The simplest and at the same time informative indicator is the moving average. The Scholastic and RSI oscillators, as shown in the diagram, give the difference between the prices of the current period and the given past. As a result, all the same, they are all connected by only one thing - the price, from the fluctuations of which they are calculated. The entire technical analysis of the foreign exchange market is set to study the price and its characteristic movements.
Actually, there is no technically price on the market as such. All actions and operations are performed in relation to currency pairs, that is, their mutual exchange rate. However, for ease of understanding, it is better to use the concept of “price” instead of the exchange rate.
Price fluctuations are usually limited by conditional levels of support and resistance. Support occurs in situations where buyers confidently and systematically enter the forex market at a certain price. Actually, one can imagine support as a “floor”, from which the price bounces as well as a ball thrown under your feet.
Resistance is formed through the efforts of sellers who enter at a certain price. Resistance determines the “ceiling” of price movement. So the price chart "bounces" from the ceiling-resistance. In a considerable part, the technical analysis of the forex market is based precisely on these two concepts.
Forex Technical Market Analysis - Relative Position
What is the importance of concepts such as resistance and support? Unlike other indicators, the readings of which must still be correctly interpreted, support and resistance accurately indicate the price levels at which large buyers and sellers put up their “defense”. In other words, these are the key levels at which the price will most likely bounce or a serious hitch in movement.
Technical analysis of the forex market helps many traders to efficiently carry out operations and make profits. At the same time, traders immediately close the order at the price level of interest and wait for the next convenient opportunity to enter. This applies for the most part to private participants in the forex market. In contrast, institutional traders open orders and close them only gradually, which is associated with the large size of transactions. If a one-time closing of a major transaction occurs, this can significantly affect the price and re-entry or continuation of tactics will become impossible.
That is why precisely such situations arise, as shown in Figure 2 below. The price reached the support level with partial fulfillment of the buy order and rebounded from it, but after a while returned to support again. Only from the second or third time usually the price confidently moves in the opposite direction or finally breaks the support level.
Carrying out a technical analysis of the foreign exchange market, it is necessary to identify such moments and profitably open and close orders.
The same applies to large sales in the forex market. In this case, the price reaches the resistance level and can several times return to it, bouncing slightly from it down and only after that confidently move to a new resistance level or return to the support level. It is on the correct identification of such situations that the technical analysis of the foreign exchange market is built.
Private traders can use these dependencies and rules to conduct profitable trading. It turns out that it is better to enter the long side at a time when large players are buying. Accordingly, it is logical to go short during major sales by institutional market participants.
Using technical analysis of the forex market, it is worth considering the area between resistance and support. Only in an ideal situation will prices return exactly or bounce off certain prices and levels. In real market conditions, this does not happen.
The price may or may not reach the designated resistance or support line. This imposes some restrictions on the trader. After all, you must independently determine the acceptable risk ranges. Support and resistance levels in this case are not represented by a clear price and line on the chart, but by a certain area with indents from the support or resistance price by a certain amount. The described situation is shown in the diagram below.
Simply put, when placing orders and closing them, focusing on the support and resistance levels indicated by the technical analysis of the foreign exchange market, there is no need to wait for a clear convergence of the price and level, but to perform the necessary actions at price approaches to the established levels.
Forex Technical Analysis - When Support Becomes Resistance
As much as this would not be desirable, the price does not always stay strictly between the levels of resistance and support. And yet, more often than not, levels are just areas in which price behaves quite predictably, and after that it continues to move depending on the mood of the bulk of market participants.
An important stage that examines the technical analysis of the forex market is breaking through support and resistance. Those moments when the price continues its initial movement after short stops at the level.
There are situations when the price runs into a proven and strong enough support level and bounces from it repeatedly. In this case, a technical analysis of the foreign exchange market indicates a serious and multi-stage work of large institutional traders. And at the same time, either due to the strengthening of the position of buyers, or because of a decrease in the activity of traders, the price skips over the level of support. At this point, most traders can trigger stop loss orders located close to and below the support line. In this situation, the price can confidently break the support line at the close of a large volume of orders, the same level will not return to the price, which has moved from support to the state of resistance due to those traders who did not fall under the wave of stop loss closures and are currently "under water".
