Technical Analysis from the Basics

One of the best ways to forecast future price movements in the Forex market is to apply technical analysis. Using technical analysis, traders monitor price fluctuations and determine possible increases or decreases in them. How to master technical analysis from the ground up? Let’s see the explanation

What Are Trends and How Are They Defined?

The sentiment of market participants determines the direction of movement. Prices on Forex do not move in one direction, they grow or fall. If the direction of price movement persists for some time, then a trend is formed.

A trend is a directional price movement that is observed over a certain period. Price moves through highs and lows. There are three types of trend direction:

An uptrend shows an increase in price within a certain period. On the chart, it looks like a series of rising highs. An uptrend is often referred to as a bullish trend.
A downtrend indicates a decline in prices. Each subsequent low and high is below the previous one. A downtrend is often called a bearish trend.
The absence of a prominent trend characterizes a sideways or sideways trend. The series of highs and lows are located at the same or almost the same level. Traders usually take into account the rule that a sideways trend can sooner or later be replaced by a strong move.

There must be at least two highs/lows on the chart to draw a trend line. If the price changes in the opposite direction to the trend inside the line, a correction is possible, and if it breaks, a trend reversal is possible.

Support and Resistance Levels

Resistance and support levels are lines drawn through extreme points on the price chart. In technical analysis, resistance and support levels indicate market demand and supply.

The price may slow down, approach this level, and sometimes it may bounce off and start moving in the opposite direction. If the price breaks through the level and remains, it means that the trend is likely to change.

The line drawn through the maximum point is called the resistance level, located above the current market price. If the price is close to this point, generally sellers enter the market. The line drawn through the minimum point is called the support level, located below the current market price. If the price is close to this point, generally buyers enter the market.

You can use support levels to enter the market to open long positions. When the price drops near this level, the price is likely to rise again. Stop-loss should be placed below the support level. Resistance levels are used in the same way. When the price approaches the resistance level, we can generally assume that it will fall again.

Graphic Pattern

On the chart, you can see various chart patterns. There are two most popular chart patterns: reversals and continuations. The formation of a reversal pattern on the chart means a change in trend. Such patterns include Head and Shoulders, Double Top, and Double Bottom. For example, “Double top” is a chart pattern of an uptrend reversal. The pattern consists of two highs, where the price twice tried to break through resistance. Seeing this pattern, one should consider selling.

If a continuation pattern forms on the chart, it means the trend is likely to continue. Flag, Pennant, Triangle, and Rectangle are some examples of continuation patterns. However, there are also types of this pattern acting as a reversal formation if it breaks through a key level.

Indicator

Each technical analysis indicator is based on a specific formula. Depending on the type of indicator or its purpose, the formula may differ. Using indicators, traders determine trends, overbought and oversold zones, trade volumes, and identify possible reversals.

All indicators can be divided into Trends and Oscillators:

Trend indicators are used to identify trends in certain time intervals. Most trend indicators are built in the same window as the price chart. Moving Average is considered the most popular trend indicator.
The oscillator works well when there is no clear trend. They help define overbought and oversold zones, as well as predict the future direction of prices. The indicator is built in a separate window below the chart. The most popular oscillators are Stochastic, RSI and MACD.

Using technical analysis it is possible to forecast price movements.