Technical analysis can be defined as skill or science of forecasting movements in the future in terms of price with reference to past data and movements. As a matter of fact, past movements can never be a full guarantee of happenings in the future. Therefore, technical analysis is not as 100% true and accurate mode of forecasting, but once you get used to using it and learn all its aspects, it will be beneficial to you when I comes to predicting.
Rules, tools and techniques of technical analysis in stock market are more of the same as ones used in forex trading. Technical analysis is commonly used in forex market analysis. Technical analysis uses price charts which is a two dimensional type of chart. The chart’s horizontal axis show time and the vertical axis display price.
Price charts are in different kinds which include: Tick chart, Line chart, Candlestick chart, Bar chart, point and figure chart among others.
Candlestick is the commonly used chart with its popularity in usage growing day in day out. Technical analysis basis it’s analysis on the charts. It works to find the resistance levels, support and trends as well as consolidations such as shoulders and heads, bottoms and tops, triple and double tops, wedges and triangles. Which can be achieved through rules set for technical analysis. Once you are able to locate all this stuff from the price chart you come up with it is easy to make a prediction of next movement and direction which will also land you in a good position.
Technical analysis efficiency and value increases once you enrich results from price charts with other tools such as Fibonacci and candlesticks levels. It is possible for you to just do technical analysis on line chart and still obtain the same results but once you do the analysis on candlestick chart then give more attention to the signals it shows, it strengthens your analysis.
How Fibonacci Numbers are used in Forex Trading
Trend lines generally are the rice direction. Once the price raises, it is called uptrend and when it goes down its called downtrend. Big trends can be analyzed to come up with some small trends. In addition, different time frames in a chart may possess different trends at specific times. In technical analysis, trend are always the first thing to find.
Support can be defined as the most minimum level which the price should never exceed. For instance, since 2006, Euro Dollars have had very strong support such that the price has being rising once it hits the support line.
Support level can however at times be broken. When you break the support line, price goes down more but then when the support level is broken, it acts like resistance with the price going up severally to fight the breakdown.
Resistance on the other side is the maximum level where price does not exceed. However, just like support line, resistance can as well be broken so that it becomes support.
Finding resistance and support levels in technical analysis forms the foundation. Technical analysis in forex trading is all based on resistance and support levels found on charts. The consolidations such as bottoms and tops, pennants, triangles also come from the resistance and support levels.