FOREX INNER WORKINGS
THE OTHER SIDE OF THE WIRE
WHO CAN MOVE THE PRICE?
GAMES OF THE BIG PLAYERS
IS PRICE ACTION RANDOM?
WHAT MOVES THE PRICE?
TRADING INDUSTRY FOLKLORE
DEVELOPING A STRATEGY
DEFINE WHAT YOU GONNA DO
DON'T BLOW YOUR ACCOUNT
INTRO TO ALGO
DON'T PLAY A ROBOT, MAKE ONE!
CHOOSING FOREX BROKER
FOREX TRADING TIPS
FOREX TRADING MISTAKES
FOREX PITFALLS OVERVIEW
In finance, technical analysis is a security analysis methodology for forecasting the direction of prices through the study of past market data, primarily price and volume. Using charts, technical analysts seek to identify price patterns and market trends in financial markets and attempt to exploit those patterns. Technicians using charts search for archetypal price chart patterns, such as the well-known head and shoulders or double top/bottom reversal patterns, and look for forms such as lines of support, resistance, channels, and more obscure formations such as flags, pennants, balance days and cup and handle patterns. Technical analysts also widely use market indicators of many sorts, some of which are mathematical transformations of price, often including up and down volume, advance/decline data and other inputs. These indicators are used to help assess whether an asset is trending, and if it is, the probability of its direction and of continuation.
Technical analysis has been evolving over centuries by merchants and stock and commodity traders. The chart analysis methodologies arose from personal experience, observations of repeating chart patterns and subjective interpretation of specific market moves. As much of the methods and underlying explanations evolved at the times of trading floors, technical analysts tend to use crowd psychology as the theoretical basis for explanations of how specific chart and indicator patterns reflect behavior of market participants and how the present "market sentiment" is going to shape the future price action.
Technical analysis has solely empirical character and has never been established as an apllied science or true "technical" discipline. Folklore is defined as "the traditional beliefs, customs, art, and stories of a community, passed through the generations". Definition of folklore thus perfectly describes the nature of what is somewhat misleadingly called "technical analysis" of markets. Technical analysis is also sometimes described as a sort of art.
Whether technical analysis actually works is a matter of controversy. Methods vary greatly, and different technical analysts can sometimes make contradictory predictions from the same data. Many stock investors claim that they experience positive returns, but academic appraisals often find that it has little predictive power. Specific features of the FOREX market make the chances of making any successful prediction from technical analysis even much lower than in stock and commodity markets.
These features are:
"Support and resistance" is common jargon for areas on the chart where price has a seemingly difficult time breaking through. Support levels tend to stop price from falling below a specific point and resistance levels act like a price ceiling that price cannot break above.
Support and resistance is one of the most widely used concepts in FOREX trading, but also one of the most flawed. Randomly generated charts display the same high frequency of support and resistance-like formations casting serious doubts on any explanations of these price levels through crowd psychology or specific properties of supply and demand.
A chart pattern is a distinct formation on a price chart that creates a trading signal, or a sign of future price movements. Chartists use these patterns to identify current trends and trend reversals and to trigger buy and sell signals. The theory behind chart patterns is based on the assumption that "history repeats itself". The idea is that certain patterns are seen many times, and that these patterns signal a certain high probability move in an instrument. There are two types of patterns within this area of technical analysis, reversal and continuation. A reversal pattern signals that a prior trend will reverse upon completion of the pattern. A continuation pattern, on the other hand, signals that a trend will continue once the pattern is complete. These patterns can be found over charts of any timeframe.
The most popular chart patterns are:
Technical indicators are calculations based on the price and the volume of an instrument that measure such things as money flow, trends, volatility and momentum. Indicators are used as a secondary measure to the actual price movements and add additional information. Indicators are used in two main ways: to confirm price movement and the quality of chart patterns, and to form buy and sell signals. There are four groups of technical indicators. The most popular ones are:
The last group should be mentioned specifically, due to trading volume being its primary source of data for analysis. It is undoubtedly true that studies of total traded volume are helpful to financial traders in stock and futures markets. Although the overall theories of these studies can apply to the FOREX spot market as well, there is simply no way to analyze FOREX total traded volume. It's important to note that because the FOREX spot market is traded OTC, no total volume can be calculated. This means that all the indicators of volume a trader sees on his platform only use a sample of total volume for analysis. How much of the data is representative, if at all, is uncertain.