Technical analysis is the most popular method of forecasting in the Forex. It is the study of graphs generated in the terminal. Thanks to this type of analysis, even people without an economic education and analytical skills, necessary to conduct fundamental analysis, can trade in Forex.
The technical analysis principles
Technical analysis is based on three principles:
- Price discounts everything. The proponents of technical analysis claim that using this kind of forecasting, it’s not necessary to pay attention to fundamental factors, as they are already included in the price. Any significant event immediately reflected in the prices’ behavior, and it is immediately obvious on the chart. Why look for reasons for price changes, if they are already taken into account. It is more important to follow the trend for getting a profit.
- Price doesn’t move randomly, but in the trend directions. The market always moves in a certain direction, because it is subject to the laws of psychology. If you see that the price has chosen a direction, you follow it, driven by greed. So, the majority of market participants does the same. Thus, you support the current prices direction, not allowing it to move erratically.
- History repeats itself. The work of all technical analysis charts is based on this principle. If a series of some events led to a particular result in the past, the probability, that this situation will be repeated in the future, quite large. Exploring graphs of technical analysis, it is possible to notice some regularities. This allows to predict further developments, and to capitalize on this.
Summing up the above, we can conclude that the main principle of technical analysis is that a person can look at historical price movements to determine current trading conditions and potential price movement.
Charts of technical analysis
Charts are the primary tools of technical analysis. They are three types of they:
- Line graphs
- Bar charts
- Japanese candles
Line chart is the simplest form of analysis, which is mainly used in short-term trade. They are represented by points that are connected by a line. Each point represents the closing price. The price movements forecast with the help of these charts is a following after the trend and finding specific figures (head and shoulders, double bottom, ascending triangle, rectangle, etc.). Each of the figures reflects certain historical patterns, and signals about further price movement.
The bar chart provides more information. Each bar represents the open, close prices, and maximum and minimum prices over a certain period.
Japanese candles chart
Japanese candles chart is the most informative type of analysis. It reflects the same metrics as bar chart, but it is more easy. The candles on the chart are painted in two different colors. Usually it is black and white or green and red version. Black (red) candles are bearish, it’s means that in this period bears were stronger. White or green candles are bullish. The candles’ size and their shadows length are also important. By analyzing traders pay attention to the combinations of candles. For example, if three long candles of the same color are in a row, we can expect a trend reversal soon.
At first glance, the technical analysis seems difficult. However, if you spend some time learning and training on demo account, it is possible to achieve very good results in trading.