Forex Analysis – Technical Analysis
This one of the Forex tutorials is directed to show the way the major part of Forex Analysis – Forex technical analysis is held like, what are the advantages and importance of performing it and make a trader be little more familiar to this type of Forex Analysis.
Two major parts of analyzing currency markets are technical analysis and fundamental analysis. The last one focuses on the economic and financial theories, developments of politics and determines the supply and demand forces. One really great and clear difference between Forex fundamental analysis and Forex technical analysis is that first mainly studies the causes of market movements, while the other one is concentrating on the effect of market movements.
Forex technical analysis uses volume data and prices of the past to forecast the future movements in price. Also Forex technical analysis focuses on the charts, their formula and formation to capture the trends, identify the opportunities of buying and selling and assessing the extent of turnarounds of the market. Depending on what time horizon the trader is going into, he can use Forex technical analysis either on the intraday (5 or 15 minute or hourly), weekly or monthly basis.
The theories FX technical analysis is based on, divide into the Dow Theory, Fibonacci Retracementand Elliott Low. Each one has the background and rules, which will be explained in the tutorial lower.
The Dow Theory
Dow Theory is known to be the oldest theory in the Forex technical analysis. It states that prices are used to fully reflect all existing information. Knowledge that’s available to participants has already discounted the price action. Forex analysis aims to the studying price action in order to make some conclusions on the future events. The Dow Theory was primarily developed to the averages of stock market, so it’s holding the prices that are progressed to wave patterns, that consist of magnitude divided into three types – primary, secondary, minor. The time involved is ranging from three weeks and less to more than a year. Also retracement patterns were identified (those patterns represent the levels defining the pare moving of the trend) as 66%, 50% and 33%.
Fibonacci Retracement Theory
Fibonacci retracement represents popular series of retracement that’s been based on mathematical calculated ratios, aroused from natural and human-created phenomena. It’s used for determination of the far that a price has backtracked or rebounded from the trend that’s underlying. Main retracement levels are 38.2%, 50% and 61.8%.
The Elliot Wave Theory
The last Forex technical analysis theory, Elliott Wave, classifies the movements of the price in waves that are able to indicate future reversals and targets. It’s the trend that moves the waves that are called impulse, and corrective waves are those that move against the trend. With this theory, they are additionally divided into five and three, primary and secondary movements. A wave cycle is completed from all the eight movements. And the time frames vary from 15 minutes to decade.
Figuring out the wave structure’s relativity is what lies in the challenging part of Elliott Wave Theory. For example corrective wave could be composed from corrective and sub impulsive waves. The key to this theory is to be able to identify the context of wave in questions. To predict the tops and bottoms of future waves people who use Elliott Wave Theory also use Fibonacci Retracements.
“The Trend is Your Friend”
is the most common motto that can be heard about Forex technical analysis. This is true, because finding the trend can help the trader to get the better visibility and becoming aware of the overall market direction. Visibility is really important when there are short-term movements that are able to clutter the whole picture of trend. For working with longer-term trends and identifying them, it’s better to work with weekly and monthly charts. The trader should find the overall trend just once in order to have the ability to select the time horizon trend in which the trader would like to trade.
Support and Resistance Levels
The points where the chart experiences the upward or downward pressure recurring are called Support and Resistance levels. Support level tends to be the low point in hourly, weekly or annually chart pattern. Resistance level is the peak (high) point of the pattern. They are identified to be those levels when showing a tendency to reappear. The support and resistance levels are unlikely to break, so it’s the best way to buy or sell near them. But once they are broken, the levels tend to be the opposite obstacle. When the market is rising, a broken resistance level could serve as the upward trend support, the same for falling market and support level that can turn into resistance.
Trend Lines
When confirming the market trend’s direction, trend lines are simple and in the same time helpful. Straight upward line can be drawn by connecting two successive lows (at least) and the point higher. Continuation of this trend line can help with determining the path that market will move along to. Downward lines are the lines that have been connecting two points and more. Points have to be not located close to each one. Channel can be defined as two trendlines going one paralleled to other, representing the support and resistance level on the charts.
SMA – EMA – SMA and LWMA
For those traders who think that trade is very helpful in Forex technical analysis, it’s also very needful to use moving averages, that tell the average price in one certain point of time over some defined period of time. Adhering to the same time measure, they reflect the latest average, so that’s why they called moving. The weak point of these averages is that they are lagging the market. So, they don’t signal a change in trends necessarily. So it’s necessary to use shorter periods, like 5-6 to 10 days moving averages, than large periods from 50 days and so on.
Averages generally divide into three: Simple Moving Average, Exponentially Smoothed and Linearly Weighted Moving Average.
The information that trader found in this tutorial can give general view to the Forex Technical Analysis, for more, the first times analysis should be performed with the help of broker.
