Technical analysis is the study of prices over time, with charts being the primary tool. This is done by comparing current price action with historical price action to identify patterns that can suggest probable future price movement. Technical analysis helps traders to determine trends and acts as a signal or indicator to either buy or sell. Technical analysts believe that the historical performance of a financial instrument indicates the future performance on that instrument.
Now lets explore some of the most popular types of technical analysis used by Forex traders.
Support and resistance
The most fundamental of ideas and the most important tool in any traders toolbox is by far support and resistance levels. They are such an effective means of analysing markets as almost every trader and market participant uses them to guide their decisions and thus respect these levels. This section will focus on the fixed price levels which we all know as the horizontal and trend lines that mark our charts, providing us with insight into the constant bull bear battle that is evident in the Forex market. Support and resistance levels can be used to identify reaction levels or areas where we can expect the market to stall and or reverse, alternatively they can be used to form a bias regarding the future direction of price.
A resistance level is an area where sellers overcame buyers, resulting in the failure of price to move higher.
A support level is an area where buyers overcame sellers, resulting in the failure of price to move lower.
Ichimoku Kinko Hyo
A technical indicator that is used to gauge momentum along with future areas of support and resistance. The Ichimoku indicator is comprised of five lines called the tenkan-sen, kijun-sen, senkou span A, senkou span B and chickou span. This indicator was developed so that a trader can gauge an asset’s trend, momentum and support and resistance points without the need of any other technical indicator. "Ichimoku" is a Japanese word that means “one look.” This charting technique was created by a Japanese newspaper writer. It does look very complicated when a trader sees the indicator for the first time, but don’t hesitate to give this indicator a try because the complexity quickly disappears once you gain an understanding of what the various lines mean and why they are used.
Moving averages are an effective tool and have many different uses and applications. They can used to determine trends, both long and short term depending on the time frame. The can be used as floating support and resistance levels, determining a bullish or bearish bias, or providing entries and exits of trades. he two most popular types of moving averages are the Simple Moving Average (SMA) and the Exponential Moving Average (EMA).
This chart type is used frequently in the forex market. A bar on a candlestick chart shows the open,close, high and low prices for the selected period. The body of the candle shows the open and close prices where the wicks show the high and low prices. If the closing price is higher than the opening price of the previous candle, then the candlestick will be blue. If instead the closing price is lower than the opening price of the previous candle, then the candlestick will be red. Candlesticks simply make it easier to see if the trading period ended up or down.