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The Basic Concepts of Forex Technical Analysis

An Introduction to Technical Analysis

Technical analysis is an integral part of trading. It can be hard for novice traders to spot chart patterns and determine next tendencies in the market and act on them accordingly, yet it's a must learn, if you want to succeed in trading.

Technical analysis is a study into price movements with the use of historical chart patterns and indicators traders can, to some degree, predict price future trends. By analyzing past price movements, traders can draw parallels with current ones and make calculated predictions.

In other words, Technical Analysis is basically a study in price supply and demand. It can give you a set of tools to understand and trade better, but keep in mind that, technical analysis is not exact science, traders can only make educated guesses of sorts, because there are many more outer influences that are hard to foresee.

KEY TAKEAWAYS

  • Mastering technical analysis is a must do
  • By analyzing past price movements, traders can draw parallels with current ones and make calculated predictions.
  • Using too many indicators can lead to conflicting views and by extension, analysis paralysis.

The Basics of Technical Analysis

In general, the foundation of technical analysis is to identify recognizable patterns that in turn will help you find the right time and price to enter or exit the market.

Let us talk a bit about charts, since you are going to use charts to see price movements in the form of candlesticks:

Green color represents price moving up and the red one price moving down, bars show the opening and closing price, and the last one - wicks, show the highest and the lowest prices.

Charts are graphical representations of historical price, volume and time frames. You are going to use them to learn market prices for a specific period of time.

So, what are Key Basics of Technical Analysis

  • Some traders believe that it's possible to predict future price movement based on historical prices. But, as we said earlier, technical analysis is not exact science, you should use technical analysis with fundamental.
  • Prices move in trends, according to Dow there are three time frames;
    • From one year to several years
    • From ten days to to one year
    • From several seconds to a few days
  • History repeats itself - price patterns tend to repeat themselves in the future. So some traders use previous price movements to open and close trades (to maximize their profits, not really exact science).

Technical analysis can be used in long and short-term trading;

  • Investors can use technical indicators to decide when to buy or sell their shares to build a more profitable portfolio.
  • Day traders can use technical indicators to identify quick profit opportunities.

Note. Timing is critical to successful trading.

Basically technical analysis can be used for almost any market; it could be for trading stocks, indices, forex or cryptocurrencies. All you need is access to technical indicators and price chart.

Technical Analysis Shortcomings

With all the opportunities that technical analysis can provide, there are some limitations you should know about.

Let’s check them out:

  • Indicators that show the same signal to different traders can be explained in different ways, which speaks about the subjectivity of technical analysis. Technical analysis is not so cut-and-dried.
  • When enough people use the same pattern of trading it might go both ways; actually force the prediction to occur or make it more difficult for the trader to accomplish the strategy at hand.
  • As you know markets sometimes experience sudden movements, which can lead to great losses or vice versa (if you are lucky), those times technical analysis can't be of help.
  • Looking at technical indicator signals solely, won't give you the whole picture. You always should combine it with fundamental analysis.

Technical Analysis

Technical analysis is used to evaluate investments and identify trading opportunities by analyzing statistical trends collected from trading activities such as price movement and volume.

The main goal of technical analysis is to be able to profit from analyzing previous price patterns to know when to enter and exit positions, especially when shift is about to happen.

Technical analysis focuses on the study of price and volume, and tools are used to closely examine how supply and demand for a security will affect changes in price, volume, and implied volatility.

In general, technical analysts look at the following broad types of indicators:

  • Price Trends - Trends are arguably the most important part of technical analysis. Trends show the overall direction stock is moving, whether it be up. Trends are formed when peaks and troughs of the graph either move gradually higher, lower, or stay the same.
  • Chart Patterns - Most of the patterns appear after the trend, support and resistance lines are drawn. These patterns describe what the overall price is doing and are one step closer to getting the full picture.
  • Support and Resistance - Trends are a form of support and resistance; uptrend lines support the stock from falling, and downtrend lines resist against the stock from rising, they can also be flat. Almost every stock that a trader looks at has a variety of support and resistance levels. As a rule, they are looking for levels at which there were several reversals. The more reversals this price point has caused, the more relevant it should be to the trader and influence decision making.
  • Indicators - simply put, these are graphs that help traders to solidify their point of view. Novices make the mistake of putting too much emphasis on indicators to make decisions, instead, using them as a confirmation tool.

    Note: using too many indicators can lead to conflicting views and by extension, analysis paralysis.

  • Signals - With the combination of lines to form patterns, traders should have a good idea on how the security is trading and should feel more comfortable forming a view on its future direction. The question is when to get it in, and when to get out. Entry and exit signals help time entry and exit stock and can be as complicated or as simple as a trader wants them to be.

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