Technical Analysis

0
59
Technical Analysis

Our technical analysis blog focuses on a variety of topics related to technical analysis in Forex. There is general information on TA methods, technical analysis tools, and various technical strategies in the FX market.

Technical analysis is the method of analysing past price action of a stock or market in order to predict future price movements. Technical analysts try to determine what drove a price movement, identify the trend and spot potential turning points.

What is technical analysis

Background of technical analysis The term “technical analysis” was first coined by Charles Dow, in his book The Wall Street Journal of March 3, 1896, entitled “Market Methods”. He was looking for a way of forecasting the price movement of the stocks and shares. Technical analysis was first introduced to the traders on the floor of the Chicago Stock Exchange in the late 19th century. Charles Dow used many different forms of analysis including bar charts, line graphs and candlesticks. In the book, Dow explained the importance of studying charts and drawing conclusions about the future. He started his analysis with price action of the stock. He drew lines on the chart to represent trends and analyzed how these changes were affecting the stock price. Then, he plotted out the data and made an attempt to determine whether it would be a bull or bear market. Dow was the first person to use technical analysis to predict future price movements of the market. The first technical analyst is widely accepted to be Charles Dow, who was the founder of Wall Street Journal and founder of the Dow Jones & Co.

 

Why we need technical analysis for Forex trading

Forex trading has always been associated with risk, and technical analysis is no different. While you can’t be sure how a security will perform, you can use historical data and indicators to analyse a potential price move in advance.

The Forex market is different to other markets in that it has an element of randomness in the form of the stochastic oscillator. In addition, the market is open 24 hours a day for an entire month, making it one of the most active and unpredictable markets. These factors make it difficult to forecast future price movements. However, traders still use a variety of tools to aid their analysis.

Technical analysis in Forex

To help traders predict where the market is heading next, there are several indicators that technical traders can use to monitor potential turning points and analyse the direction of the market. The most commonly used technical tools are:

Stochastic – measures the volatility of the price in the past by examining the fluctuation of the closing price compared with the opening price

MACD – stands for the Moving Average Convergence Divergence and measures the price movement over a period of time by analysing the difference between two moving averages

RSI – stands for Relative Strength Index, and measures momentum in the market based on price activity. It compares the closing price with the opening price, and is measured on a scale of 0 to 100.

How to apply technical analysis in forex trading

For years, technical analysis was used by traders to predict stock movements. However, during the 20th century, many people stopped using technical analysis due to the rise of statistical methods.

The latter are better suited for high-frequency trading. A fundamental reason for the decline in popularity of technical analysis can be traced back to the stock market crash in 1929 and the Great Depression that followed. Technical analysts predicted that the market would continue to fall, but most people ignored them. They mistakenly believed that market behavior would be affected by the depression, as well as the economic crisis and world war. During the 1940s, there were very few people using technical analysis. In 1951, George Lane used technical analysis and he became known as the father of modern technical analysis. In 1953, John Bollinger also used technical analysis. At the end of the 1950s, technical analysis had become very popular again. Many different forms of charts were developed, such as candlesticks, line graphs, and bar charts. Today, technical analysis is widely used in the financial markets to identify trends and predict future price movements. Most traders now use technical analysis to predict short-term and long-term market movements.

There are many ways to apply technical analysis to the forex market, including trend following, trading systems, Elliott Wave, Gann and so on. The trend following method is the most common technique to apply technical analysis to the forex market. The trend following method can be applied by traders to identify and take advantage of trending markets.

Traders can buy or sell into the market based on their view of the trend. If the traders believe that the current price action is a trend continuation, they would buy into the market at the current price levels.

For example, technical analysis has been in existence since the late 1800s. Today, it is commonly used by investors, traders and professionals to make their trades in financial markets more effective and precise. Technical analysis tools The main tool of technical analysis is the price chart. Every trader has a price chart for every market that they trade in. In the forex market, there are five major price charts:

  • The EUR/USD
  • The USD/JPY
  • The USD/CAD
  • The GBP/AUD
  • The AUD/NZD

Price charts allow the traders to analyze the price action of the currency pair at a specific time. Technical analysis also relies on a variety of charts such as the MACD, RSI and Stochastic Oscillator.

Technical analysis is not a static process. It involves looking at price action, interpreting it, and then making conclusions. The trader may analyse these tools to get a better idea of what to look for in the price chart and the direction of the trend. The main aim of technical analysis is to find the next move. Traders will need to know the price action of the currency pair and understand its movement. Some technical indicators are designed to highlight the strength of a trend or indicate when a reversal is likely to occur.

Technical analysis is an evolving field. There are many different ways that traders can use it to their advantage. The main objective is to make educated guesses about the direction of the price. These guesses are usually correct. Traders rely on technical analysis as an important part of their trading. A trader who relies heavily on technical analysis usually will achieve more profits than one who does not.

Summing up on technical analysis

 Technical analysis for forex trading (or TA for short) is about identifying and analyzing trends using indicators. Indicators are patterns, such as moving averages or trendlines, that you identify in the market to determine whether a trend has started, is accelerating, or is ending.

TA can be used for all markets: forex, stocks, futures, bonds, cryptocurrencies, etc. The only thing it cannot do is predict price movements.