What is Technical Analysis in forex

What is Technical Analysis

Technical analysis is used by traders to evaluate price movement and for determining the trend. Technical analysis (TA) uses technical indicators. Each technical indicator has its own advantage and uses.

Technical indicators are use entry and exit point decision, market volatility and momentum.

There two kinds of indicators, one kind is price value forecasting which are leading indicators whereas the opposite is trend confirmation and are lagging indicators.

Simply put, by using technical analysis, you are trying to find a particular pattern or formation (a shape) on a price chart that is regularly formed on the charts, which is supposed to help predict future price  developments. TA is not used only in forex trading, but also in other financial markets like commodities, shares, cryptocurrencies etc.

The analysis assumes that the current market price already includes all external influences such as supply and demand, political influences and market sentiment.

There are plenty of technical indicators one may use to analyse price charts.

Now let’s take a look at the most accurate technical analysis indicators.

The most accurate technical analysis indicators in forex :

Support and Resistance

Support and resistance are probably the most frequently used technical indicators and are also suitable for beginner traders. Trading using these two indicators is one of the most effective ways of trading, according to experts.

Support

Support is a price where is a preponderance of buyers over sellers, or bulls over bears.

For this reason, the price will not get lower than this threshold in a certain period. The longer the price stays in the support area, the stronger the support level. In the picture to the left you can see support as the green line below which price will not fall on the chart, and if it does it will only fall for a short time. Buying a currency at its support levels is generally considered a proven strategy.

Resistance

Resistance is a price where is a preponderance of sellers over buyers (bears over bulls).

The abundance of sellers means that the price cannot get higher than through this point. This point represents a kind of price ceiling that sort of pushes price down as it tries to break up through this level. At resistance levels, some traders open their trades short, so called short, when they are actually speculating on a subsequent fall in price as a result of reaching the ceiling i.e. the resistance level.

Of course, prices do not stay in the support and resistance range all the time. If they break through these levels and close outside these areas, then we speak of outbreaks of support or resistance.


Moving Averages

Moving Average or MA indicates when to enter new trades or at what level to set a stop.

This is probably the oldest and most commonly used price indicator.

Just to illustrate, the 5-day moving average is calculated as the sum of the closing prices for the last 5 days / number of days.

Sell signal for moving averages – if the current price falls below the level of the moving average.

Buying signal at moving averages – if the current price is above the average.

In addition to these indicators, we should also mention the trend lines between which the so-called trend channel is located.

Read more: What are Moving Averages


Elliot Waves

Read more: Elliot Waves strategy in forex

Relative Strength Index (RSI)

shows us the strength of the trend

The Bollinger Bands

shows the volatility of the price

There are many more indicators, but if you learn how to properly use these 5 basic indicators to your advantage, you are well on your way to developing your long term profitable trading strategy. Remember that success in forex depends on testing your strategies in the markets. We recommend to test first on the demo version, in case of continuous profits, then move on to trading sharply.

Beginners often ask us whether technical analysis or fundamental analysis is more effective.

In our opinion, it is best to combine both analyses, that is, for example, to use economic news (fundamental analysis) and have the timing of trade entry confirmed by technical indicators.

If both fundamental and technical indicators confirm to you that it is the right time to enter a trade, the probability that this trade will be profitable for you increases rapidly.