Forex technical analysis - basics

Forex technical analysis is one of the three types of analysis with whose help traders forecast the market. The other two are Forex technical analysis and sentimental. A successful trader actively uses all three. 

Technical analysis studies how prices (currency rates) move in the market. Traders can use historical charts to investigate patterns, as well as indicators to predict future movements. This type of analysis consists in interpreting price charts: rate changes, transaction volumes, timeframe, etc.


Forex technical analysis1


How Forex technical analysis is done

A trader chooses a chart of a currency pair that he wants to analyze. With its help, he determines:

  • General price trends (rise or fall)

  • Long-term or short-term trends

  • The chart can be in the form of line charts, bar charts or Japanese candlestick charts. The latter is the most common variant. Candlesticks show:

  • Open price in the selected period (minute, half an hour, hour, etc.).

  • Closing price (minute, half-hour, hour, etc.)

  • Maximum price of the selected period

  • Minimum price.

According to the changes in these prices, trend lines are built, and also indicators are working.

The Trend is Your Friend

The popular expression "The Trend is Your Friend" suggests that it is vital for a trader to guess correctly in order to get profitable trades. For Forex trend analysis, you need to select about 100-200 candlesticks on the chart and see where prices are moving. 

If the trend goes up, this movement is confirmed by higher and higher highs and lows on the chart. The opposite is true, about the trend downwards. They end sooner or later and change into the opposite. Traders need to monitor the moments of this shift closely. 

Technical Analysis Tools

Technical Analysis Tools are indicators that help predict future price changes. Today there is a vast number of indicators for analyzing prices, trends, volumes and other market indicators. They can be divided into four main types:

  • Trend Following - they track the trend. Moving Averages, Ichimoku, ADX.

  • Oscillators - show when the price (most likely) will change direction. RSI, MACD

  • Volatility is how great the course differentials are. Bollinger Bands, ATR Indicator.

  • Support/Resistance - mark "barriers" in the movement of rates (the price never rises above or falls below). Pivot Points, Donchian Channels

Time Frame Forex technical analysis

What time on the chart will be best for trading? It depends on the chosen strategy and style of the trader. The timeframe is the period during which a candle is formed. 

  • For example, the trend chart for day trading will be from half an hour to 4 hours. 

  • For swing trading, it is better to take a timeframe of 1 day.

  • Position trading more often uses long-term charts: weeks and months.


Forex technical analysis2


Forex sentiment and fundamental analysis

Keep in mind other types of analysis for traders. Forex sentiment analysis shows how investors feel about the market or financial instruments. When they say that the market is bullish or bearish, it is in a sense related to sentiment. 

  • In the bear market, assets and prices are going down.

  • On the Bull's — turns up.

Traders will learn about the market sentiment using special indicators, watching the press and price charts.

Fundamental analysis takes into account the general state of the economy, bank interest rates, unemployment, government revenue, international trade, pandemic and so on. All these significant factors affect the behaviour of the currency one way or another. 

Forex in 2020 is the third-largest in the world. There is a place to turn forex analysis adepts!