What is technical analysis on Forex?
Technical analysis is performed by reviewing data on prices and data volumes to determine whether they will continue in the future or not. Whenever analysis is based solely on price movements, we conduct a technical analysis.
The principle of technical analysis is that markets act according to trends and that everything that influences the behavior of prices is expressed on a chart.
Trend analysis is absolutely necessary to understand and work well in the Forex market. One of the big advantages of this market is that you can earn both a rise and a fall, because buying a currency is equivalent to selling your counterparty.
Technical analysis can reveal many signs that a trend may change or continue, and find critical areas in prices that can serve as reference information for its work.
Trend
Experience tells us that markets are moving along trends, an investor must identify them and detect factors that may suggest a change. The trend can last for years, months, days or even hours.
Technical analysis attempts to identify critical levels that may change it. Traceable trend lines usually give us support and resistance zones, price targets and, in general, many useful technical references.
It is recommended to work together with the trend; it is much easier to succeed by acting in favor of the trend than against it. Bold trends tend to be less steep than bearish trends.
Indicators and numbers
The same numbers are repeated again and again over time. The most famous are the figures "head and shoulders", "triangles", "rectangles", "double maximum", "double minimum" and "flag".
Indicators usually indicate overbought or oversold levels; they indicate future possible trends and corrections. We have trend indicators (moving average, MACD) and leading indicators that try to anticipate a turn or gap in a trend (Stochastic, RSI, CCI).
Experience shows that the mood of operators is repeated, knowledge of the development of prices and market phrases gives us an idea of the future evolution of prices.
Support and resistance
The second most important concept of technical analysis (after trend analysis) is support and resistance. Levels that remain constant over time, and that they are difficult to turn up (resistance) or difficult to break (supports). It is logical that investors over a long period of time agree that at a certain level the price is good or bad or that a certain price is worth decaying.
Prices have a “memory”: investors remember them, and in the chart you can see this phenomenon.
A gap of support or resistance is always a technically significant fact, prices are freed from barriers to move to the next critical level. Not always, a gap in the level, which, in our opinion, is a significant support or resistance, leads to an escape of prices. Sometimes there are false breaks. It is possible that, despite the critical level, the currency does not attract investors.
Five basic rules for working on the basis of technical analysis
1. Have a system and strict discipline. If you give up on yourself and go into market psychology, it’s very likely that you will fail. During the day, you can change your mind many times and what seems like a good purchase can be a disaster in a few hours. If you do not have references to work, and you give up hope, you are lost.
2. If you set a stop level, observe it. It is preferable to be faithful to the dynamics of work and absorb a small loss than to lose capital or discipline. If you do not get benefits, analyze why. The fundamental value must always be fresh and prepared for a favorable position. Avoid holding positions against you or having a position without technical references.
3. Try to abstract from euphoria or frustration. This is not an easy task, since target prices soar many times over, and prices are rising strong. In other cases, pessimism dominates the environment; it is in such situations where you can do your best. The psychological environment is usually a trap, and it is important to know how to avoid it.
4. Set objective prices. It is preferable to cancel the vantage point at a reasonable price than to abandon it to their fate. If the position is not occupied in the first market, it is preferable to consider price targets.
5. The tendency to buy on the supports and the sale of resistance. Many times these levels are clear, and many people can see them. The uptrend usually returns to the support zone, this area usually gives a buy signal, although it seems that the market is getting worse. And a fall after a new high is a buy signal, a rebound after a new low is an output signal.
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