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Technical Analysis

A technical analysis is traditionally considered much simpler than a fundamental analysis. This type of analysis is based on a theory that the current market situation has already existed in the past, and that if you study how the market behaved following the said situation (to put it simpler, in what direction the rate of this or that currency shifted), it is possible to forecast the outcome of the current situation. A technical analysis is based on the following postulates:

  • The market takes everything into account. All the factors influencing a currency rate and included in a fundamental analysis are already accounted for by the market itself. This is why it is essential to study the dynamics of the currency rates.
  • Prices change according to trends and patterns. This means that a currency behaves in a specific manner at a specific time - “up”, “down”, or “stay”. This type of behavior is called a “trend”. A trend may be an uptrend (the rate is growing), a downtrend (the rate is falling), or a sideways trend (the rate is not changing drastically). The current market trend must be determined for a successful trade.
  • History repeats itself. We just spoke about this. A similar situation has already happened in the past and not just once. An analysis of such past situations may certainly be applied to the current situation.

In order to forecast the future performance of a currency rate, a rate change chart should be considered in order to identify certain patterns. Judging by the presence of certain patterns, it is possible to determine whether a rate will rise, fall, or remain unchanged. Based on these findings, it is possible to make the corresponding trading decisions with regard to the Forex market: buy, sell or keep.

Currency Rate Charts

Different charts of currency rates are used for different reasons in a technical analysis. In most charts, the Х axis is time, and the Y axis is the price.

The linear chart has been around for a long time and is the simplest type of chart, but also the least informative from a trader’s point of view. The name comes from the broken line on the chart that represents the price dynamics (though depending on its scale, it might also be a flat curve).

 The next type is the bar chart. It looks as follows:

This currency rate chart provides more information on the dynamics of the forex market price. Its special feature is that every time interval is shown as a vertical line with two sidelines on the left and on the right. The upper and bottom points of a vertical line show the maximum and minimum currency rates points, respectively. The sideline to the left is the price level for the opening period and the sideline to the right the price level for the closing period. This chart provides information not only on the average price per period, but also on its dynamics within a given period.
With regard to periods, the following time intervals (periods) are usually used in the analysis (periods): 

  • 1 minute (designated as М1)
  • 5 minutes (M5)
  • 15 minutes (М15)
  • 30 minutes (М30)
  • 1 hour (Н1)
  • 4 hours (Н4)
  • 1 day (D1)
  • 1 week (W1)
  • 1 month (MN)

The choice of the interval for an analysis is determined by the trading strategy that you want to employ. To trade based upon charts with an interval of less than an hour is rather risky, as these are best used for consultative purposes only. Professional traders will normally implement time intervals of more than a day.

The third type of chart is a candlestick chart.

This chart of a currency rate has a lot in common with the stick chart. Only instead of sidelines, a square box is drawn at the left and at the right which is called “the stick body”. The vertical lines are called “shadows”. If the currency rate for a time period goes down, i.e. the price at the period end (closing price) is lower than the price at the period start (opening price), the stick body is filled, otherwise it is left blank. However, this is not a strict rule: sometimes it is the opposite, and sometimes if the price rises, the stick is painted green, and if the price falls - red. It’s up to each individual to set it up the way he likes it. The candlestick chart provides a very vivid visualization of the market. But a new Forex market trader will need some time getting used to such a chart as a means of analyzing the market.

The Major Figures In A Technical Analysis

Let’s consider the figures that appear on the charts.
As previously mentioned, the currency market can find itself in the following situations:

Uptrend (it is also called “bull trend”),

Downtrend (“bear”),

 Sideways Trend (“absence of trend”, “horizontal trend”).

 

And so, the charts depict certain patterns. Depending on the trend, they are subdivided into continuation patterns (they signal that the current trend will continue) and turnaround patterns (they signal that the trend will change soon in the opposite direction).

Among the continuation figures are:

Zigzag − Steep changes of prices up and down:

 Triangle – changes within a converging channel;

 Flag - has “staff” after which prices change within a narrow range.

Among the turnaround figures are:

Double Top – Its name clearly describes its essence and is even more evident on the chart:

Double Bottom – This is the upside down analogue of the Double Top:

Triple Top – It’s obviously an expanded option of the Double Top:
 
Triple Bottom – Upside down analogue of Triple Top:
 
Head-Shoulders – This figure resembles a human silhouette. The shoulders, as shown on the chart below and may have different heights.
 

 

These are the main patterns found on currency rate charts. There are other patterns apart from these, of course, but they are most often of no practical use.
These technical studies will allow you to make simple forecasts regarding the performance of currency rates. It should be mentioned once more: the most important step is to determine the current Forex market trend, and then to “catch” the appropriate pattern which will indicate if the price will continue its trend in the same direction or turn around soon.
Once you’re equipped with such a knowledge base, you can start making your first deals on the Forex marketplace.

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