Technical Analysis is one of the most popular ways to analyze market trends. It basically consists of the analysis of prices and historical patterns to try to predict and anticipate future movements
The technical analysis in Forex is based on the fact that all the information of what is currently happening in the market is reflected in the current position of the price of the currency with which you want to trade. Therefore, all you need to make trading decisions is to study the action of prices.
The key point of this type of analysis in Forex is to know that the markets are predisposed to the trend and to know these trends at their early stage is the key to be successful with technical analysis.
The main tool are charts that identify trends and patterns for, find or expect, changes or fluctuations of the currency that generates profits, also uses as important tools the lines of support and resistance.
Strategies in technical analysis are based on mathematics, statistics and logic. According to observation, this analysis determines, taking advantage of mass trends, the direction the currency is likely to take in the future. That is, to take facts from the past to predict the future of the market reaction.
Advantages of Forex Technical Analysis
- It is the most followed by most Forex traders.
- Once learned does not require hours of study of the charts, which makes it an advantage for those who do not have the time to devote to market analysis.
- It generally works well for those who work it because the forex market tends to develop strong trends.
- You can track several currencies at the same time, as it’s not as overwhelming as fundamental analysis, which you have to specialize in because of the exaggerated amount of data you have to know to be successful.
- Knowing and mastering the technical analysis you can work with any other type of currency, since the tools are the same and the rules can be easily applied to any time margin or negotiable currency.
- It does not depend on the need for economic events in the market to be able to trade.
- It is a versatile technical analysis, suitable for all types of currencies, as well as for commodities, raw materials, energy, stocks, indices, …
- You don’t need to be an economist to practice technical analysis, you just need to be able to identify patterns and trends in graphs.
Basic Principles of Forex Technical Analysis
In this strategy of technical analysis there are basic fundamentals for trading, they are:
- Support lines: It is a price area where it is considered difficult for the price to go down even more than that point. The knowledge you have of these lines is essential to make an accurate analysis.
- Lines of Resistance: It is the opposite to the support, that is to say, that a resistance is a level of the graph where the prices stop their ascent and fall, because the prices of the seller have more importance than those of the buyer.
- Trends: A trend occurs when you take the average variable prices of a currency for a given time. This is useful for the trader to observe and compare the cusps of rising or falling price lines.
- Retreats: When prices retract a bit from the current trend before returning to their original direction, they are movements against the trend, but tend to retreat a predictable percentage as well. For example, reversals of 33%, 50% or 66% are known.
- Channels: This is when prices move in two parallel trends. The technical analysts use this so that when the price touches the minimum buy trend and when it buys the maximum sell trend.
- Graphics: It is the most used instrument in technical analysis. They can be used to represent the evolution of the price in the market and predict future prices.
As we will see in the next article (Types of Forex Charts) of this Forex course, three main types of charts are used:
– Line Charts
– Bar graphs
– Japanese Candlestick Graphics
Main Indicators of Technical Analyses
- Mobile Media
- Bollinger Bands
- Parabolic SAR
- Oscillator RSI
- Graph of volume, volatility and stochastic.
- Commodity Channel Index Indicator
- ATR (Average True Range)
- Cumulation distribution
- Arms Index (TRIN)
Recommendations to apply Forex Technical Analysis
There are several aspects to consider when applying the technical analysis.
For example with regard to graphics. They can be used at intraday intervals (every few minutes), per hour, per week or per month.
It depends on how long you want to stay in that position, for example if you are going to trade a few hours you will want to see the graph of 5 or 15 minutes.
If you want to stay in a position for several days, it is recommended to see charts with a larger margin.
Whoever decides to trade with technical analysis, should know that this is a useful strategy especially for short term investments, since this non fundamentalist strategy is based on identifying patterns in a set period of time.
Although technical analysis is a strong tool to invest, the analyst needs to update constantly, because there is the possibility that what today has given good results, tomorrow will not and that will depend on the news that move the market so it is a challenge and good practice for the trader to keep abreast of the strategies and what happens in the world of the economy.