Forex technical analysis
technical analysis is the primary method of predicting price behavior. It it
based on the study of price trends. FXFINPRO Capital provides free access to
the results of Forex technical analyses conducted by experts.
Forex analysis serves as the basis for most decisions,
hence its importance for traders. To
conduct a comprehensive analysis you need to look over a large volume of
information, examine charts at different time frames, and evaluate the behavior
of indicators. Professionals use various mathematical models to improve the
results of Forex analysis, obtain a better understanding of market events, and
make predictions. This ability gives a substantial advantage over other
analysis is based on the assumption that trends of the past are likely to
repeat in the future. This means that once a trader learns how to read a chart,
they will be able to increase the number of profitable transactions. Thus, the
goal of Forex analysis is to make the most probable prediction of profitability
of a transaction.
analysis reports are important for traders since they use them in their
investment decisions. Experts involved in analytics
tend to study a large number of price charts in an effort to determine the
reasons of this or that change. Also, various mathematical models are employed
to explain what's going on in the market or to make a forecast.
Forex technical analysis
on the assumption that trends of the past will inevitably repeat themselves in
the future. This means that once a trader learns how to understand trends, they
can increase their confidence in their investment strategy. The main purpose of
technical analysis is to make a high-probability prediction of the potential return
from certain transactions.
analysis reports based on the results of a technical analysis have the
- Signals. In the core of
technical analysis lies observation of changes in price trends, but no numerical
analysis or coefficients;
- Precision. As has been verified
by numerous traders, this type of analysis allows to identify entry and exit
- Support and resistance levels. Technical
analysis helps to potentially understand the maximum and minimum price levels
for a given asset. Experienced traders know where a rise or fall is expected.
- Comprehensive approach. Experts
who conduct technical analysis tend to work with four types of prices at the
same time: opening and closing, minimal and maximum prices. Obtained charts could
potentially hold valuable information for traders.
However, technical analysis of Forex has its
- Subjective interpretation of
charts. Different experts have their own personal views which may be
- Short validity period. The
results of a technical analysis need to be applied shortly after the forecast was
- Exceptions. Oftentimes, issues
withthe validity of a forecast
For a complete and correct construction of the system trading, it is necessary to understand the features of the main types of trading systems. For example, in the
construction of the trading system two options of opening and closing of positions can be envisaged:
- Signals for opening of the position will simultaneously serve as signals to close the previously opened opposite position. Thus, the trader will constantly
jump from long to short position and vice versa, practically without exit “to cash”, i.e. not being in-the-money. This type of trading system is called
reverse trading system or a system of "stop-turn". It can only be used for trend trading tactics;
- Signals for opening of the position do not coincide with the signals for closing of the previously opened opposite positions. The trader closes the
previously opened position on other signals of other indicators and for some time stays in-the-money, waiting for a new signal for opening. This type of
trading system is called non-reversing trading system and can be used both for trend and for the countertrend trading tactics.
Depending on the type of trading strategy and the type of system you choose, you will either have one and the same rule for the opening and closing of a position,
or different ones, so these issues need to be defined before selection of indicators or patterns and the wording of rules start. There are 6 basic rules of building
of trading systems:
- The positive expectation. The trading system should initially be based on a positive expectation, i.e. probability of the market
movement after receiving a signal in the direction of the open position should exceed the probability of the opposite event. In the most general case
positive expectation increases when positions are opened in the direction of the strong current trend and, conversely, are not opened against it. Inclusion
in the trading system of rules that lead to the settlement of transactions against a strong trend reduces the positive expectation and leads to the
construction of inefficient, loss-making system.
- A small number of rules. The trading system should not be overloaded with rules. You can envisage several different rules for
opening and closing of positions, depending on the level of risk, but the optimal number of indicators of an effective trading system must not exceed 5-6.
Otherwise, addition of each new indicator makes the rules of your system more and more confused and often results in delay of opening of position due to a
multi-level verification of each signal.
- The stability of the system. Parameters of indicators of your trading system should be tested at a sufficient interval of
historical data. Looking at the history of quotes in the moment, we can pick up non-standard parameters of indicators in such a way that they will show us
the best time to make a deal. But if it happens, you need at least to test these parameters in the other papers of the same market and at a different time
interval for the same paper. Basically, it so happens that that the best parameters today do not lead to the same results at a different period of time, and
the trader's main task is to find stable parameter values, which lead to equally good results for a long period of time.
- Combination of lots. Your trading system should be capable of combining lots of the position size depending on the risk to which
opening of this position exposes your trading account.
- The uniqueness of interpretation. All signals from your trading system should clearly indicate a certain state of the instrument.
The presence in the trading system of signals, which in different cases behave differently in the same situation, is unacceptable.
- The applicability of systems at different phases of the market. Most indicators of technical analysis behave differently in trend
and sideways movement of the market. Your trading system or portfolio of your trading systems needs to be adapted to the conditions of any market state.
