The Forex technical analysis consists in projection of future trends based on past trends and patterns that have been showed in the market graphs.
A technical analyst will study the price and volume movements and from that data create charts (derived from the actions of the market players) to use as his primary tool. The technical analyst focuses on the activity of that instrument’s market.
Patterns and cycles
The technical analysts take for granted the two following points:
Technical analysis are used to identify patterns of the market behavior which have long been recognized as significant. For many given patterns there is a high probability that they will produce the expected results. Also there are recognized patterns which repeat themselves on a consistent basis.
Chart patterns have been recognized and categorized for over 100 years and the manner in which many patterns are repeated leads to the conclusion that History tends to repeats itself.
Important indicators for technical analysis:
Trend indicators are smoothing the price data out, so that a persistent up, down or sideways trend can be easily seen. (Examples: moving averages, trend lines)
Strength indicators describe the intensity of market opinion on a certain price by examining the market positions taken by various market participants. Volume or open interest are the basic ingredients of strength indicators.
"Volatility" refers to the magnitude of day-to-day price fluctuations, whatever their directional trend. Changes in volatility tend to anticipate changes in prices. (Example: Bollinger Bands)
Cycle indicators indicate repeating market patterns from recuring events such as seasons or elections. Cycle indicators determine the timing of a particular market pattern. (Example: Elliott Wave)
Support and resistance describes the price levels where markets repeatedly rise or fall and then reverse. This phenomenon is attributed to basic supply and demand. (Example: Trend Lines)
Momentum indicators determine the strength or weakness of a trend as it progresses over time. Momentum is highest when a trend starts and lowest when the trend changes.
When price and momentum diverge, it suggests weakness. If price extremes occurs with weak momentum, it signals an end of movement in that direction. If momentum is trending strongly and prices are flat, it signals a potential change in price direction. (Example: Stochastic, MACD, RSI)
Tools to analyze the trends
In order to help you analyse these indicators, you can set the following tools/indicators in your trading platform
- Indicators (Oscillators, eg: Relative Strength Index RSI)
- Number theory (Fibonacci numbers, Gann numbers)
- Waves (Elliott wave theory)
- Gaps (High-Low, Open-Closing)
- Trends (Following Moving Average)
- Chart formations (Triangles, Head & Shoulders, Channels)