Technical Analysis in Forex09.02.2016

Technical analysis is a statistical-mathematical analysis of previous quotations with forecasting the following prices. The initial data for a technical analysis in the Forex is the price: the highest and the lowest price, opening price, closing price within a certain period of time, and also the volume of transactions. Any factor influencing the price, such as economic, political or psychological, is already considered by the market and included in it.

Technical analysis is based on three main assumptions:

1.  Movement of the market considers every aspect.

2. Prices move directionally.

3. History repeats itself.

This type of analysis consists in a series of charts or graphs that are displayed in the trading platform. The charts precisely show the direction of the price movement, or the so-called trend, in real time. Most small and medium-sized participants of the financial markets are dependent on technical analysis. It is assumed that professional traders prefer the fundamental analysis instead. The fundamental analysis is the type of analysis that is based on news and all the decisions about trading come from events, news, reports, political changes, natural changes, and so on.

Technical analysis is a method of predicting the price movement which is based on the analysis of charts using technical indicators. This type of analysis is an indispensable tool for every Binary Options trader. It helps to determine the direction of price based on historical data. The advantage of this type of analysis is that you can use it in short-term and medium-term forecasts, from intra-day to long term trading. The analysis is based on 3 axioms:

Technical analysis is a great way to forecast the price movement especially with the help of different indicators. Some examples of indicators are Moving Averages, Stochastic, Bollinger Bands, RSI, and more.

It is considered that Charles Dow, who lived until 1902, invented this approach of analyzing the markets. At that time he focused on stock market and his observations were included in the so called technical analysis, which had to do with numbers and figures. Today, when everything is done online, we use much more tools that were unthinkable a century ago. We can see the price in real time, analyze the patterns, use the indicators, and more. However, you should remember that all the indicators in the technical analysis are telling exclusively a past story. It is true that you can predict based on that, but keep in mind that it is about past, and the market can be unpredictable at some point.

The best way would be to mix the fundamental with technical analysis. Obviously, it can be difficult for beginners, but after you exercise it, you will see that the success is much easier to achieve.

Chart types

In technical analysis, the charts are really essential as you may visually asses the price situation on them. You will generally note 3 main types of charts, though there are more:

-          Line chart;

-          Bar chart;

-          Candlestick.

The line chart type shows only the closing price of the currency pair for a given time period. As the traders say, the closing price is the most important, which is why it is shown in the form of a graph.

The bar chart comes with more details and will show you the highest price - H (upper point of the bar), the lowest price - L (lower point of the bar), opening price - O (dash to the left of the vertical bar), and closing price - C (dash to the right of the vertical bar). This type of chart is recommended for M5 timeframes and up.

The candlestick chart is made quite similar with the bar chart type, but visually looks better. That is why an important part of traders tends to use namely this type of chart. The distance between the opening and closing is colored depending on what is above: the opening price and closing price. It is very clear to use for all of the timeframes.

Timeframes

It is clear that price movement take place in time, so the presence of timeframes is indispensable. These sections represent the time intervals of quotations on the chart of the financial instrument. It is the time which includes one bar or candlestick. For example in a M15 timeframe, a candlestick will represent the price movement within 15 minutes. The timeframe also influences your trading process. Most of the professional traders opt for longer term trading and generally beginners tend to trade on M1 and M5 timeframes, in order to make money much faster.

The most popular timeframes among traders are: M1 - 1 minute, M5 - 5 minutes, M15 - 15 minutes, M30 - 30 minutes, H1 - 1 hr, H4 - 4 hours, D1 - 1 day, W1 - 1 week, MN - 1 month. Based on these periods, you can choose your type of trading, such as intraday, medium-term, swing, long term trading, and so forth.

Indicators

The indicators represent the main part of technical analysis. In fact when you refer to this type of analysis, the first thing that comes to mind is the indicators.

According to the basics of technical analysis, it is known that the market price may have one of two states: trend or flat. Thus, the indicators conventionally are separated into 2 kinds:

-          Trend indicators – they show you a direction, which is downward or upward. For example, you can think about Moving Averages, MACD, RSI, OBV, and more. You will find all these on your trading platform.

-          Oscillators – generally, they do very well in the absence of a pronounced trend. Some popular oscillators are: Stochastic, RSI, ROC, and more.  

Advantages of technical analysis

Here are some of the advantages that make technical analysis exclusive:

-          Technical analysis allows you to select the right time to enter the market.

-          The indicators can really make a difference in predicting the price.

-          The chart is a simple way to show the price history of the currency pair.

-          The charts and the timeframes allow you to visualize the price movement in time and understand how it evolved until the current point.

-          In technical analysis is about real time data.

-          You can use many strategies that are based on technical analysis.

Conclusion

It is believed that technical analysis is more applied by short term traders, which is true. This kind of analysis is exclusively concentrated on price, so in theory, you should not pay attention to news, events, politics, economies, and so on. However, as mentioned above, any good Forex trader would definitely utilize both fundamental and technical analysis. Carrying out fundamental and technical analysis must be a mandatory part for each trader. It is the best and only method to find out the sequence of actions and make the right decision.