Technical Analysis
:
Patterns and forecast methods used today
Basic Forex forecast methods:
Technical analysis and fundamental analysis
This chapter and the next one provide insight into the two
major methods of
analysis used to forecast the behavior of the Forex market.
Technical analysis
and fundamental analysis differ greatly, but both can be
useful forecasting
tools for the Forex trader. They have the same goal - to
predict a price or
movement. The technician studies the effects, while the
fundamentalist
studies the causes of market movements. Many successful
traders combine a
mixture of both approaches for superior results.
If both Fundamental analysis and Technical analysis point to
the same
direction, your chances for profitable trading are better.
The categories and approaches in Forex Technical Analysis
all aim to support
the investor in determining his/her views and forecasts
regarding the
exchange rates of currency pairs. This chapter describes the
approaches,
methods and tools used to this end. However, this chapter does not intend to
provide a comprehensive and/or professional level of
knowledge and skill, but
rather let the reader become familiar with the terms and
tools used by
technical analysts.
As there are many ways to categorize the tools available,
the description of
tools in this chapter may sometimes seem repetitive. The
sections in this
Another way to categorize Technical Indicators:
The indicators and tools aim to provide information in
various approaches:
•
Cycle indicators
A cycle is a term to indicate repeating patterns of market
movement,
specific to recurrent events, such as seasons, elections,
etc. Many
markets have a tendency to move in cyclical patterns. Cycle
indicators
determine the timing of a particular market patterns.
(Example: Elliott
Wave).
•
Momentum indicators
Momentum is a general term used to describe the speed at
which prices
move over a given time period. Momentum indicators determine
the
strength or weakness of a trend as it progresses over time.
Momentum is
highest at the beginning of a trend and lowest at trend
turning points. Any
divergence of directions in price and momentum is a warning
of weakness;
if price extremes occur with weak momentum, it signals an
end of
movement in that direction. If momentum is trending strongly
and prices
are flat, it signals a potential change in price direction.
(Example:
Stochastic, MACD, RSI).
•
Strength indicators
Market strength describes the intensity of market opinion
with reference
to a price by examining the market positions taken by
various market
participants. Volume or open interest, are the basic
ingredients of this
indicator. Their signals are coincident or leading the
market. (Example:
Trading Volume).
•
Support/Resistance indicators
Support and resistance describe price levels where markets
repeatedly
rise or fall, and then reverse. This method shows the price
levels at which
the market is expected to reverse and stay within the S/R
levels (e.g. –
not exceeding the support or the resistance level). This
phenomenon is
attributed to basic supply and demand forces. (Example:
Trend Lines)
•
Trend indicators
Trend is a term used to describe the persistence of price
movement in
one direction over time. Trends move in three directions:
up, down and
sideways. Trend indicators smooth variable price data to
create a
composite of market direction. Generally, the trend could be
either UP,
or DOWN, or TREAD (flat). (Example: Moving Averages, Trend
lines).
•
Volatility indicators
Describe the intensity of fluctuations in the market prices.
A change in
the volatility level hints at a coming change in the price.
Volatility is a
general term used to describe the magnitude, or size, of
day-to-day price
fluctuations independent of their direction. Generally,
changes in
volatility tend to lead changes in prices. (Example:
Bollinger Bands).
Unlike the fundamental analyst, the technical analyst is not
much concerned
with any of the “bigger picture” factors affecting the
market, but
concentrates on the activity of that instrument's market.
