What is Forex Technical Analysis? Technical trading sounds very technical. But in fact it is incredibly dynamic, because it is based on human psychology. It’s all about market sentiment.
18. in the middle of the XIX century, a Japanese trader named Munehisa Homma invented technical analysis for trading rice futures. His book “The Golden Fountain“ developed a trading method based on market psychology – ”when everyone is waiting for the market to fall, this is the time to go away and wait for prices to rise,” he wrote.
His work led Wall Street to the 20th largest investment in stock exchanges in the United States. it formed the basis of the techniques developed by stock market investors at the turn of the century.
since the beginning of the floating exchange rate era in the early 1970s, Forex investors have widely adopted this approach in trading. As experts at the Federal Reserve note, currency pair trends are more solid than stocks, which is why technical analysis is so widely used by forex traders all over the world.
What is Forex Technical Analysis? Start With the Graph
Currency trading means reading graphs of past price movements to detect future trends.
The main conditions of currency trading are “support” and “resistance”. You see that the EUR / USD currency pair has fallen at a certain price. Let’s say 1 dollar, that is, one euro is equal to one dollar. Every 15 minutes, the price goes up to $ 1.10, $ 1.09, $ 1.15 in the last two hours, but it goes down to $ 1 every time.
it is clear that 1 dollar is the point of the support base, that is, the price keeps it at this level. A forex investor who sees this may think that the price will not fall below the $1 level, but will probably rise and stay at parity for a long time.
But how to determine the future trend for sure. Well, you can’t, but you can measure the increased probability by finding certain patterns on the charts that often cause a particular trend. Here are some examples.
The Importance of Pip Value in Graphs
A pip works like this; candles that show a price drop are red, candles that show price increases are green (sometimes blue). yesil So, in a red candle, the open price is at the top, the closing price is at the bottom, and in a green candle it is at the top. yesilmaz If there is a wick, it shows the highest price in a five-minute period (it may be higher than the opening price), and if there is a wick at the bottom, it shows the lowest price in the period.
Below the graph are time indicators. at 07:00 there is an inverted triangle formation that shows strong resistance; and therefore probably a lower movement. In fact, the three-bar inversion that follows indicates a reversal, although it is weak. Nevertheless, the trend is descending to the support base before returning again.
Some forex technical analysis guides will give you a long list of chart patterns that provide trend indicators. Although it is useful to be familiar with them, it is more important to determine the trend; models do not always do what you expect, but a solid trend indicator derived from a number of factors has a strong probability of meeting expectations.
Combining this type of chart reading with a stochastic indicator such as RSA will help you increase your confidence in a technical trend. Although there are sadists who avoid everything except the lines on the chart, we strongly recommend using the two tools together.
Longer-Term Chart Patterns
As you become more experienced in reading charts, you will be able to apply longer-term chart patterns. The king of them is Fibonacci Retracement; a model created with long-term application.
The way it works is as follows; taking two or three dots on a graph and the distance between them are detected Fibonacci the Fibonacci ratios by dividing the withdrawal; start with zero to withdraw, and then click apply to three points in the Fibonacci number series. Fortunately, forex trading platforms will have an application that shows this for you. After the levels are determined, horizontal lines (so-called trend lines) are drawn and used to determine possible levels of support and resistance. Takes some getting used to; But you will soon identify this pattern, which some investors actually follow for days and weeks at a time.
There are trading strategies that are adopted by some and find very long-term models on the charts. The Elliot Wave approach is a good example, but there are also several others. Supporters swear by them, others say that this is nonsense, and there is solid research that supports both points of view.
Experience is the best way to detect patterns and choose forex trading strategies. Experiment with different approaches when trading and keep a detailed record of how they work for you using your trading diary.
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