It is important to determine such moments of breaking through support and resistance and not allow the loss of your funds. Technical analysis of the forex market can help with this by working out similar situations in the past, where these levels have already shown their strength and, accordingly, you can roughly estimate the duration of their development by price.
Forex Technical Analysis - The Pleasure Principle
Gustav Feschner introduced the psychoanalytic term “pleasure principle”. It defines a person’s constant desire to enjoy and avoid pain. This principle can be fully applied at the time when the technical analysis of the forex market is carried out. Not naturally to the chart, but to the behavior of traders participating in the market. In fact, there is no doubt that each trader is also involved in his emotions, because he is a person with all his problems and achievements enters the market and operates with orders.
So, it’s worth thinking about what emotions are trapped by those traders whose orders do not close with stop loss after breaking through the support level. First of all, it is anxiety and possibly fear at one’s own expense. Under the power of these feelings and without the use of iron rules of money management, such traders will wait for the price to return and will not close orders to minimize losses.
If the price nevertheless returned to the level, then these traders close their deals with minimal losses and receive significant relief. And from closed deals, the price again rushes towards the breakdown. So the support level becomes resistance, and the price moves into a new area and consolidates in it (see the figure below). As a technical analysis of the foreign exchange market shows, such situations are quite common, however, relying on the fact that the price will return to the previous level is quite risky.
It is also possible that the price confidently overcomes the support level and rushes in the direction of breakdown. In this case, transactions closed by stop loss or due to the inability of the trader to ensure their losses, leads to a sharp drop in prices. It is important to understand this feature of the market and take into account the psychological component when conducting a technical analysis of the forex market.
All the same thing happens with the resistance line. In this case, the resistance becomes support, and the price rebound after the breakdown is held up, as shown in the diagram below.
It is important to strictly adhere to your own rules, which will include the mandatory installation of stop losses for each transaction. After all, without this, you can often fall into similar situations and quickly lose all your money.
Forex Technical Market Analysis - Price Behavior
For traders, it is important not only to find out whether the price will break the line of support or resistance, but also to correctly evaluate, by conducting a technical analysis of the currency market, the possibility of price, its behavior when approaching the level and its breakdown. That is, it is important to find out how serious and strong this or that line of support and resistance is.
As an example, shown in the diagram below, there is a situation where the price approaches the resistance line rather sharply, but the first time it cannot overcome it, even slightly, and bounces. However, most likely, due to the presence of sufficiently active sellers, the price, although not overcoming obstacles, begins to fluctuate in the resistance area for a long time. In this case, a technical analysis of the foreign exchange market shows that although sellers are active, their efforts are not enough to confidently overcome the level.
In another situation, the price may not even reach the level of resistance or support and stay vaguely between them. This is possible with equal activity of bulls and bears among large traders at the moment. In such a situation, a technical analysis of the forex market determines the minimum opportunities for a profitable entry into the market, and, most likely, it is necessary to wait for a more suitable moment.
It is important not to rush into a deal when approaching the levels of resistance and support, if there is no precise confidence in the nature of the price behavior. After all, you can not calculate and get into a situation directly opposite to what the trader had expected at the beginning, and fail in the form of closing a stop loss order with minimal losses. In addition to reviewing past periods of time, technical analysis of the foreign exchange market also includes monitoring the current situation for a more accurate result.
Technical analysis of the foreign exchange market - entry after testing
A fairly common mistake among novice traders is an attempt to place an entry or close order directly on a support or resistance line. After that, they expect verification at the price of this level. This is somewhat reckless and incorrect in relation to what the technical analysis of the forex market says.
It’s best not to make such a mistake and act more deliberately. If you have doubts about the strength of support or resistance, and the price has already approached the level and is testing it, you should set an entry order slightly higher than the support level or lower than resistance, respectively.
It turns out that the entry order will only work if the price has already precisely bounced off the level, and there are great chances to earn on a long rate. Otherwise, if the price nevertheless breaks through the support / resistance level, then a stop loss will work, and losses will be minimal.
