Forex Technical Analysis

To forex traders, especially forex day traders, their trading decisions are primary dependent on forex technical analysis. Longer term traders might need fundamental analysis as well. The major difference between forex and other financial markets is that trading transaction volume is not available to forex market. Another difference is that there is no gap in forex, since forex is a 24/7 market.

1. Forex Technical Analysis Charting

While there are a couple of other options for charting, like line charts or bar charts, the candlestick charts are most widely used in forex trading, and point and figure charts are especially suitable for forex analysis.

Candlestick charts

Candlestick charts embrace eastern physiology to illustrate the rise and fall of price as “yang” and “yin” candles. With the help of various candlestick patterns, candlestick analysis can give a vivid of description of current momentum, while generate high probability candlestick trading signals.

Point and Figure Charts

Since point and figure charts can filter minor price fluctuation by adjusting box size, it makes the identification of major support and resistance much easier, and generates less but more reliable signals.

2. Forex Technical Analysis Basics

Support and Resistance

Support and Resistance is the most common technical analysis concept. Trend lines, moving averages, pivot point, Fibonacci levels, and point and figure charts can offer valuable support and resistance information.

Trend Analysis

There are three kinds of trends, trending, range-bound, and sideways. The up-trending market makes higher highs and higher lows, while the down-trending makes lower highs and lower lows. The range-bound market makes equal highs and equal lows. The sideways is going no where, no position should be initiated during this market.

Chart Patterns

There are two major chart patterns – continuation and reversal. Double top, double bottom, head and shoulders, inversed head and shoulders, triple top, triple bottom are common reversal patterns, while cup with handle, flag, pennant, rectangle are common continuation patterns. Triangles can be either continuation or reversal patterns.

3. Forex Technical Analysis Tools

Moving Averages (MAs)

Moving averages are the most common technical analysis tools. MAs can act as support and resistance, or the crossover of MAs can give trading signals as well. Exponential moving average (EMA) is also widely used, while put more weight on most recent prices.

Moving Average Convergence Divergence (MACD)

It is the most reliable technical analysis indicator, which is the difference between two exponential moving averages, the 26 and 12-period EMA. A 9-period EMA of MACD acts as a trigger line or signal line. A MACD signal is generated when there is a crossover – MACD falls below or rises above the signal line. Another MACD trading signal is called divergence, when the price diverges from the MACD.

Stochastics

This oscillator is used to gauge whether current trend is approaching end by assigning a number from 0 to100, while below 20 is considered oversold, and above 80 overbought. Be cautious of strong trending market, price can keep rise or drop, while the reading remains overbought or oversold. The reading alone can be used as a trading signal.

4. Advanced Technical Analysis

Pivot Point Analysis

Pivot point is the average price of previous day’s high, low and close. It is used as important guide of intra-day support and resistance. Various support and resistance levels can be derived based on pivot point as well.

Fibonacci Theory

The reason why Fibonacci theory works is not clear. But experienced traders will watch closely when price approaching these important Fibonacci levels. Widely used Fibonacci trading techniques include Fibonacci retracements (38.2%, 61.8%) and Fibonacci extensions (161.8%). Others include Fibonacci arcs, fans, and time zones.

Elliott Wave Theory

Elliott Wave Theory tries to interpret market price actions in a 5-3 wave structure, which comprises of five impulse waves (1-2-3-4-5), and three corrective waves (a-b-c). Due to the subjective interpretation, it takes experience to use EWT effectively.

Gann Theory

W.D. Gann was a very special trader of early last century. It was said that Gann made $50 million during his trading career through Gann theory, which is claimed derived from ancient mathematics, geometry, and astrology. Few can grasp the spirit of Gann technical analysis, and no Gann’s follower has achieved similar results. Gann theory can be found in various of his writings.

Final Words

To master forex technical analysis, there are some great technical analysis books, and lots of free technical analysis information online as well, including tutorials, courses, seminars, or classes.

No matter how confident you are about your analysis, if market doesn’t agree with it , follow the market instead of your genius analysis. Argue with the tape had been proved very expensive many times.

To study various technical analysis tools, it doesn’t mean you need to combine them together. The contradiction analysis results with different tools might cause confusion and analysis paralyze. Further more, not all technical analysis tools will work the same for a trader. For example, Champion day trader, market wizard Martin Schwartz used magic T theory, and 10-day EMA, while another market wizard Mark Weinstein found cycles, Fibonacci retracements, and Elliott Wave Theory make his ticks.

Forex technical analysis is by no means an accurate science. It acts more like an art – the art of speculation. Forex traders have to make their decisions based on imperfect information in most situations. Combined quality screen time and thorough understand of technical analysis, forex traders can find the right tools for their forex trading success.