When it comes to choosing a trading strategy, as an important next step after selecting a timeframe, the most important thing here is individuality of the trader.
His appetite for risk, self-management and skills and actions in extreme situations. The following classification of trading strategies is generally accepted:
The tactics is represented by a group of systems that are tuned according to the rules for identification and following the developed strong trend. The tactics is
based on trend indicators of computer analysis and models (patterns) of graphical analysis. It is generally accepted that the trend strategy is the least risky and
optimal for use especially for rookies.
- Countertrend trading strategy
The tactics is represented by group of systems tuned according to the rules for identification of reversal of the current trend. Following this tactics is an
attempt to embody the dream of all stock traders - buy minimum and sell maximum. Thus, the countertrend strategy is constantly trying to "predict" a reversal of the
current trend and give its followers the opportunity to enter the market at the beginning of the trend at the most competitive prices. In practice, it is necessary
to take into account that following countertrend tactics of increases the risks of the trader and requires more stringent conditions for placing of protective
orders and fixing of damages.
- Combined trading strategy
A strategy that tries to summarize the features of both tactics described above. The combination is performed by a variety of methods, from control of the size of
the position in each phase of the market to the use of specific analysis tools. In general, the combination is an attempt to most effectively combine the advantages
and disadvantages of both trading tactics in order to maximize profits of the trader.
In addition to the initial experience and knowledge two important factors are taken into account in order to choose optimum timeframe
- The estimated pace of commerce;
- Availability of enough time for decision-making in the selected pace
There are approximate average rates of dependence of the type of strategies in the ratio on the timeframe and pace of trading:
- Intraday strategy - timeframe 1 minute - pace of about 20 transactions per day;
- Intraday strategy - timeframe 5 minutes - pace of about 10 transactions per day;
- Short-term strategy - timeframe 15 minutes - pace of about 2 transactions per day;
- Medium-term strategy - timeframe 1 hour - pace of 2 transactions per week;
- Medium-term strategy - timeframe 1 day - pace of 2 transactions per month;
- Long-term strategy - timeframe 1 week - pace of 2 transactions per year
The trading system is made separately for each time interval. It is impossible to transmit the trading system built for daily graphs on the 5-minute graphs
without changing its settings, starting from the parameters of indicators and ending with the full review of the rule set. That is why the choice of the main
timeframe is the first and one of the most important steps in creating of an efficient trading system.
The term "trading system" is usually understood as a set of rules based on which a system trader performs trading operations. Here, the principle "The more complex the better" does not work. As one of the renowned traders said: "A good system should fit on the back of a postage stamp." Most often, a simpler way turns out to be the most appropriate and effective both for understanding and application. Certain signals of indicative technical analysis or models (patterns) of graphical analysis can act as basic trading rules. The general rule for the construction of trading systems is sufficiency of number of such rules. Studies have shown that the optimal trading system consists of 3-5 of rules describing opening and closing of positions. If less than 3 rules are used in the trading system it often does not take into account such important things as monitoring of trend and its strength. But too many rules can be more dangerous, especially if they belong to different classes and categories. In the end, such confusion of signals can mislead even an experienced trader. Generally, using in the system of more than 5-6 rules is as ineffective, as using of 3 rules.In principle, the selected rules must help the trader in dealing with the following issues:
- Determine the presence, direction and strength of the trend, and as a result, the direction of the opening position;
- Determine the rules for opening positions, that is, the rules when and where and under what conditions entry into the market will be made;
- Define rules of closing positions, that is, the rules when and where and under what conditions exit and profit taking will be made;
Determine the rules of position closing with a loss (setting stop loss), if the scenario does not go to the open position;
- Determine the rules of capital management, that is, which volume (the size of trading positions) the trader will trade;
Before a trader starts assembling a group of rules in the system, it is necessary to determine three important parameters:
- What will be the main timeframe for trade;
- What will be the chosen trading strategy;
- What will be the chosen type of the system
System trading is an approach developed over the years of best practices and philosophy of trade. System traders presume that market is unpredictable and they are
always ready for not very favourable changes in scenarios. It is never possible to predict and anticipate all factors that have a daily impact on the market and
cause changes in stock prices. System traders may call stock trading a "game", but never in life do they treat it as a game. Trading for them is a daily and even
boring job generating income on a regular basis. System traders adequately perceive and understand all the possible risks and know how to manage them. For him it
does not matter in what direction the stock prices move. He is ready that his trading system gives him the opportunity to earn on any movement of the market in any
market situation. Minimum of emotion here and the only thing the system trader care about is his own rules of trade which at any specific time enable him to perform
one of the three actions:
- Buy (open long or close short position);
- Sell (open short or close long position);
- Stay out of the market (that is, stay where he is currently), because at this time the trading system does not see gaming moments in it.