Of course, a trader limits his potential income somewhat by opening an order not at the level of support or resistance, but higher or lower, respectively. However, this is a fairly low price, given the fact that the risks are significantly reduced, which reduces the need to use a technical analysis of the foreign exchange market.
Technical analysis is much more than just shapes
Trading considers various approaches to technical analysis, each of which has its own forecasting technique.
Basic types of technical analysis:
- determination of trends, price channels,
- Highlighting levels
- the use of corrections and Fibonacci extensions,
- Elliott Wave Theory,
- Gann Square levels.
Advanced types of technical analysis:
- correlation (for arbitrage trading),
- volume research (vertical and horizontal),
- analysis of the stock glass and transaction tape,
- study of optional levels,
- analysis of time series models.
A feature of TA is its applicability to any market assets. Forex, cryptocurrencies, stock indexes, traders study using similar methods. Trading strategies may vary (the choice depends on the nature of the asset), but TA tools, whether it is Forex indicators or Japanese candlesticks, remain unchanged.
The Forex market is characterized by high volatility and increased sensitivity to external events - currencies actively respond to news.
Technalization MethodsFor Forex:
- following trends, working out channels.
- analysis of optional levels.
A popular Forex trading platform has become MetaTrader, which presents a wide range of technical tools.
Bitcoin or other cryptocurrencies
Cryptocurrency exchanges provide the opportunity to make transactions between participants directly, without a broker. The crypto assets market is characterized by impulsivity and long-term trends.
Techniques for cryptocurrency technical analysis:
- trend trading
- analysis using indicators.
- analysis of the stock glass and the tape transactions.
The advantage of trading on cryptocurrency exchanges: access to a glass of quotes, additional opportunities appear, for example, tracking large orders in a glass. Many exchanges (in particular, BitMEX) offer leverage, trading becomes similar in dynamics to Forex trading.
Futures is a derivative financial instrument that is associated with the underlying asset.
Futures may be:
- for shares, indices (for example, for Sberbank shares or for the S & P500 index),
- raw materials (for oil, gold),
- marketable (for coffee, beef, orange juice),
- currency (for example, a pair of USD / RUB, Si).
A feature of futures is the limited validity of contracts. After the expiration of the transaction, the transactions are automatically closed with conversion to the main currency (the process is called expiration). During the action on any instrument, you can conduct an unlimited number of transactions - both for purchase and for sale. Externally, trade is similar to margin (with leverage), assets are highly dynamic and are related to instruments with increased risk.
On the derivatives market, exchanges offer ETFs (Exchange-traded Funds, exchange-traded investment funds), which have underlying assets similar to futures, but unlimited.
Methods of technical analysis of the derivatives market:
- following trends
- development of price channels,
- level research
- volume accounting
- analysis of the stock market and transaction tape.
Derivatives, as a rule, are characterized by a low commission, which attracts speculators (short-term traders).
Fundamentals of Technical Analysis
The three main tenets of TA are:
- everything is in the price
- prices are prone to trending,
- the story repeats itself.
The essence of TA is to forecast the price movement based on past (historical) data.
What kind of technical analysis is suitable for beginners
The first thing you need to learn for beginners is to learn to read the chart. The novice trader should understand:
- in charting methods (line, candles, bars),
- time frames (m1, m5, H1, H4, D1, W1, M1),
- in the basics of building bars (opening, closing, low and high prices),
- in trend determination methods,
- in the features of determining support zones and resistance levels.
A suitable method is graphical analysis.
Graphical analysis (GA) is a type of TA, which consists in a visual comparison of price movements with basic graphic patterns.
- continuation of the trend,
The trader, determining the pattern on the chart, receives a forecast of future movement.
- head and shoulders,
- double-headed peak
- V-shaped top
- saucer (flat bottom).
The trader defines the figures in a visual way - the time frame does not matter.
Head and shoulders
The most popular figure among beginners. In addition to the sonorous name (Head & Sholders), the head and shoulders figure has a high probability of execution and is well recognized on Forex charts and other markets.
- left shoulder
- right shoulder
- neck line
- return impulse to the neckline.
