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Technical Analysis.
Technical Analysis.
Technical analysis is a generally accepted method of studying the market, aimed at predicting the movement of trading instruments since the market has a reproducible memory since the patterns of market behavior in the past affect the future direction of the course. All traders treat this analysis method seriously, and it serves as a guideline for making deals.
price trends
chart patterns
volume and momentum indicators
oscillators
moving averages
support and resistance levels
Basic Technical Analysis Tools.
Trend.
Charles Dow suggested the universal approach to determining the current trend. Price change (exchange rate) does not occur straightforwardly and is a wave-like movement with the formation of local maximum (peaks) and local minimum (depressions). The dominant trend is determined by the strength and duration of ups and downs and the relative position of peaks and bottoms within a given period (timeframe).
An uptrend or Bullish Trend is characterized by price growth being more robust and longer than the fall. In the oscillatory movement of the market, each subsequent peak is higher than the previous one, and each subsequent depression is higher than the previous one.
A downtrend or Bearish Trend is characterized by the price drop being more robust and longer than the increase. In the wave-like movement of the market, each subsequent depression of price is lower than the previous one, and each next peak is lower than the previous one.
Sideways, Flat market, Trendless Range – characterized by the absence of a pronounced upward or downward trend and price changes in the horizontal range. Talking about a trendless market or consolidation would be correct in these cases.
The concept of trend makes sense only for a specific period, and at the same time, opposite patterns may develop on different timeframes. It is advisable to identify trends embedded in each other of different durations sequentially: long-term (months), medium-term (weeks), and short-term (days, hours).
Price Patterns.
A figure, the pattern is a visually different configuration (formation) on the price chart, which frequently may appear due to the typical template behavior of market participants in similar conditions.
Head and shoulders – a technical analysis figure formed after an extended uptrend indicates a possible trend reversal. The model consists of three peaks: the middle one rises above the side ones. In an ideal figure, the shoulders are on the same level and symmetrical.
Inverted Head and shoulders – is a technical analysis figure that forms after an extended downtrend and indicates a possible trend reversal. The model consists of three depressions: the average is lower than the laterals. A higher second shoulder increases the likelihood of a fracture of the trend. Some more complex models have two heads or double shoulders.
Double top – is a technical analysis figure that forms after a long uptrend and indicates a possible trend reversal. The model consists of two consecutive vertices and resembles the letter M. On a growing trend, the price sets a new maximum, and on the subsequent growth after correction, it cannot exceed the previous vertex and falls, possibly with acceleration and gaps.
Double bottom – is a technical analysis figure formed after a long downtrend and indicates a possible trend reversal. The model consists of two consecutive depressions and resembles the letter W. On a falling trend, the price sets a new low, and on the subsequent decline after correction, it cannot overcome the previous depression and begins to grow, possibly with acceleration and gaps.
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Support and Resistence.
The resistance and support lines are the foundation of the classic trend analysis. Over practice, all trend lines, models, and figures are just combinations of resistance and support lines. The occurrence of these lines has the following logical explanation:
The resistance line connects significant highs (peaks) of the market. It occurs at a time when the bulls (buyers) are either no longer able or do not want to buy this product at higher prices. Simultaneously with each upward movement of the price, the resistance of sellers (bears) and sales positions increase, which also puts downward pressure on the price. The upward trend stops at a certain price level and bounces off. The price will likely break through the previously established resistance level if the bulls gather their strength or the bears weaken their grip. Otherwise, the reverse price movement is inevitable.
A support line connects significant market lows, and the emergence and existence of support lines are the opposite of resistance lines. Here the “bulls” change places with the “bears.” Sellers are active players in the market who push the price down, while buyers are the defending side. The more active sellers and passive buyers are, the higher the likelihood that the support level will be broken and the price will go further down.
Suppose both the resistance and support lines are strong and hold long enough. In that case, various images and associations arise depending on their combination, which gives the name to trending models and figures.
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Fibonacci Levels.
Fibonacci numbers are often used in technical analysis, physics, astronomy, and other disciplines. The technical analysis usually uses 0.618 or 61.8%, 0.382 or 38.2%, and the psychological middle of 50%. Fibonacci lines are built relative to significant highs/lows and represent support or resistance lines, from which traders make deals to buy or sell. These levels are also used to predict correction. If the correction begins, the rollback may be a third of the trend or half of it, and the maximum size – is up to 61.8%. If the price rolls back by more than 60% – this is not just a correction but a reversal of movement in the other direction.
There are several rules for constructing Fibo correction levels. Levels are located between two key points, and the previous trend is used to build them. Thus, if the trend is going up, we will stretch the Fibo levels per the last downward movement from beginning to end and vice versa. We always work from the past to the future.
