Technical Analysis is how traders analyse financial instruments in stock investing to determine their possible future price levels. Technical analysis uses charts and graphs to identify trends, patterns, highs/lows and various other indicators they can use to help predict future market movements. The motive behind technical analysis is not to make psychic predictions or “tell the future” but rather it looks at historical data, studies patterns and develops theories on what may happen next based on this information.
There are many different forms of Technical Analysis tools, but by far the most common are these few:
Trend lines
Trend lines can be drawn along peaks or troughs over time, revealing support/resistance areas that the currency might gravitate towards. A sharp break of a trend line can strongly signal a reversal of price movement. It is best to use multiple trend lines and observe the market before deciding what action to take.
Forecasting
Another common form of Technical Analysis tool is forecasting; this method looks at previous price movements to predict the future direction of prices. For example, if a currency has been rising steadily for weeks, it may indicate that it will continue doing so; however, there are always exceptions and pattern breakage, so forecasting should not be used as a substitute for analysis.
Price Patterns
Patterns appear in charts when a currency’s price makes similar highs/lows over time, revealing various shapes such as triangles, flags or even bullish/bearish engulfing patterns. Identifying and defining these patterns can be an effective method of predicting market movement.
Volume Charts
Trading volume is the number of buyers and sellers actively participating in particular security during a given period. Volume bars show the activity over time. It may be helpful to look at volume changes through various periods such as daily, weekly or monthly charts to get an idea of any significant shifts taking place within the market.
Price Momentum Oscillator (PMO)
When looking at momentum oscillators such as RSI, Slow Stochastics or MACD, you are looking for buy/sell signals. The most popular one with forex traders is the Price Momentum Oscillator (PMO), which determines the strength of a price move. The information it provides can gauge what type of exit setup (stop loss, take profit) would be most suitable.
Supertrend
The SuperTrend indicator is also known as the ‘universal’ indicator because it can display trend lines, both standard and dynamic. It displays support, resistance, bright entry/exit signals, standard deviation bands or channel around price data. It gives traders an idea about the current trend direction and future movements based on previous patterns.
Arrows
Arrows are another form of Technical Analysis tool which pick up on momentum changes. They compare today’s closing prices with those from one month ago, and if the price has moved significantly in either direction, it will draw an arrow across the chart.
Oscillators
Oscillators are used to determine market momentum by comparing today’s closing price with previous trading periods. It looks at how much a currency has changed over time and compares this to other currencies (competitors) to measure market strength. Popular oscillators include RSI, Stochastics or MACD.
Volume Profile
Another famous volume-based trader can help you understand where big buyers/sellers are active within the forex market. When plotting volume bars on your charts, you can determine critical levels where large orders are located (if buying) or executed (if selling).
Fibonacci Retracements
Fibonacci retracement levels are based on numbers generated by Italian mathematician Fibonacci. They can help determine support and resistance areas as price moves up/down the levels. The standard Fibonacci used most often are 23.6%, 38.2%, 61.8% and 100%.
