were developed by Japanese rice traders. They are used extensively in technical analysis. Like the bar charts, the top of the vertical line represent the high. The bottom of the vertical line represents the low. However, the price action between the open and the close is represented differently by the use of candlestick bodies. A shaded body represents a lower closing price below a higher opening price. A hollow body represents a higher closing price above a lower opening price.

The price action that takes place above and below the body is referred to as tails or wicks. As a forex day trader, you may use any one of the 3, 5, 10, 15, 30, 60 and 180 minutes charts for technical analysis. As a swing and position trader, you may use a daily, weekly or a monthly chart. These charts all use the Greenwich Mean Time (GMT) or the Eastern Standard Time (EST) depending on the software that your broker platform uses. But you can always adjust these times according to your local time.

While doing technical analysis, you need to understand markets patterns? You need to understand what are Uptrends? You should also know what downtrends are and what are sideway trends? Forex markets expand and retrace constantly. Currency prices may continue to expand for sometimes either upward or downward. It is the nature of the currency markets to surge then pause and retrace.

Trends in markets make a series of peaks and troughs as they move. An uptrend consists of a series of ascending peaks and troughs, each peak higher than the last peak and each trough lower than the last trough. A downtrend consists of a series of descending peaks and troughs. A sidways trend consists of a series of horizontal peaks and troughs meaning all peaks and all troughs are almost on the same level.

Part of becoming a good investor in forex is learning to understand that the markets evolve and changes with time. As it does, your trading strategies should also evolve and adjust. You will need to make a little tweak here and a little tweak there sometimes in your trading strategies.

There will be periods of low returns or losses. But once you have made the changes and adjusted your trading strategies, you will start making profits again. Don’t get stuck with only one currency pair and one trading strategy. Start looking at macroeconomic events and how different currency pairs react to them.

Oil drives the global economy. High oil prices put recessionary pressures on the global economy. Lets discuss a currency trading strategy that depends on following oil prices in the global markets. There are many sources of oil. Some countries export oil. Most of the countries in the world import oil. So oil prices tend to affect almost all the currencies. Some currency pairs react more strongly. Others less so when oil prices change. When oil prices rise, they continue to rise for several months. Fortunately for you, oil prices trend for extended periods.

Likewise when oil prices decline, they tend to continue declining for several months. Last year in 2008, we saw a major upsurge in oil prices for several months then a sudden collapse, oil prices than stabilized around $55 for quite sometimes. Some of the currencies that react strongly to oil price changes are GBP and CAD. Lets focus on USD/CAD currency pair in our oil following strategy.

As United States imports more oil from Canada, the value of CAD should increase with increase in oil prices in relationship to USD. This means that the pair USD/CAD should start trending downward with the increase in oil prices. This is an example of a trend trade.

Watch for times when the oil prices are rising and the exchange rate USD/CAD is decreasing. Similarly, watch for times when oil prices are declining and the exchange rate USD/CAD is increasing.

Use CCI (Commodity Channel Index) to trigger your trade. Watch for the 14 period CCI to cross above 100 and then cross back below 100. This tells you that the buyers have made a temporary upward push on the currency pair USD/CAD but was not able to turn the trend around.

Enter the trade. Set a limit order of 300 pips and a stop loss order of 75 pips. Go short on USD and long on CAD. This setup gives you a risk to reward ratio of 1:4. This risk to reward is very good and it allows you to be wrong a few times but without ruining your chances of being profitable. 300 pips mean $3000 profit and 75 pips means $750 loss if the trade goes against what you anticipated. Usually such a trade will continue for a month.

You can also look to trade the USD/CAD pair in the opposite direction if the oil prices start to decline. However, prolonged downtrend in the oil prices is usually unlikely. This trading strategy just depends on knowing which way the oil prices are moving right now so that you can take advantage of it. Oil prices have again started to climb and reached above $68. You can take advantage of the rising oil prices by trading USD/CAD pair as described above.

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What exactly are they trading? Future commodity trading is not like the stock market where people buy shares of a stock. You do not actual own anything. You are just speculating on what the price will be of a commodity in the future.

When you want to put on a futures trade, you must first put up margin money. This is in case the market moves against you; you will have enough capital to pay the loss to the brokerage firm.

Although speculators make up the bulk of futures traders, the markets were intended to protect farmers from losing everything. A farmer can hedge in the futures and protect any loss he will have in the cash market. A farmer can sell the futures in wheat. He might do this if he thinks the wheat market will fall before the harvest. A bread manufacturer might buy the futures if he thinks the price will rise before harvest. Whatever happens to the wheat market, both will guarantee their price.

A speculator is interested only in trading to make a profit. If he thinks the market will rise, he will purchase the futures. If he thinks the market will fall, he can sell a futures. You do not have to own the contract first to sell it. You can first sell the futures contract.