The interpretation of the model is as follows. Suppose a steady upward trend has formed on the chart (repeated impulses of left shoulder dimension). Кульминацией движения может быть импульс большего размера (голова), подтверждение разворота — слабость быков, выраженная в меньшем импульсе правого плеча и формировании нового движения с пробоем линии шеи.
Дополнительным подтверждением изменения тренда и точкой наилучшего входа будут возврат к линии шеи и обратное тестирование. The expected movement is down, from the neck line to the size of the head, stop loss - the maximum price at the top of the pattern.
Flag Shape - Price Consolidation
A flag (or an inclined rectangle) is one of the obvious figures for the continuation of the trend.
- flag base
- flag canvas (price consolidation).
In the formation of directional movement with pulses of dimension of the base of the flag, the trend will continue with the exit from the consolidation. The potential for future movement is the size of the base, stop loss - at the level of the apex of the base.
What else to read on this topic
The GA is detailed in John Murphy's book, Technical Analysis of the Futures Markets: Theory and Practice. The author in a simple accessible language sets out the basics of technical analysis, gives examples, considers trading strategies.
Other useful sources:
- D. Schwager “Technical analysis. Full course. "
- T. Demark "Technical analysis - a new science."
- M. Kahn “Technical Analysis. Simple and clear. ”
- S. B. Akelis “Technical analysis from A to Z”.
Particularly noteworthy are the works of B. Williams, “Trading Chaos” and “New Dimensions in Exchange Trading,” but the texts are designed for trained traders.
Tips for beginners
Four important rules for beginners:
- trade with the trend
- don't forget to put your feet
- do not open additional volumes,
- weigh risks.
The last rule is the most important. With a leverage in their arsenal, newcomers often abuse margin trading opportunities. A simple trading system should be developed with risk management that limits the risk of the transaction (for example, 1%) and the maximum daily loss (for example, 5%).
History of occurrence
Technical analysis originated in Japan as early as the 16th century. Munehisa Homa, a representative of the oldest Japanese dynasty of merchants, is considered to be its ancestor. Then in Japan, rice was the main commodity traded on the exchange. Munehisa so carefully approached the issue of trade that he studied the entire dynamics of price changes over the past hundred years. As a result, he deduced certain patterns of price behavior under certain conditions. Based on his research, a trading system was developed that brought him fabulous profits and helped to become the richest person in Japan in the shortest time. Having appreciated his merits, the emperor awarded him the title of samurai and appointed him his personal financial adviser.
His method of trading and market analysis became widespread after the publication of a book in the 1760s, which laid the foundation for the candlestick method, which has been successfully applied not only in Japan, but throughout the world. In Europe, they learned about Japanese candles only at the end of the 19th century.
Charles Dow, one of the founder of the popular Dow Jones indexes, who at that time was the editor-in-chief of Wall Street Jornal magazine, is considered to be the founder of classical technical analysis in the West. In 1890, the journal published a series of articles on the possible prediction of price behavior based on certain laws. The Dow described the principles on the basis of which it was possible to enter into a transaction for a sale or purchase with a reduced risk.
It is noteworthy that the Dow theory gained wide popularity only after his death.
The beginning of the heyday of technical analysis is considered to be the end of the 70s of the last century, with the advent of computer technology, when the analysis of graphs and their construction was simplified.
If earlier, players using TAs had to draw graphs and carry out calculations manually on a piece of paper, then using the capabilities of computer technology made this work as easy as possible. It was this simplicity of analysis that gave impetus to the development of the masses. As a result, almost any trader, having studied the basics of TA in just a few days, could be considered a specialist in those. analyze and hypothesize about future price behavior in the future.
Laws or postulates of technical analysis
The technical analysis is based on 3 main rules:
1. The market takes into account everything
It is based on the principle that all events (economic, political, psychological) are already taken into account in price. It doesn’t matter for what reasons the growth is going on, the main thing is that these reasons push the price up and that means you need to take the side of the majority and not go against the market.
2. History repeats itself
Based on ordinary psychology and mass behavior of people in certain situations. Knowing how people reacted in the past when a particular market model arose, we can more likely assume that in the future they will behave similarly in the same situation.
