What is Technical Analysis in Forex?
The technical analysis it is done by looking at the price and the volume data operated to determine if they continue in the future or not. Whenever the analysis is based exclusively on the movement of prices we are doing a technical analysis.
The principle of technical analysis is that markets act by trends and that everything that effects the behavior of prices is expressed in the graph.
The analysis of the trend is absolutely essential to understand and operate successfully in the Forex Market. One of the great advantages of this market is that you can earn both the rise and the fall, because buying a currency is equivalent to selling your counterpart.
The technical analysis can detect many indications that the trend can change or continue, and locate critical areas in the prices that can serve as reference for its operation.
Experience tells us that markets move by trends, the investor has to identify them, and detect the factors that may suggest a change. A trend can last for years, months, days or even hours.
The technical analysis tries to detect the critical levels that are likely to change it. Traced trend lines generally give us support and resistance zones, price targets and, in general, many useful technical references.
It is recommended to operate along with the trend; it is much easier to succeed by operating in favor of the trend than against it. Bold trends tend to be less steep than bearish trends.
Indicators and figures
The same figures are repeated over and over again over time. The best known are the figures of "head and shoulders", "triangles", "rectangles", "double maximum", "double minimum" and "flag".
The indicators usually indicate a level of overbought or oversold; they indicate future possible trends and corrections. We have trend-following indicators (moving average, MACD) and leading indicators that try to anticipate a turn or break within the trend (Stochastic, RSI, CCI).
The experience shows that the mood of the operators is repeated, knowledge of the development of the prices and the phrases of the market give us an idea of âï½ïï½ââï½ïï½thethe future evolution of the prices.
Support and resistance
The second most important concept in the technical analysis (after the trend analysis) is support and resistance. There are levels that remain constant over time and that either are difficult to drill upwards (resistance) or difficult to break down (supports). It is logical that investors, over a long period of time, agree that at a certain level the price is good or bad, or that a certain price costs to break up.
Prices have "memory": investors remember them and in the graphics you can see this phenomenon.
A rupture of a support or resistance, is always a technically significant fact, prices are released from barriers to go to the next critical level. Not always a break of a level that we think is a significant support or resistance, leads to an escape of prices. False ruptures sometimes occur. It is possible that despite a critical level being swept, the currency does not attract the interest of investors.
Five basic rules to operate based on technical analysis
1. Have a system and a strict discipline. If you abandon yourself and go to market psychology, it is very likely that you will fail. During a day you can change many times of opinion and what seems like a good purchase can become a disaster in a matter of hours. If you do not have references to operate and you abandon yourself to hope, you are lost.
2. If you have set a stop level, respect it. It is preferred to be faithful to a work dynamic and to absorb a small loss than to lose capital or discipline. If you do not get benefits, analyze why. The fundamental value is always to be fresh and prepared to take an advantageous position. Avoid holding positions against you or have a position without technical references.
3. Try to abstract from the euphoria or discouragement. This is not an easy task, since many times the target prices soar and the prices rise sturdy. Other times, pessimism dominates the environment; it is in this kind of situations where you can do your best operations. The psychological environment is usually a trap and it is important to know how to avoid it.
4. Set objective prices. It is preferential to undo an advantageous position at a reasonable price than abandon it to your fate. Unless the position is taken on a primary market floor it is preferred to be disciplined with the price objectives.
5. Tends to buy on supports and sell resistance. Many times those levels are clear and many people can see them. An uptrend tend to return to the support zone, that area typically gives a purchase signal even though it seems that the market is deteriorating. And a fall after a new maximum is a signal of purchase, a rebound after a new minimum is an exit signal.
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