Technical Analysis

Forex Technical Analysis Tutorial

Technical analysis is a widely acknowledged method for studying the price behavior in the financial markets all over the world. It is the most favored tool of forex currency trading professionals for deciding their day to day trading strategies.

Technical analysis is a vast field of study stuffed with a variety of theories, models, approaches, methods and indicators.

To master technical analysis is not a task that can be achieved in a few days or weeks just by studying the books and theories. What you all need is an experience of number of years to become an expert in technical analysis. This article is a small attempt to describe briefly what it all involves.

1. What is meant by Technical analysis?

A method of determining the price trends and the market direction based on the statistical analysis of price and volume data of any stock, commodity, forex or any other financial instrument. Basically it is an interpretation of historical price/volume charts to study and identify the trading patterns and to develop trading strategies.

2. What are the Premises on which Technical analysis is based?

Technical analysis falls back on an axiom “History Repeats Itself”. As per the theory of technical analysis, prices tend to move in trends for a long period of time. Market action discounts the known and unknown facts, news and rumors, fundamental and political factors. Technical analysis dictates that only supply/demand factors influence the price movement of any security.

3. Theories behind the Technical Analysis

There are two widely recognized theories on which the entire technical analysis has evolved over the years.

Dow Theory: It assumes that the averages discount everything, the market has three trends, the trends have three phases and volume must confirm the trend and the trends persist until there is an indication of reversal.

• The three trends are long, medium and short term trends.
• The three phases during the up trend are accumulation, rapid advance and distribution.
• And the three phases during the down trend start with distribution, rapid decline and accumulation.

Elliot Wave Theory: As per this theory the price of any security is governed by cycles originated from the Fibonacci numbers series.

4. What is a Chart?

Chart is a graphical representation of price and volume data of any security, with price and volume plotted on the Y axis and time plotted on the X axis. There are four different types of charts line chart, bar chart, candlestick chart and point and figure chart. Charting or visual analysis is the main element of technical analysis.

5. What are the Different Approaches to Technical Analysis?

Supports and Resistances, Trend Line Studies, Chart Patterns and Market Indicators are the most widely used methods to carry out the technical analysis. Under each method there are further sub divisions. Most popular methods include Fibonacci theory, Gann theory, moving averages, Bollinger bands, relative strength analysis, Stochastic, and Oscillators. Head and shoulder, triangle, double top/bottom, triple top/bottom, rounding top/bottom and wedges are few charting patterns. As a trader one must choose the method that suits him as per the experience and knowledge and use a right combination of different methods.

Wrapping Up

Even though the technical analysis is a very popular tool but there are critics who doubt its effectiveness. Successful traders are smart enough to blend the fundamental analysis and technical analysis. If you wish to pursue the technical analysis then it would be advisable to learn it as a full time or part time course with an established institution.