Let’s first define what Technical Analysis is. Technical Analysis is the study of historical and ongoing price data through charts, price patterns and chart indicators. Charts display price in time intervals using bars and candlesticks. Technical Analysis is based on the Dow Theory and there a number of assumptions in that theory. The most important is that all available information is immediately impounded into the market prices of the currencies. The second assumption made is that prices always move in trends or patterns. The third assumption that is made is that history repeats itself. This means you can predict the future price action by studying the past prices.
We follow trends because experience has shown that once a trend is in motion, it is most likely to continue rather than reverse it. The more one studies chart patterns, the clearer it becomes that reading and interpreting chart patterns are more an art form than a skill. Two charts are important in technical analysis. Bar charts and Candlesticks charts. Bar charts display price data in vertical lines that represents price action during a given time period. The tip at the bottom of a bar chart is the low for the period. The tip at the top is the high for the period. The open and close are represented by small horizontal dashes called tics. The tic to the left of the vertical line is the open. The tic to the right of the line is the close.
Candlestick charts are similar to bar charts in many ways but different in other ways. Candlestick charts were developed by Japanese rice traders. They are used extensively in technical analysis. Like the bar charts, the top of the vertical line represent the high. The bottom of the vertical line represents the low. However, the price action between the open and the close is represented differently by the use of candlestick bodies. A shaded body represents a lower closing price below a higher opening price. A hollow body represents a higher closing price above a lower opening price. The price action above and below the body is referred to as tails or wicks. A forex day trader may use any one of the 3, 5, 10, 15, 30, 60 and 180 minutes charts. A swing and position trader may use a daily, weekly or a monthly chart while doing technical analysis. These charts all use the Greenwich Mean Time (GMT) or the Eastern Standard Time (EST) depending on the software that your broker platform uses. But you can always adjust these times according to your local time.
While doing technical analysis, you need to understand what are markets patterns? What are Uptrends? What are downtrends and what are sideway trends? Markets expand and retrace constantly. Market prices may continue to expand for sometimes either upward or downward. It is the nature of the markets to surge then pause and retrace. Trends in currency markets make a series of peaks and troughs as they move. An uptrend consists of a series of ascending peaks and troughs. Each peak higher than the last peak! Each trough lower than the last trough! A downtrend consists of a series of descending peaks and troughs. A sidways trend consists of a series of horizontal peaks and troughs. All peaks and all troughs almost on the same level indicate a sideways market.
Technical analysis is the study of past prices to predict future price action. It depends on the use of technical indicators in finding the best points for entry and exit for each trade. A number of advanced technical indicators have been developed. They are used by the traders to confirm a particular market pattern. Two or more technical indicators are used in conjunction to confirm whether the markets are trending, ranging etc. You need to master these technical indicators if you want to become a successful trader. Each chart and technical indicator plays a unique role in the overall analysis process. You need to learn how to use these technical indicators to confirm trending or non trending conditions. The time periods and the technical indicators are useful in spotting interday or intraday turning points caused by large moves, retracements, continuances or reversals.
Each technical indicator performs differently in both trending and non trending markets. You should understand how each technical indicator shows direction, entry, exit or weaknesses or strength of price action in trending or non trending market conditions. You should memorize these differences to make the best use of these tools in your trading.
Hassam 