Basics of Technical Analysis
Technical analysis is a very popular method of predicting movements in the forex markets. It assumes that the historical movement of the price of a certain instrument can help predict its future movements. In technical analysis traders apply certain algorithms, mathematical markers or indicators in order to detect trends and patterns in the chart movement and trade accordingly.
Technical analysis has become a vast area encompassing a large number of
In technical analyses forex traders assume three important points and act accordingly:
1) The market accounts for everything
Traders assume that the market price for a currency pair reflects all information that effects it and it constantly adjusts itself to incorporate new information related to it.
2) The price follows a trend:
Forex trend is the pattern detected in the price movement of a currency pair
3) History repeats itself
Patterns in the financial markets, especially in the forex markets, tend to repeat themselves all the time. This is based on the assumption that human psychology rarely changes, therefore the pattern of a currency pair repeated in the history is doomed to repeat itself in the future.
There are many books and resources on technical analysis that forex traders can use to expand their knowledge and background about the subject. However, when it comes to forex, we recommend the following concepts of technical analysis that can come in handy for traders:
A) Forex support and resistance methods
This is one of the most basic and important aspects of technical analysis. Let’s assume that the pair EUR/USD during the last week reached a certain price that it couldn’t go above. This price ceiling is called resistance level. On the other hand, the lowest price (i.e. price bottom) the EUR/USD pair reached and could not drop below for this period is called support level.
B) Forex Elliot Waves methods
The Elliot Waves principle was first developed by Ralph Nelson Elliot in the 1930s. Elliot Waves’ theory is based on behavioral patterns in the prices of the free markets that reflect the investors’ hopes and fears in the form of waves in a graph representation.
C) Forex Fibonacci methods
Fibonacci numbers are the result of adding the previous together to find the next. For example 1+1=2, 2+1=3, 3+2=5, 5+3=8 and so on. The Fibonacci string will go on like this: 0,1,1,2,3,5,8,13,21,34,55,89,144,233...
The Fibonacci methods allow traders to open a long or short trade based on Fibonacci retracement expectations. In forex, the sequence of ratios usually used is 23.6 %, 38.2%, 50% and 61.8%. Fibonacci retracement levels can be drawn by connecting a trend line from a perceived high point to a perceived low point on the chart. By calculating the difference between the high and low, the user can apply the % ratios to achieve the desired pullbacks.
D) Moving averages indicators
These are the most popular indicators for forex technical analysis that allow traders to identify trends on charts. They are basically lines overlaid on the currency pair chart indicating long term price trends with short term fluctuations smoothed out.