3. Price movements are prone to trends.
When the direction is moving prices in one direction, it is logical to go along with it. When demand exceeds supply, there is an upward trend (uptrend), otherwise there will be a downward trend (downtrend). Based on this postulate, two consequences follow:
- A trend, at each of its points, is more likely to continue than to reverse its direction.
- Trends are not endless and end sooner or later
Therefore, one of the main objectives of TA is to determine the beginning of the origin and end of a trend.
What studies technical analysis
At the heart of those. The analysis contains several sections or tools, the study of which enables the trader to make assumptions about further price behavior.
- Types of graphs or how to display them. The most widespread are 3 types: linear, bars and Japanese candles
- The basic concepts without which the study of technical analysis does not make sense. This is the concept of trend, flat, support and resistance lines, channels, levels.
- Patterns or models are typical combinations that are formed on the price chart. Distinguish between trend continuation models and reversal trend models.
- Japanese candles - based on a set of several candles, sometimes even just one, certain assumptions are formed about the further development of events.
- Technical indicators and oscillators. Derivatives are formed from the price, time and trading volumes (both collectively and separately) and are displayed in the form of graphs that are either superimposed on the price chart or used separately as additional information.
- Trading strategies using the above tools to determine favorable situations for entering and exiting a transaction in order to increase profits.
- Risk management system. And although this item is not included in the study of technical analysis, it is the most important. Properly selected money management can bring virtually any trading system into profit and vice versa, a misunderstanding of risk management kills even the most effective trading strategy.
Example TA on the exchange
Over the past years, Gazprom shares have been traded on the channel. The upper limit is 148-150 rubles, the lower 125-130 rubles, which act as strong levels of support and resistance. Of course, sometimes prices tried to break through the channel, but came back.
Buying prices from the lower bar and selling from the upper bar, the trader could easily make money on these predictable movements. The width of the channel is even a minimum of 18-20 rubles. This is approximately 12-14%. Over the past year, it was possible to make about 5-6 such transactions that would bring profits in the amount of 60-80% yield.
Why is TA so popular among traders?
A number of reasons contribute to this:
- Quick study. In contrast to the fundamental analysis, the study of which requires a lot of time, the development of TA will take only a few days. The basics can generally be learned in a few hours.
- Quick result. Transactions based on fundamental indicators are usually very lengthy. A position can be held for several months, years, and sometimes even decades. Using only the technical aspects of the analysis, you can achieve visible results in just a few days or even hours. There are even special trading strategies designed to complete many transactions in one day.
- There is no need to thoroughly study the traded instrument. It is enough to analyze just about ANY chart in just a few minutes to make an assumption about the further price movement.
- TA is applicable and works absolutely on any timeframes: monthly, daily, hourly and even minute (by the way, the smaller the timeframe, the more different “market noise” there, so the analysis efficiency decreases over short periods).
- The massive use of automated trading algorithms or simple trading robots, which in most cases trade precisely using knowledge from technical analysis.
- Massive information almost everywhere about the opportunity to replay the market many times using methods of technical analysis. Moreover, they are advised to make transactions as often as possible. What can I say? As they say: “Look for whom it is profitable!”. And it is profitable just to brokers and trading exchanges that get their little penny from each trader's transaction. Therefore, the more transactions, the more profit. No Buy and Hold! Strategies. Only active trading. Here are the newcomers and are underway, in the hope of a quick enrichment.
Why those. analysis works
The effectiveness of technical analysis is explained quite simply. A huge number of traders all over the world using technical analysis in their trading see the same charts, models, figures, using the same indicators and oscillators. And as soon as a signal appears that the TA interprets as a buy signal, the majority starts buying. As a result, the price starts to go up. If for those. analysis needs to sell, then many start selling, which pushes the price to the bottom. And the stronger the signal, the more players enter the game.
In the world there are several hundred (if not thousands) of various indicators, on the basis of which, we can infer an assumption about further price movements. And the more people use this or that indicator, the more effective it is. Therefore, over time, the number of traders is spread over these indicators, which ultimately reduces the effectiveness of each.
