All traders in the forex market eventually come across technical analysis. In the quest to get more accurate facts about the market, most traders resolve to use technical analysis methods in order to move forward with the trade. Technical analysis is the examination of currencies in the trading chart with the goal to identify price patterns which can give a hint on the direction of price. There are numerous tools used for technical analysis. Technical analysis in the forex market, therefore, relies on data that has been recorded over time. Let us delve into the core principles of technical analysis in the forex market.
Support and Resistance in Technical Analysis
One of the most common tools you will find while doing technical analysis is support and resistance. Support and resistance are basically the levels where you will observe price action. Usually, the areas where support and resistance have been identified are places where price action hesitates. When prices bounce at these levels, the traders are able to make some trade moves. Traders therefore always look for the areas where support and resistance have been identified because they mark the entry and exit points. Metatrader has dozens of indicators that specialize in technical analysis. Most beginner traders tend to get confused about the usage of Metatrader 4 Vs Metatrader 5. For the forex market though, MT4 is the main platform used for analysis.
Key Concepts in Technical Analysis
As noted earlier, technical analysis is all about following the price action. The trend that has been established is thus indicated in various ways. When doing analysis, the three key concepts that a trader should be familiar with are:
- The Bullish Trend
- The Bearish Trend
- The Flat/Sideways Trend
The “Bullish” trend is marked by an upward price movement. When the market is described as being bullish, it means that the movement upwards is bigger than the downward movement. Traders are able to capitalize on the movement of the price by observing the signals left by the bullish trend line. This line is straight and it connects the sloping candle lows. Whenever there is a bullish trend, the line intersects with the price and this is the perfect opportunity for a long trade.
The “Bearish” trend is marked by a downward price movement. The market is said to be bearish when the price movement downwards is bigger than the upward movement. The bearish trend line indicates the price movement in case the market is bearish. This line connects all the candle highs on the chart. Traders following the bearish trend are able to enter a trade when there are reversals and breakouts.
The sideways trend is often observed when there is no price movement in the market. Even though the forex market is quite dynamic, there are instances where the trend is flat. When there is a continuous flat trend for a long time, it is often an indication that the prices will take a huge jump right after the trend.
Price Action Trading in the Forex Market
Apart from pure price action trading, there are other kinds of trading in the technical analysis realm. Pattern trading includes candlestick patterns and classical chart patterns. Let us look at each of these.
- Candlestick patterns. The candlestick patterns are rightly named as they represent various candlesticks on the chart. These patterns can either be in the forward direction or they can also be reverse from the price direction. There are various patterns observable and they all come with different levels of price actions.
- Classical patterns. Classical patterns, on the other hand, are created by the general price action. Similar to the candlestick patterns, the classical patterns also come either as reversals or continuations. There are various reliable patterns that traders can use and they include triple top, double bottom, triangles and rectangles among others.
Technical analysis in the forex market is all about analyzing the different aspects of the charts by taking into account historical data. There are various tools used for this analysis and they rely on support and resistance. It is also possible to backtest in order to make the data more useful. There are also trend lines used on the charts and traders can use various patterns to determine the general and specific direction the price is taking.
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