In the coming weeks, we will be discussing three different types of Market Analysis! At the end of this segment, you should have a basic understanding of how they differ from each other and why you must consider all of them when analysing the market for your next entry!
This week we are going to look into an overview of the Technical Analysis of the Forex market!
What is Technical Analysis?
It is an approach where various techniques are used to predict the probability of future price movements based on historical price data and patterns.
It is an approach based on the belief that history likes to repeat itself and that certain patterns that have formed in the past will behave in the same (or very similar) way in the future.
It is important to remember that Technical Analysis is very subjective! It is more than likely that traders will come up with different conclusions and ideas when presented with the same charts!
Let's dive into the fun part and briefly discuss our Trading Top Ten of Technical Analysis!
Regardless of what your trading strategy is, you have to be able to know what Trend is and how to identify one. A trend can be defined as a general direction in which the market is moving over a specific period of time. There are three main trend types:
Bullish Trend - an upward trend with the prices rising
Bearish Trend - a downward trend with the prices falling
Sideways - a ranging trend with the prices bouncing between specific higher/lower prices over an extended period of time (usually stuck between support/resistance zones)
Trend lines are the most common form of identifying a trend. Trend lines are lines drawn along (at least) two major tops (downtrend) or bottoms (uptrend).
Remember that you need at least two tops or bottoms to draw a valid trend line but it takes at least three tops or bottoms for a confirmed trend line!
2. Support/Resistance Levels
Support is a level that price has fallen to but was unable to break below it.
Resistance is a level that price has risen to but was unable to break above it.
In theory, these levels are where the buying power (demand) or selling power (supply) are strong enough to prevent the move further. However, it is not uncommon for the price to break through these levels and continue to rise or fall. Some of these will be fake breakouts that test levels before bouncing off and reversing the trend. However, if the trend is strong enough, you may see that the broken support level becomes a new resistance level (and vice versa, the broken resistance level may become a new support level)!
It is important to remember that these levels are to be looked at as areas of support/resistance and not an exact number! By doing so, you can set your SL accordingly and hopefully prevent closing up our positions when the fake breakouts occur!
Generally speaking, the more often price has tested the support/resistance levels, the stronger they become! As such, it is always important to look at the bigger picture when analysing your charts!
3. Japanese Candlesticks
Japanese Candlesticks are probably the most widely used tool to analyse the price action as each candlestick contains all the information you need to understand what happened in the past!
But how do we read it? It is very easy! Both the Body and Shadows make up a Japanese Candlestick.
The Body - wide part of the candle represents the price range between the Open and Close of the candle.
Shadows - thin lines above or below the body represents the entire high/low range that price has moved between its Open and Close
Lucky for us, most platforms use default settings where when:
close is lower than the open it will be filled in or black indicating Bear candle
close is higher than the open it will be empty (hollow) indicating Bull candle
However, remember that you can easily personalise the colours of your candlesticks within your trading platform!
But Japanese Candlesticks can tell you much more than that! There are plenty of patterns that you should know of and use to become a better trader!
Patterns such as the Three White Soldiers Candlestick, the Hanging Man Candlestick or the Inverse Hammer Candlestick to name just a few!
Join us next week for Part 2 of our Overview of the Technical Analysis where we will continue with our Trading Top Ten list! We will move onto discussing 7 indicators that we believe every trader should know of! We will touch on Moving Averages, Fibonacci, Bollinger Bands and many more! Make sure to sign up to our Telegram for free trading analysis, trading tips and notifications when our posts are up!