There is risk in any type of trading. That is why some traders only buy futures options, so they know their risk is limited to what they paid for the option. Others who trade futures contracts use technical analysis like fibonacci trading. They will only enter trades that have certain criteria from the chart analysis.

You must have read Part I of how hedge fund managers trade forex. You need to understand that hedge fund managers are always on their nerves edge. They constantly look for strategies that work.

Hedge fund managers want to make good money while always on their guard if things go bad, how to get out of a bad position before it really hurts. You as individual investors also want to bet your own hard earned money in the hope of making capital gains.

Ranging and trending are two primary trading methods. Many hedge fund managers like to follow the trend. Dont forget the saying, Trend is your friend. If you want to become a trend trader, than you need to understand and anticipate trends that may develop in currency pairs. If you want to do range trading, you should understand what best times when currency pairs are ranging and how to do scalping and when.

You also need to decide the time frame that you will trade most. You should decide whether you will use the 5 min charts, 30 min charts, 4 hour charts , daily charts etc and why.

Will you only day trade or hold your position overnight? If you are doing a job, will you trade after hours? What time of trading best suits you? These things should be very clear in your mind before you start trading.

Learning the art of entry and exit is essential for your success. Should it be single entry, single exit? Should it be single entry, multiple exits? Should it be multiple entries, single exit? Should it be multiple entry, multiple exits?

You should learn money management principles in depth. It is good money management principles and their consistent application that will make you survive in the long run. Never ever try to put more than 3% of your equity at stake at one time. Understand how to calculate the reward/risk ratio for each trade. Never trade if the reward/risk ratio is below 3/1

Now, this is the time to take a test drive of the forex system that you have developed by back testing and forward testing. Back testing can be done on Metatrader and other platforms that are freely available online. Forward test your strategies on a demo account using live data.

Open a mini account and try to test it live with a small amount of money. This way you will not lose much money but will be playing against your emotions.

Ultimately trading is all about developing discipline and controlling emotions. You dont get this feel in demo trading when you know nothing is at stake.

Now is the time to get intimate with your strategies. There are two main types of trading strategies”one has a high percentage of profitable trades in a number of trades and the other has a high profit factor per trade.

The key here is to know exactly what type of market environment your strategy performs well in and what type of market environment your strategy fails in, because only then will you know when it is time to pull the plug.

Understand how much drawdown you can afford on your trading account with this trading strategy. You can establish a bench mark figure using a back test. Decide before hand how much drawdown is acceptable before you pull the plug out of the trade.

The last step of thinking or trading like a hedge fund manager is self reflection on your past trading performance. Self reflection is very important. Most of the time we become so absorbed with trading that we do not notice the obvious and keep on repeating it again and again.

This is why it is important to spend some time on a weekly or monthly basis to go over or reflect on your trading. You need to establish a certain ROI level for yourself and keep on tweaking your trading strategies until you start achieving that figure.

Support and resistance levels enable traders to project how far they believe a currency pair will move. It also tells them at what points the price action of a currency pair may turn around and start moving in the opposite direction.

But sometimes, the markets change direction due to a fundamental factor. The market change of direction is strong enough to cause a currency pair to break through a previously established support and resistance level. When a previous support and resistance level is broken by the markets, new levels are established. However, the broken levels may still have some influence on the market in the future.

Sometimes there are attempted breakouts. This is also known as False Breakouts. It will become obvious to you that prices do not always stop at exactly the same points each time. So if you are going to set up stringent requirements for your support and resistance levels, those levels may not hold up. You would fake yourself out of a lot of valid price movements.

Even when you take all the precautions with your support and resistance levels, you may fall victim to a false breakout. Now, you will ask how I can tell when the price has truly broken through support and resistance in a new direction.

There are two methods that help you screen out a false breakout with a true breakout. Setting price-amplitude benchmarks and identifying role reversals.

Setting price amplitude benchmarks involves analyzing a chart to determine if you can identify when the price momentarily broke through the prevailing support and resistance level before pulling back and once again returning to the previous level.

The dips through the predetermined levels are usually short lived. You can draw a secondary support and resistance lines which you can then utilize as your price-amplitude benchmarks.

A price amplitude benchmark will tell you if the price has broken through the predetermined level but has not broken through the benchmark; you dont have to worry much about a new direction and the change in the trend direction. However, if the price had enough momentum forcing it to breach the benchmark, it can continue in the new direction establishing a new trend.

Identifying role reversals method involves watching the price action to see if support levels turn into resistance levels and resistance levels turn into support levels. Often, you will see the price action bounce off a level of resistance, then turn around and start heading lower and bounce off the previous resistance level.

Once a resistance level is broken, that same level will turn into a support level. Similarly, when a support level is broken, that same level will turn into a resistance level. You understand both the benchmark and the role reversal confirmations and use both in your trading analysis to filter out a false breakout from a true one.