Technical analysis of the foreign exchange market
The basic way to predict the direction of the price movement on Forex was and remains the technical analysis of the currency market. The latter is based on the fact that the price in the future will repeat certain movements that have occurred in the past. Thus, technical analysis (TA) allows you to track price fluctuations, determining a possible price drop or increase. The maximum technical analysis is used on the stock and currency exchanges.
Currency Market Technical Analysis Tools
Analyzing the market, the trader builds his analysis on the basis of the so-called “Charts” are time series of prices. In addition, other statistics are used, for example, trading volumes. For this, a special program is needed on Forex; on the stock market, trading volumes are visible in the so-called. “A glass of price”.
In the technical analysis of the foreign exchange market, only the fact that quotes (prices) move up or down is considered. In this case, the reason for this movement is not taken into account. Having correctly and timely recognized the trend (trend), the trader determines his position in the market and makes a profit (profit).
By analyzing the information obtained as a result of TA, the trader is provided with a variety of tools for making forecasts. Most often, traders use technical indicators, Japanese candlestick combinations, TA figures, trading robots (advisors) and PriceAction patterns. Often 2 or 3 of these tools are combined, which greatly increases the effectiveness of forecasts.
Axioms of technical analysis
Price takes everything into account.
This postulate implies that the market price that we see in the terminal was formed just like that because of all the factors known and unknown to us. In other words, the meaning of the price and its behavior in the past are all that a trader needs to analyze. This is the convenience of TA - it does not require a study of all the external factors that affect Forex. A trader can quickly analyze the situation and make a forecast.
The price movement follows trends.
The point is that price movement is not an accidental event, it has some tendencies. So, you can decompose the time series into separate intervals, during which the price change occurs in one direction. This explains the smooth wave-like shape of price charts, which consist of peaks and dips (highs and lows). There are 3 main trends: an upward trend (trend) when the quote is growing, a downward (quote is falling) and side (flat) when the price fluctuates in a very small range.
History repeats itself.
The essence of the statement is that the repetitions take place due to the same reaction of the participants. It turns out that knowing the past, it is quite easy to make forecasts for the future. For the Forex exchange, this means that if you find similar price movements in the past, you can predict the future price movement. From here originate the figures of technical analysis of the foreign exchange market. The first figures are Japanese candles created by rice traders in Japan.
Methods of technical analysis of the foreign exchange market
There are 3 main methods of TA on Forex: graphical, mathematical and cyclic. Graphic refers to the oldest methods and is based on graphing. The latter allow you to visually assess the behavior of prices due to the formation of typical figures, which means that it is easy to determine the direction of price movement. There are patterns of the continuation of the trend (the price is moving in the same direction) and reversal patterns that signal a change in the current trend in the near future.
The graphical method is simple and quite convenient to use, although it does not have high accuracy.
The mathematical method of TA is more complex and time-consuming, using various mathematical formulas and calculations. Thanks to him, the trading terminal is building the so-called market indicators indicating oversold or overbought market. Conventionally, the mathematical method can be divided into 2 directions: trend (determining trends) and flat.
In the trending version, according to a certain formula, a middle line is built that intersects the entire chart. By determining a specific level of the time series of prices relative to a given line, the trader makes assumptions about further price movement. The flat analyzes the line showing the "refracting" proximity to price extremes.
The cyclic method uses the theory of cycles, which states that any change in price occurs cyclically by analogy with day and night. This method is often used in Forex trading robots.