June 9, 2021 | by sandeep
Let’s Get to Know Forex’s Technical Analysis
It’s now time for us to learn how to analyze price charts.
To have the highest probability of success trading Forex, there are three pillars that we ultimately need to master: Technical Analysis, Fundamental Analysis and Sentiment Analysis.
In this article, we’ll take a closer look at Technical Analysis or the analysis of charts using mathematical algorithms.
Technical analysis works based on looking at past price points. It can be summarized as the study of historic price movements.
It looks at what an asset’s price did yesterday, last week and last year, focusing specifically on its historic price movements. With this information, you then get to determine what prices might do in the future.
The idea behind technical analysis is that market information is reflected entirely in the asset’s price and, therefore, there’s no need to look at macroeconomic or political factors.
For example, the illustration above shows that the price is going up. As soon as it goes up, it comes back down to then go back up again to roughly the same level where it stopped the previous time.
With technical analysis, you base your future trading decisions on what you see happen with regards to historical price action.
If the price goes back to a specific historic area where it has reversed in the past, then the trader can decide to react based on this information the next time the price reaches that historic price point.
Basically, what the price did in the past might repeat itself and traders may use this as an opportunity to enter a trade. Additionally, with the information found in the charts, traders try to spot trends and patterns that, at some point in the future, may repeat themselves.
Many of these patterns that you will come across on the price charts have specific names, usually based on how they look
In this example, we’re looking at the common chart pattern called Head and Shoulders. Once this pattern has been recognized, should it repeat itself in the future, you have a good chance to be better prepared to carry out a trade decision based on this knowledge.
It’s called Head and Shoulders because it’s got a left shoulder followed by a head and then a right shoulder right before the price falls. If you look over to the right of the first pattern, you’ll see something very similar happening again.
A technical analyst might anticipate that this pattern will repeat itself again in the future as it has done in the past.
If the price repeats the earlier pattern, then we can expect the exact same or a very similar price formation as that highlighted in the picture.
In technical analysis, we’re simply recognizing patterns and we’re anticipating that these patterns will repeat themselves in the future.
It’s quite straightforward. We learn the pattern. We trade the pattern.
Now, there is a little bit of a problem with this type of analysis. Quite often traders looking at the same chart might come up with two different theories or scenarios of what is likely to happen.
For example, the blue line in the picture above represents a price. The price moves up, stops, comes down, moves back up again, and reaches a high that is circled in red. This level seems to have resisted any further price appreciation. So, the price stopped going up and, in fact, turned back around and came down.
We can have two traders look at this exact same price action in blue and reach different conclusions.
Trader A may decide that this previous price action may repeat itself and go up as shown by the dotted green line.
Trader B, on the other hand, may look at the same chart and decide the price will stop at the red circled area like last time and reverse itself.
So both Trader A and B are looking at what the past has done but they’re coming up with a different analysis of what the future is going to show. So there’s clearly a conflict of opinion there.
This is why some people say technical analysis is very much subjective and doesn’t take into account the hard facts of economics. But more on this in our next session!
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*Any opinions, news, research, analyses, prices or other information contained here are provided as general market commentary and do not constitute investment advice. FXPRIMUS does not accept liability for any loss or damage, including without limitation to, any loss of proﬁt, which may arise directly or indirectly from the use of or reliance on such information.