Forex Technical Analysis – The Complete Resource
I am sure that you now remember the famous saying “History tends to repeat itself” as I had discussed it in the earlier lesson.
The first thing that pops up in mind whenever someone uses the word technical analysis is “Charting”. The mind, body and soul of technical analysis are charts, and this is the reason all technical analysts are also called “Chartist”.
Technical analysis in the forex market is a method to identify the current trend and live price action of a given currency pair on the basis of historical price action in order to find the best possible probability of the future price movements with the help of charts and many different types of charting tools such as basic price patterns, indicators, oscillators, divergences, breakouts, fake outs and more.
You must be thinking, How we can potentially speculate the future price movements of a currency pair solely on the basis of charts i.e. without any help of fundamental and/or economic reports?
Do not trouble yourself anymore; continue reading and you will find the answers to all your questions.
The 4 Pillars of Technical Analysis
- Current Market Price Discounts Everything
Technical analysts have a strong belief system, whatever will happen with any given currency pair i.e. whether it is positive or negative impact on the basis of an economic news release, monetary, political, fundamental reports and/or any other variables affecting the currency will finally reflect and result into live price action of that particular currency pair.
Technical analysis interprets the information from the current live price action along with the historical price action and helps us in speculating a future price movement thus giving us a high probability trade and, as a result, a single glimpse on the chart makes us understand the price movements, and trading becomes very simple.
- Price Movements Always has a Reason
A price movement takes place whenever there is an imbalance between the demand and supply of the commodity. Let’s go back to college days and try to remember the four basic laws of demand and supply.
- If there is an increase in demand and the supply is of the same quantity as earlier, a shortage occurs, as a result, price increases.
- If there is an increase in supply and the demand is of the same quantity as earlier, a surplus occurs, as a result, price decreases.
- If the demand remains consistent and the supply increases, a surplus occurs, as a result, price decreases.
- If the demand remains consistent and the supply decreases, a shortage occurs, as a result, price increases.
The continuous demand and supply imbalance creates a trending market i.e. if the demand goes on increasing, and the supply remains stable or decreases, as a result, price advances and a strong bullish trend is established and vice versa for the bearish trend. Sometimes price also moves in a sideways trend (moving in a fixed price range) when the market is stable i.e. there are equal buyers and equal sellers.
- History tends to repeat itself
Another important reason, technical analysts only use historical prices via charts to analyze the previous demand levels, supply levels and price swings in order to speculate the future price actions because the market is traded by human beings and as it is the nature of humans to show repetitive emotions and response, as a result, technical analysts find many great forex trading opportunities because market also shows repetitive patterns and similar scenarios.
- Live Price Action is always the First Priority
Whenever a fundamental trader analyzes the price movement of any currency pair, there are a lot of questions i.e. the economic results are positive but why is the price declining or the government has passed an important bill but why is the price not advancing and etc.
Technical analysis helps us in getting free from such time wasting questions; it helps us in identifying the current situation regardless of the fundamental variables. Live price action is always the first priority because if the current price respects the historical price i.e. shows a positive confirmation of demand or supply at the historical demand or supply level, then only we can benefit from the demand or supply level otherwise a historical price is just a historical price.
A technical trader basically looks for two most important things before entering the market. First is what is the current price, and the second is how price reacted previously at this price level. If the history reflects that the current price level is a demand zone, then it is the best probability that the price would advance from here; as a result, we can enter the market with a bullish perspective as soon as the price shows a positive confirmation and vice versa for the supply zone.
Technical analysis is an art; it is so beautiful that a trader patiently waits for the market to tell its own story and follows peacefully to benefit from it
By simply understanding the live price action of a currency pair, we save a lot of time i.e. we don’t really need to go through any fundamental, monetary, political reports, economic news releases and/or any other boring stuff, but having some knowledge about fundamentals and keeping track of economic events via free online economic calendar is not a bad idea because whatever might be the results of any events, staying alert at such event times can save us from shake outs and fake outs because price does dances and show huge spikes at such times.
The Most Popular Charting Tools used in Technical Analysis are as following
- Support and Resistance
- Candlestick Patterns
- Moving Averages
- Elliot Wave Theory
- Chart Patterns
- Harmonic Price Patterns
- Pivot Points
- Trend Spotting
- Technical Indicators
- Momentum Indicators
- Technical Oscillators
In the later lessons, we will go through the complete list of all the above mentioned most popular charting tools used in technical analysis.
Technical analysis is more about psychological trading than logical i.e. without getting involved in the minute fundamental details of any given currency pair. Trading is done solely on the basis of price action regardless of everything i.e. whatever may be the results now or in the future of any given currency pair according to the economic news release, monetary, political, fundamental reports and/or any other variables always reflects in final via live price action.
Technical analysis helps us in identifying the “Likely” future price movements; as a result, we are able to pin point our entry and exit for the trades, but do remember, technical analysis is very subjective; it is not necessary that every trader sees the chart same way and understand the price action in the similar way; every trader sees the chart and analyzes the trend in its own unique perspective with the help of different time frames.
Do not worry for anything; every trader has its own individual trading strategy and it takes time for a beginner to develop a successful trading strategy as per their individual needs. Do remember, a perfect trading plan always includes a trading style, self-management (mental and emotional toughness), money management and risk management.