Technical Analysis is based upon studying price movements using price patterns and/or statistical data. Technical analysis = Charts, also helps us identify trends which can help us find profitable trading opportunities. Technical analysis offers insight into what Forex traders are doing. Traders use charts to identify patterns and trends to make successful trading decisions. Technical analysis can be used in different time frames. Whether it is monthly, weekly, daily, hourly, or even minutes, a trader gets to choose the time frame that suits his trading style best. There are widely used concepts of technical analysis are:
* Support and Resistance Levels
* Trends
* Fibonacci Retracements
Support and Resistance Levels
Support and resistance levels are points where a chart experiences recurring upward or downward pressure. Support level is usually the low point in any chart pattern (hourly, weekly or monthly). Resistance level is on the other hand, whereas a highest of the peak point of the pattern. Look at chart below!
The zigzag pattern is making its way up (bullish market). When the market moves up and then pulls back, the highest point reached before it pulled back is now resistance. As the market continues up again, the lowest point reached before it started back is now support. In this way resistance and support are continually formed as the market oscillates over time. The reverse of course is true of the downtrend.
Support and Resistance levels are not exact numbers. Often times you will see a support or resistance level that appears broken, but soon after find out that the market was just testing it. With candlestick charts, these "tests" of support and resistance are usually represented by the candlestick shadows.
How the shadows of the candles tested the 111.79 resistance level. At those times it seemed like the market was "breaking" resistance. However, in hindsight we can see that the market was merely testing that level.
So how do we truly know if support or resistance is broken?
No definite answer of this question. Some argue that a support or resistance level is broken if the market can actually close past that level. See the chart below!
The price had closed above the 111.54 resistance level but ended up falling back down below it again. If you had believed that these were real breakouts and bought this pair, you would've been seriously hurt in!
So to help you filter out these false breakouts, you should think of support and resistance more of as "zones" rather than concrete numbers. One way to help you find these zones is to plot support and resistance on a line chart rather than a candlestick chart. The reason is that line charts only show you the closing price while candlesticks add the extreme highs and lows to the picture.
The highs and lows can be misleading because often times they are just the "knee-jerk" reactions of the market. It's like when someone is doing something really strange, but when asked about it, they simply reply, "Sorry, it's just a reflex."
Trends
Trends are simply the general direction that the currency pair is moving. It could be up, down or sideway. An uptrend or a downtrend could be drawn by the tools named Trend Line. An uptrend line is drawn by connecting at least two successive lows. Naturally, the second point must be higher than the first. The continuation of the line helps determine the path along which the market will move. An upward trend is a concrete method to identify support lines/levels.
1. Uptrend
Conversely, downtrend lines are charted by connecting two points or more. The validity of a trading line is partly related to the number of connection points. Yet it's worth mentioning that points must not be too close together.
2. Downtrend
A Channel is defined as the price path drawn by two parallel trend lines. The lines serve as an upward, downward or straight corridor for the price. A familiar property of a channel for a connecting point of a trend line is to lie between the two connecting point of its opposite line.
Sideway or flat market consists of a narrow ranging channel with very little spread, in the illustration that the pip spread hardly goes beyond 12 to 14 pips.
3. Sideway
Fibonacci Retracements
These are the levels at which the market is expected to retrace to after a trend. Fibonacci retracement key levels in most markets are: 38.2%, 50% and 61.8%. Suppose a currency pair is on an uptrend from 1.2000 to 1.3000, which is a 1000 pip rally. When the currency pair reaches 1.3000, how much will it retrace?, 38.2%: The size of this movement is 1000 pips. So 1000 * 0.382= 382 pips. So after rallying 1000 pips we expect the currency pair to retrace 382 pips. Using similar calculations we find out that after a 1000 pips rally a currency pair would retrace 500 pips back to the 50% level and 618 pips back to the 61.8% level. Obviously, the 50% level is a more significant buying level than the 38.2% and the 61.8% is the most significant.
* Support and Resistance Levels
* Trends
* Fibonacci Retracements
Support and Resistance Levels
Support and resistance levels are points where a chart experiences recurring upward or downward pressure. Support level is usually the low point in any chart pattern (hourly, weekly or monthly). Resistance level is on the other hand, whereas a highest of the peak point of the pattern. Look at chart below!
The zigzag pattern is making its way up (bullish market). When the market moves up and then pulls back, the highest point reached before it pulled back is now resistance. As the market continues up again, the lowest point reached before it started back is now support. In this way resistance and support are continually formed as the market oscillates over time. The reverse of course is true of the downtrend.
Support and Resistance levels are not exact numbers. Often times you will see a support or resistance level that appears broken, but soon after find out that the market was just testing it. With candlestick charts, these "tests" of support and resistance are usually represented by the candlestick shadows.
How the shadows of the candles tested the 111.79 resistance level. At those times it seemed like the market was "breaking" resistance. However, in hindsight we can see that the market was merely testing that level.
So how do we truly know if support or resistance is broken?
No definite answer of this question. Some argue that a support or resistance level is broken if the market can actually close past that level. See the chart below!
The price had closed above the 111.54 resistance level but ended up falling back down below it again. If you had believed that these were real breakouts and bought this pair, you would've been seriously hurt in!
So to help you filter out these false breakouts, you should think of support and resistance more of as "zones" rather than concrete numbers. One way to help you find these zones is to plot support and resistance on a line chart rather than a candlestick chart. The reason is that line charts only show you the closing price while candlesticks add the extreme highs and lows to the picture.
The highs and lows can be misleading because often times they are just the "knee-jerk" reactions of the market. It's like when someone is doing something really strange, but when asked about it, they simply reply, "Sorry, it's just a reflex."
Trends
Trends are simply the general direction that the currency pair is moving. It could be up, down or sideway. An uptrend or a downtrend could be drawn by the tools named Trend Line. An uptrend line is drawn by connecting at least two successive lows. Naturally, the second point must be higher than the first. The continuation of the line helps determine the path along which the market will move. An upward trend is a concrete method to identify support lines/levels.
1. Uptrend
Conversely, downtrend lines are charted by connecting two points or more. The validity of a trading line is partly related to the number of connection points. Yet it's worth mentioning that points must not be too close together.
2. Downtrend
A Channel is defined as the price path drawn by two parallel trend lines. The lines serve as an upward, downward or straight corridor for the price. A familiar property of a channel for a connecting point of a trend line is to lie between the two connecting point of its opposite line.
Sideway or flat market consists of a narrow ranging channel with very little spread, in the illustration that the pip spread hardly goes beyond 12 to 14 pips.
3. Sideway
Fibonacci Retracements
These are the levels at which the market is expected to retrace to after a trend. Fibonacci retracement key levels in most markets are: 38.2%, 50% and 61.8%. Suppose a currency pair is on an uptrend from 1.2000 to 1.3000, which is a 1000 pip rally. When the currency pair reaches 1.3000, how much will it retrace?, 38.2%: The size of this movement is 1000 pips. So 1000 * 0.382= 382 pips. So after rallying 1000 pips we expect the currency pair to retrace 382 pips. Using similar calculations we find out that after a 1000 pips rally a currency pair would retrace 500 pips back to the 50% level and 618 pips back to the 61.8% level. Obviously, the 50% level is a more significant buying level than the 38.2% and the 61.8% is the most significant.