Therefore, the most effective are considered the simplest (but strong) models and only a few basic indicators that are used by most players in the market. The explanation is also quite simple. Most traders learn only the basics of those. analysis, which is enough for them to trade.
Technical analysis, akin to statistics and opinion polls. Its main purpose is to reveal the mood of the crowd or the balance of forces and take the side of the majority. In bullish moods, get into a purchase, in a bearish mood - in a sale. And as soon as the balance of power begins to change, exit the deal.
The maximum trading efficiency is achieved by combining two methods of analysis: technical and fundamental. With fundamental, stocks are selected that have high growth potential and are currently undervalued by the market for one reason or another. Technically, you need to look for the right entry point to the transaction, using the maximum opportunity to buy these shares at an adequate price, at the time of their growth.
Updates in this and other articles can now be monitored on the Telegram channel: @vsedengy.
Trends are confirmed by volumes
If growing movements in the market are supported by growth in volumes, and bearish movements are supported by lower volumes, then the price is likely to rise. If growing movements in the market are accompanied by a decrease in volume, and lows - accompanied by growth, then the price is likely to decline. Those. trading volume should increase in the direction of the trend.
Assets move in concert
Track correlations of various tools. Take into account the fact that correlations change over time. Accordingly, when making an investment decision, you need to familiarize yourself with the situation in other sectors of the market.
A modern form of technical analysis appeared with the development of computer technology in the 1990s. Modern traders were given the opportunity in a split second to make the calculations that their predecessors took days and weeks, because the charts had to be drawn on their own.
Technical Analysis for Beginner Traders
In technical analysis, there are three different types of charts: a linear, bar or candlestick chart. The most popular and informative today is considered to be the candlestick chart. You can get acquainted with the basics of candlestick analysis by reading this article.
For technical analysis, you can use computer indicators - they allow you to quickly and easily get acquainted with the current statistics of price movements, discarding unnecessary noise.
Other traders do not use indicators, since they believe that they only complicate the analysis. Such analysts look only at the price, evaluate the patterns and formations that formed on the chart. You can read more about these technical analysis methods here.
The logic of technical analysis this: every Japanese candlestick (bar, dot) on the chart is an expression of the views of millions of traders. That is exactly what the balance of supply and demand looks like at the moment. Market participants “vote” for the further direction of the price movement, opening a deal in their trading terminal. They buy if they believe in rising prices, and sell if they expect prices to fall. If market participants are not sure - they do not make transactions and the price is without movement in the lateral range.
Thus, the technical analyst is not trying to figure out the reasons for the price movement - he leaves these thoughts to the “crowd”. It is important for him, looking at the chart, to assess the mood of the market, to analyze the cardiogram of the behavior of the players. To do this, just look at how quotes and trading volumes change.
Why do technical analysts so easily trust other traders, you ask?
The answer lies in the human psychology. The fact is that, put in the same circumstances, people tend to make the same decisions. This can be called stereotyped, stereotyped thinking. Technical analysts are aware of these stereotypes and, on their basis, are trying to predict where the price will go today.
Does technical analysis work?
No one can predict the movement with 100% probability. This is a scientific fact. However, technical analysis is a very useful tool in order to “read” the chart and select the points of opening and closing positions. It will really increase your chances of concluding an effective transaction in the market.
Today, there are many diverse trading systems roaming the Internet, promising millions of earnings in the financial markets based on technical analysis signals (“one moving average crossed the other from top to bottom - tomorrow there will be growth”).
We do not share the optimism of the authors and buyers of such courses. Such a simplified presentation creates an illusion of omniscience for novice traders, a false confidence that quickly and successfully translates into a loss of deposit for the trader and stable earnings for such “teachers”. From here we see crowds of failed traders screaming at every corner that financial markets are a scam.
With illiterate use, technical analysis will bring you something like this:
Knowledge of the basics of technical analysis is a necessary component of exchange literacy, but this, of course, is not a grail. Financial markets are a multi-factorial, complex and interesting model that needs to be observed in a complex, taking into account fundamental factors as well. The more your experience in the market, the more books you read and crises experienced - the more effective the methods of technical analysis will work for you.