How Do I Use Technical Analysis to Trade?

A Forex chart with a bundle of lines, waves and other indicators is what is used to measure technical analysis of pricing direction. The concept behind technical analysis is that the past price direction may happen again, so traders try to observe patterns in order to better predict future fluctuations.

 

Please note: such analysis does not confirm anything, but rather indicates a calculated guess.

 

Various Analytical Tools Available

There are a number of different tools aside from that which traders may use to conduct technical analysis; among such methods are the Japanese candlestick formations, inflection points, chart patterns and technical indicators.

 

Points of inflection are probably the simplest to understand, and apply, among all the technical [analysis] tools which are available; This may include support, as well as resistance, whereby the previous point indicates a level at which prices are bouncing higher, and the rest of the points indicate a level at which the price may fall from. Support and resistance is possibly determined by looking at the past price fluctuations, watching psychological levels (the 00’s and the 50’s), or even applying formulae that generate potential support & resistance areas.

 

Under the inflection points are trend lines; these connect the recent heights reached (or peaks) of price action in a down-trend, as well as the latest lows of price action in an uptrend.

 

Ascending/descending channels may also be added to the charts, by connecting parallel highs, and lows.

 

Fibonacci retracement and extension tools can also be used as inflection points in order to predict by (means of calculated guess) where the prices could pull back in an ongoing trend.

 

Japanese candlestick analysis compares the open, high, low and close of price action in a particular period of time, and can be conducted on individual candles or a group. This process may involve a lot of memorization in terms of recognizing the patterns involved, but this tool has been applied from the beginning of such trading and is still in use by the majority of traders.

 

Chart patterns are also a very reliable method of technical analysis and may be simpler to remember due to the names, compared to Japanese Candlesticks; there is a number of formations that the patterns take, including without limitation to:

 

  • The double top/the double bottom
  • The head and shoulders
  • The inverse head and shoulders
  • The bullish and bearish flag
  • The ascending
  • The descending
  • The symmetrical triangle
  • The cup and handle
  • And more

 

Lastly, technical indicators compromise the likes of moving averages, stochastic, RSI, parabolic SAR, Bollinger brands, MACD, and volume indicators.

 

These methods have complex, mathematical formulas and rationale behind them, but it is only necessary to understand the purpose and functionality of such tools, as well as how the signals are generated.

 

For instance, moving averages usually involve the closing average prices, for a specific period of time; a declining moving average means that the currency pair has been continuously moving lower, hinting that further declines may be in the cards. These indicators may be used on a singular basis, or in combination with other moving averages of different areas

These technical [analysis] indicators may be grouped into the leading, and lagging indicators. As their name suggests, leading indicators give a signal before a trend varies, while lagging indicators simply assure ongoing trends.

 

Lead indicators may be prone to false provision of signals, since they occur early on while lagging indicators may give late signals; this is why it is recommended to watch a single, trusted indicator in parallel with a lagging indicator. A list of these indicators can be found in the Forex Tigon LTD learning center.

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