Forex Technical Analysis

Understanding Forex Technical Analysis

Forex Technical Analysis is the interpretation of future market data examining the charts at face value. Most traders use the method of technical analysis to fully understand an investment’s price history. Due to the fact that Forex is a 24-hour-market, large amounts of data is available to predict future price activity, which adds to the statistical significance of the forecast. This makes the best market for traders that use tools, such as trends, charts and indicators.

Most technical analysts make the following key assumptions:

  • All market fundamentals are reflected in price data. Moods, different opinions, and other market fundamentals do not need to be studied.
  • History can repeat itself often in fairly predictable patterns. These patterns are referred to as signals. A technical analyst will discover current market signals by examining past market signals.
  • Prices move in trends, meaning that price fluctuations are not random and unpredictable. Once a trend has been established, it will usually continue for a period of time.

Getting in and out at the right time

Traders rely on indicators, being price charts, volume charts and other mathematical representations. These indicators are used to find the best entry and exit points for a trade. Some of these can also help to identify a trend, while others can help to determine the strength and sustainability of that trend.

Technical analysis can help you to see your trading plan more objectively and minimize the emotions that come along with trading.

Price chart types

Line Chart

A line chart draws a line from one closing price to the next. When connected together with a line, general price movements of a currency pair over a period of time can be seen.

Bar Charts

A bar chart shows opening and closing prices, as well as highs and lows. The bottom of the vertical bar indicates the lowest traded price during that time period, while the top of the bar indicates the highest price paid. The horizontal line to the left of the bar is the opening price and to the right is the closing price. Each bar represents a period of time, being as short as 1 minute or as long as several years.

Bar charts are also referred to as “OHLC” charts, as they indicate the Open, the High, the Low and the Close for that specific currency.

Distinct price patterns will eventually appear over a period of time.

Candlestick Charts

Candlestick charts indicate the same price information as a bar chart, but in a better visual format. The candlestick bars also indicate the high-to-low range with a vertical line, however the body in the middle of the line indicates the range between opening and closing prices. If the body is filled or solid, the currency pair closed lower than of what it opened at.

Advantages of candlestick charting:

  • Candlesticks are easier to interpret, being a good method for beginners to start learning forex chart analysis.
  • Because candlestick charts are more visually appealing than bar charts, it is easy to use as your eyes adapt quickly to the information in the bar notation.
  • Candlestick patterns have interesting names which helps to remember what the specific pattern means.
  • Candlesticks are good at identifying market turning points.

Indicators

Technical traders use many different indicators in conjunction with support and resistance to help them in predicting the future direction of exchange rates.

A few indicators that are quite popular are: Bollinger Bands®, Fibonacci retracement, moving averages, moving average convergence divergence (MACD) and stochastics. These tools are not normally used by themselves to generate signals, but rather conjoined with other indicators and chart patterns.

Technical Indicator Types:

Trend indicators level out price data, so that a persistent up, down or sideways trend can be easily seen.

Strength indicators define the intensity of market opinion on a specific price by examining the market positions taken by different market participants. Volume or open interest are the main elements of strength indicators.

Volatility refers to the extent of day-to-day price fluctuations. Changes in volatility tend to anticipate changes in price.

Cycle indicators show repeating market patterns from recurrent events, such as seasons or elections. This type of indicator determines the timing of a certain market pattern.

Support and Resistance describes the price levels where markets continually rise or fall and then reverse. This is attributed to basic supply and demand.

Momentum indicators determine the strength of a trend as it develops over time. Momentum is at its highest when a trend begins and lowest when the trend changes.

Getting Technical – Forex Technical Analysis

Technical analysis should be a key element of your trading strategy combined with fundamental analysis, you can increase your odds to profitable trade outcomes. Confluence is key! The more things that add up, pointing in the same direction, the better the chances of a successful trade.