Technical Indicators.
Oscillators.
Relative Strength Index (RSI)
This indicator refers to the number of oscillators. It performs better when reaching extreme areas, marked by two levels of 30 and 70. A zone above 70 is an overbought area, and below 30 is an oversold level. The presence of the indicator line in the region above 70 indicates a potential decline in market prices; below 30 means that prices are pretty low, and you should expect the start of purchases. A price that stays outside these levels has yet to be the basis for entering the market since the state of an overbought or oversold asset may persist for a relatively long period. The RSI oscillator states these states but does not report when precisely the trend change will occur. Therefore, a more rational moment for entering the market is the intersection of the oscillator curve of one of these lines.
Stochastic Oscillator
A stochastic oscillator is an indicator of the rate of change of momentum of a price. Stochastic estimates market speed by determining the relative position of closing prices in the range between the high and the low for a certain number of days. The simplest oscillator takes the current price and subtracts the cost from a few days ago. Suppose trading on the EURUSD pair closed today at 1.2050 and ten days ago – at 1.2000. In this case, the value of the oscillator would be 0.0050. For example, a 14-day stochastic indicator measures the position of closing prices within the entire range between the maximum and minimum for the previous 14 days. Stochastic expresses the relationship between the closing price and the high-low range as a percentage from zero to 100. A stochastic oscillator of 70 or higher indicates that the closing price is near the upper limit of the field; stochastics of 30 or lower mean that the closing price is near the lower end of the range. Thus, if the market closes at its maximum every day, then you can only see the indicator at 100% on stochastics. The main idea is that if the market tends to close at the top of the daily range, it is bullish; if at the bottom, it is bearish.
Trend.
Moving Average Convergence Divergence (MACD)​
The MACD indicator combines three moving averages, and only two will be seen. One, faster (reflects a short-term trend), is called the “MACD line,” and the other, slower (reflects a long-term trend), is called the “MACD signal line.” The logic behind MACD is that it recognizes the difference between two moving – fast and slow. A fast-moving average is a characteristic of a short-term trend, while a slow-moving average is a characteristic of a longer-term trend. The more these MAs diverge, the farther up or down the indicator's histogram, and the more pronounced the bullish or bearish tendency is. The reason for such a high assessment of this technical tool is that combining an oscillator's properties with a trend indicator's capabilities can give a practicing trader much helpful information for making trading decisions.
Bollinger Bands​
Bollinger Bands indicator is one of the most critical indicators for professional traders today. Currently, this algorithm is represented in the set of technical analysis tools and included in almost every trading terminal. It also often becomes the basis for new developments, acting as a basic algorithm. Initially, Bollinger Bands are positioned as a trend indicator, but many regard it as an indicator of volatility. Bollinger Bands are three bands, the middle of which is the standard moving average. The primary Bollinger function is to find and identify a currency pair's sudden price deviations from the current trend's average rate. It’s sometimes complicated to find the ideal conditions for the transaction, but Bollinger lines help find valuable hints of the trend changes and increases in volatility. Therefore, using indicators in practice allows traders to trade successfully under any circumstances, even when false signals appear.
Trend.
Momentum​
One of the most straightforward and capable technical indicators is Momentum. Its primary purpose is determining the significance of price changes over a specified period. When used correctly, it can increase the profit from transactions several times. You must understand how it works and focus on details to minimize losses. In trading in currency pairs and stock assets, the Momentum indicator is helpful in all time frames but is most effective in long-term trading.
In some cases, it is allowed to use Momentum in transactions against the main trend movement in short-term trading. Using this indicator, the trader can get a clear idea of how strong the trend is during its analysis. At the same time, this tool can also be used as a trend indicator, displaying the current trend.
Parabolic SAR
Parabolic SAR belongs to the type of trend indicators and is currently one of the most popular methods for determining the trend and reversal in Forex trading. The main reason for creating the Parabolic SAR technical indicator is the analysis of trend markets. PSAR reflects on the price chart and looks like a moving average. The only difference of the Parabolic SAR is that it moves with high acceleration and can change its position relative to the price. If the price crosses the Parabolic SAR lines, the indicator reverses, and its following values appear on the other side of the quote. PSAR location change may signal the completion of a trend, transition to correction or flat, or market reversal. Long positions should close when the price falls below the line of the technical indicator, and short – when the price rises above the Parabolic SAR line. That is, you need to track the direction of the movement of the Parabolic SAR and keep open market positions only during this movement. Often this indicator is used as a trailing stop line.