The most important advantage of the system trading is that it gives the trader the ability to trade effectively for a long time, constantly increasing his capital.
System trading, in addition to the above features, has a number of advantages over other trading approaches:
- First of all, it gives the trader clear milestones for execution (or non- execution) of transactions. Trading system, which is a set of rules for the
opening and closing of positions, tracks emerging trade moments on the market and at a time specific moment allows the trader to either be in the market (in
the short or long position) or be out of it. Thus, any position and any signal of the trading system are clearly justified and eliminate the possibility of
- Secondly, system trading allows in the long term to filter signals and to distinguish successful from unsuccessful ones. The trading system is not complete
without accurate recording of results. Record keeping allows the system trader to analyse the results of his trading system and find out exactly which of
its components give the best and the worst results, which subsequently give the ability to optimize and improve the trading system;
- Thirdly, the trading system leaves no room for emotions. Doubts like "buy or not buy" or "do it now or wait until tomorrow," give way to clear signals of
the trading system, which also worked well in the past, or at least when tested on historical data;
- And finally, system trading builds confidence.
- Possible subjective discrepancies in analysis
Like any other type of analysis, technical analysis is quite subjective, and therefore in professional circles of financiers there is a joke that there are as many
forecast options as there are technical analysts. It is important to keep in mind when analysing the graphs that the current analysis may be influenced by certain
professional and psychological preferences of a certain person. If, for example, an analyst is a buyer (bull), then he will see signs for purchase where they may
not be. If the analyst is a seller (bear), then the same will happen in relation to sale. So, often, two analysts may see different trends on the same graph. And
what is often interesting (especially watching public speaking of analysts on TV) is that one can always find support for his findings and coherent logic reasoning;
Often technical analysis is accused of giving signals too late. By the time the technician detects and confirms the trend, most of the changes will already be
behind us, and the risk reward ratio will be not so great. Dow Theory is often criticized in regard of tardiness;
In fact, not all the figures and tenets of technical analysis work in 100% of cases. As with everything in life, there is a significant difference between theory
and practice, in life a trader or analyst will encounter surprises in the market, therefore optimal in these situations is the model of the deep analysis of the
behaviour of a particular instrument, with features of signals of technical analysis inherent to it.
- Technical analysis focuses directly on price
In technical analysis, in order to forecast the behaviour of the price or its direction in the near future in the most appropriate and accurate way, two factors
should be taken into account. These are current price and features of its behaviour in the past. Modern technical analysis experts believe that it makes sense
to focus on the price despite the fact that the market may give unexpected unpleasant surprise. And in many situations, it is usually possible to recognize the
signs foreshowing a particular change.
- Supply, demand and price behaviour
Many technical analysts use opening price, closing price, maximum and minimum in the analysis of a tool. In each of these four prices there is useful
information. Individually, they do not tell you much about this instrument, but in the aggregate these 4 prices can clearly show the behaviour of supply and
demand in the market. This "fusion" in the form of "bars" or "candles" shown in the charts already has powerful analysis capabilities. For example, the model
analysis in the form of systematic formations of single and groups of candles has a history of more than five centuries, from the time when Japan's rice was
traded on the stock exchange.
A simple visual analysis of the charts of financial instruments allows you to define and allocate the so-called support and resistance lines. They can be
identified by specific clusters of prices in a certain confined space of the graph-corridor. Such formations indicate that supply and demand are in a temporary
state of unstable equilibrium. And sooner or later, it will lead to potential exit of price from these zones, and thus it will provide an opportunity for
profit. Here, accordingly, if the price has risen above the upper line of the corridor (resistance line), the demand wins ("bulls"). If the price has fallen
below the bottom line of the corridor (support line), then supply wins ("bears").
- Graphical display of the price
It's hard to overestimate convenience of evaluation of the financial instrument behaviour on the graph of its price. The graph is a simple and convenient way to
display the history of the instrument price. Especially, considering advanced possibilities of modern analytical programs available to any interested person.
Taken together, the graph allows estimating behaviour of prices before and after any major event, past and present variability, history of trading volumes,
dependence of the instrument on the market.
Another important point is that techniques and methods of technical analysis allow picking the best time and place to enter in a trading position in the market.
This feature is also widely used by the adherents of fundamental analysis, who use it to decide what to buy, and use technical analysis to decide when to buy.
The optimal entry into the market can have a significant impact on the profitability of the operation and it is technical analysis that will help you detect
necessary turning points.
