What is Technical Analysis?
Have you seen a forex chart? A red and green line, moving up and down? when a trader studies this chart to predict future price movements he is doing he is doing technical analysis!
It’s used by online traders to help them anticipa te future price movements, based on past performance.
In this course we will learn how to use technical analysis in your day to day to trading.
A forex trader searches for special patterns, such as the well-known head and shoulders or double top reversal patterns, studies indicators such as moving averages, and looks for forms such as lines of support or resistance, channels, and more obscure formations such as flags or pennants.
Have you ever heard the old saying, ‘’History tends to repeat itself’’? Basically, this is what technical analysis is all about! Technical analys ts look for patterns that have formed in the past and based on that will ‘’predict’’ that the price will act a certain way.
Technical analysis is connected to using charts and this makes perfect sense, since charts are the easiest way to visualize and follow historical data.
Now let’s look at some of the most widely used types of charts:
A very common and helpful chart, candlestick gives you a quick view of the market actions for a day, week, month or a year.
The use of candlestick charts dates back to seventeenth century, when the Japanese traders used it to trade in rice. Today candles are used to set up trades and spot trend reversals. All of that and more, you will learn in this lesson.
The long thin lines above and below the body of the candle are the wicks (also called shadows or tails).
The body of the candle represents the range between the opening and the closing prices. The colour of the body define s whether it was an up or a down period. In our charts we use green and red candlesticks.
A long green candle represents a bullish pattern, an uptrend. This shows that the closing price was much higher than the opening one and there was a lot of buying pressure.
A long red candle is a bearish pattern and it signals a downtrend. This is when the closing price is significantly lower than the opening one and sellers were aggressive.
Generally speaking , the longer the body is, the more intense the buying or selling pressure. Conversely, short candlesticks indicate little price movement and represent consolidation.
Feeling overwhelmed? Don’t worry, here comes the easier one – the line chart. Line charts represent a curve, which shows closing price for a given period.
It is simple and gives clear view of the current situation in the market.
You can see that it is quite simple. Changes in price over certain period of time are displayed as the dots, which form a curve of the chart.
As the name suggests it, the chart is created by using bars. Each bar has a high (top) and a low (bottom) with a line on either side; right side being the opening price and the left side being the closing price for the selected time.
Congratulations, you just completed one of the hardest lessons in Forex. Don’t worry; you will see that Forex trading is not all about charts. There is so much more to it. Let’s keep discovering the magic of Forex together.