The basis of modern technical analysis is made up of the following:
- The price is a comprehensive reflection of all market forces. At any given time, all market information and forces are reflected in the prices.
- Prices move in trends that can be identified and turned into profit opportunities
- Price movements are historically repetitive
Almost every trader uses some form of technical analysis. Even fundamental analysis traders are likely to glance at price charts before executing a trade, as these charts help traders determine ideal entry and exit points for a trade. They provide a visual representation of the historical price action of whatever is being studied. As it is focused on identifying trend reversal, the question of timing to enter a trade is easier to address with technical analysis.
Chart Analysis
Forex chart analysis is the main tool of technical analysis. Charts generally depict all the data obtained on the currency market and it does not matter, what chart you are looking at, it conveys very important and detailed information. Thus, your success in the Forex market directly depends on your chart analysis skills. Traders usually work with those charts that are more convenient and understandable for them and that meet their personal preferences and requirements. The chart time frame could be expressed in minutes, hours, days, or weeks.
The main types of charts include:
Line charts, Bar charts, and Candlesticks
Type of the Indicators
Besides studying chart patterns, there are other varied and more sophisticated technical tools and mathematical indicators available. The most commonly used are technical indicators, measuring support and resistance, and using trend lines, although all three can be considered as technical indicators as they all rely on looking at the chart and reviewing recent history trying to spot whether a price is following a pattern or moving in a range.
A technical indicator is a graphical representation resulting from calculations based on the price action and is usually displayed along the bottom of the chart. A wide range of technical indicators is widely used by many traders. They can be categorized according to what they describe and what they indicate.
The trend is a term used to describe the persistence of price movement in one direction over time. Trends move in three directions: up, down and sideways. Trend indicators smooth variable price data to create a composite of market direction.
Example: Moving Averages, Trendlines
Market strength describes the intensity of market opinion with reference to a price by examining the market positions taken by various market participants. Volume and open interest are the basic ingredients of this indicator. Their signals are coincident or leading the market.
Example: Volume
Volatility is a general term used to describe the magnitude, or size, of day-to-day price fluctuations independent of their direction. Generally, changes in volatility tend to lead to changes in prices.
Example: Bollinger Bands
A cycle is a term to indicate repeating patterns of market movement, specific to recurrent events such as seasons, etc. Many markets have a tendency to move in cyclical patterns. Cycle indicators determine the timing of particular market patterns.
Example: Elliott Wave
Support and resistance describe the price levels where markets repeatedly rise or fall and then reverse. This phenomenon is attributed to basic supply and demand.
Example: Trendlines
Momentum is a general term used to describe the speed at which prices move over a given time period. Momentum indicators determine the strength or weakness of a trend as it progresses over time. Momentum is highest at the beginning of a trend and lowest at trend turning points. Any divergence of directions in price and momentum is a warning of weakness; if price extremes occur with weak momentum, it signals an end of movement in that direction. If momentum is trending strongly and prices are flat, it signals a potential change in price direction.
Example: Stochastic, MACD, RSI
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