Technical analysis is forecasting of price changes in the future, based on the analysis of price changes in the past. It is based on the analysis of time series of
prices, i.e. charts. Many charts are used in technical analysis to display prices in the course of time, and the analysis itself is based on the mathematical and
statistical calculations. In addition to price series, technical analysis uses information on trading volumes and other statistics. Technical analysis does not
consider the reasons why the price changes its direction (for example, due to low stock returns, fluctuations in the prices of other goods or other conditions
change), but only takes into account the fact that the price is already moving in a certain direction. From the point of view of a specialist in technical analysis,
you can get profit in any market, if you properly and timely recognize the trend and open a position in the direction of the trend, and then close a trading
position in time. So, if the price fell to the lower limit, you should take the opportunity and open a position for purchase, and if the price has increased to the
upper limit and turned - open a position for sale. Pretty much like weather forecasts, technical analysis cannot predict the future price with 100% accuracy.
Technical analysts use technical analysis in order to inform investors what will "most likely" happen in the market in the future.
Technical analysis is used for shares, indices, commodities, futures, or for any standardized trading instrument, the price of which is formed naturally by the
interaction of supply and demand.
In the early 20th century, the Dow Theory laid the foundation for what later became the modern technical analysis. Dow Theory was not a single document; it was put
together from numerous recordings of Charles Dow. Of the many theories put forward by Dow, the key ones are the following:
- Price includes everything
- Price movement is not chaotic
- The principle of "WHAT" is more important than "WHY"
- The underlying principles
Price includes everything. Specialists in technical analysis assume that the current market price fully reflects and includes all
effective information. That is, the information is already reflected in the price, and such price is fair. Therefore, it can serve as a basis for analysis. In a
more extended interpretation, we can say that the market price reflects the knowledge of all market participants, including traders, investors, portfolio managers,
analysts on the part of buyers and sellers, strategists, technical analysts, fundamental analysts and many others. In many ways this is true, but by itself, the
technical analysis has its undeniable advantages and disadvantages.
Price movement is not chaotic. Modern markets are complex and unpredictable, but in any combinations, there are times when the price of an
asset moves directionally. And there are even more prolonged and protracted periods when the price of the same asset does not move directionally. That is, prices
still do not move chaotically, otherwise the entire technical analysis would be meaningless, and would not work. And the most basic and effective task for any
trader is to detect these periods and the use such trends for earnings.
The principle of "WHAT" is more important than "WHY". The price is the end result of the battle between the forces of supply and demand,
between "bulls" and "bears" in the market. The purpose of technical analysis is to forecast periods, the transition between them and the direction of the price
movement. Therefore, technical analysis is a "direct" tool because it focuses solely on price. Without specifying a string of questions "Why? How ?" unlike
technical analysts, the same experts in fundamental analysis and analysts are always interested in what happened and why, and why the price is like this at the
moment. Thus, technical analysts are only guided by "what" rather than "why." Why has the price increased? The answer is simple: the demand increased. After all,
the price of the instrument is nothing else but the amount you're ready to pay to acquire it. And to know "why" you want to do it is not at all necessary.
Forex fundamental analysis
fundamental analysis is another popular method of market
based on fundamental analysis contains data about social and political
developments in the world as well as a list of economic indicators that could affect
supply and demand for currency. All traders
understand that such currency indicators have a potentially direct impact on
the exchange rate.
understand a price trend, one needs to know what factors have the most
influence on supply and demand. In other words, one needs to know what
indicators reflect the degree of rise or decline in a country's economy. Also,
it is important to understand how ongoing events affect the situation in a country.
For example, how the level of unemployment affects the euro exchange rate.
Fundamental analysis is
based on the assumption that the current situation in a country determines the
future exchange rate of its national currency.
fundamental analysis is mostly about making a forecast of
exchange rates based on economic, political, and social factors. A number of indicators exist that can help in assessing the
economic situation in a country:
- Inflation level;
- Interest rate;
- Employment rate;
- Balance of trade;
- Government monetary and
- Can indicate long-term
- Requires knowledge of many
A Forex analysis that's based on fundamental methods enables the making long-term
predictions. However, an expert needs to know a variety
of indicators which may be confusing to a beginner.
Forex analysis: conclusion
While both types of Forex analysis have their place, it needs to
be noted that they work best in conjunction.
With this in mind, Forex reports
will not only be an important tool for a trader but also an effective way of
making profit from trading currency.
Trading of complex financial products, such as Stocks,
Futures, Foreign Exchange (‘Forex’), Contracts for Difference (‘CFDs’),
Indices, Options, or other financial derivatives, on ‘margin’ carries a high
level of risk, and may not be suitable for all investors. The high degree of
leverage can work against you as well as for you. Before deciding to trade any
of these markets you should carefully consider your investment objectives,
level of experience, and risk appetite. The possibility exists that you could
sustain a loss of some or all of your initial investment and, therefore, you
should not invest money that you cannot afford to lose. You should be aware of
all the risks associated with trading these markets, and seek advice from an
independent financial advisor if you have any questions or doubts. Please
carefully read our full
‘Risk Disclosure’ and ‘Risk Disclosures
for Financial Instruments & Investment Services’