TECHNICAL ANALYSIS

 
 

Introduction

Technical analysis is based on the examination of historical price data in order to forecast future prices. This data is used to form charts in order to analyze trends in both long term and short term periods. Using different charting techniques, buying and selling opportunities can be identified and capitalized upon. The longer the trend, the more reliable it is considered.

General principles

1. Market rates include all data.

All prices included in charts are a result of all of the factors in the marketplace, including economic, political or technological. Therefore studying the price chart gives a clear picture of how currencies behave over time, given the different elements that affect them.

2. Price trends move in one direction.

This assumption serves the basis for the trend analysis and is the heart of the whole technical analysis.

There are three types of trends:

  • Bull trend - price movement upwards

  • Bear trend- price movement downwards ( by analogy with a bear which paws downwards);

  • "flat" trend – no real trend present, prices are directionless overall. Usually a long-term "flat" predicts the possibility of a significant breakout.

Trends

Trend - is a set tendency in changing the price level limited by a certain time interval. There are three major kinds of trends: primary, intermediate and short-term. The primary trend usually lasts from 1 to 2 years and it reflects investor’s analysis of the internal economic processes that form the basis of the business activity cycle. According to statistics, the business activity cycle from trough to trough lasts about 3-6 years. Hence, the rising or falling trend lasts from 1 to 2 years. A Bull market usually lasts longer than a bear market (since it is easier to break than to build). Prices do not move in a straight line and the movement in the main direction of the primary trend is interrupted by certain retracements. Trends which are in anti-phase to the primary trend are called intermediate (medium-term) changes in prices. They last from 3 weeks to 6 months and more. Short-term trends that last from 1 to 3-4 weeks interrupt the movement in the direction of the medium-term trend just as those interrupt the movement in the direction of the primary trend. Usually, this is a reaction to accidental current events and it is more complicated to identify them, than the primary and the intermediate trends. Currently computer science makes it possible to follow hourly and instant changes in price in the market. The technical analysis methods are also suitable for hourly tendency analysis. However, it should be mentioned that the turning moments in hourly charts are effective for a short period of time and do not particularly affect a long-term tendency. Besides, trade on shorter time segments is more apt to be due to psychological and instant reactions. At this time decisions are often affected by emotions. In the short term there are many more opportunities to manipulate prices. This makes the charts less reliable than for longer-term periods.

Support and resistance

Support and resistance lines are the foundation for the classical trend analysis. All trend lines, models and patterns are combinations of support and resistance lines. A resistance line draws together important high points of the market. Those levels appear at the moment when buyers neither can, nor want to buy at higher prices. With every upward movement of prices , resistance of the sellers will often get stronger and sales increase which in turn decreases pressure on the price. The trend stops as if colliding with the invisible ceiling and here begins a fight between the bears and the bulls. Depending on who turns out to be stronger, the trend either continues moving upwards (breaking through the resistance level) or moves downwards. Quite the reverse happens to the support line. It is worth mentioning that in charts it is better to draw the resistance/support lines through the areas of prices concentration, than through price deviations. Massive price concentration shows conduct of the major part of the traders and deviations demonstrate only panic activities of the weakest market traders. It should also be pointed out that traders remember price levels, and if any events happened approaching certain level, the next time, when prices approach the same level, the trader most probably will act exactly in the direction where the price moved the previous time.

Channel

Channel is a corridor where the price chart limited by the support line below and by the resistance line above moves. The longer the price moves in the channel the higher the probability that it will leave the channel. There are three types of channels:

  • The bull’s channel - the channel moving upwards;

  • The bear’s channel- the channel moving downwards;

  • The flat channel or range;

Besides:

Breaking through the channel happens when a price breaks through either support or resistance. Breaking through resistance in the bull’s channel is a good signal for purchase. And vice versa for the bear’s channel. In the flat channel the signal is less strong. If the support in the bull’s channel and the resistance in the bear’s one is broken through we have a weak signal for sale/purchase (it is better to have confirmation from other indicators).

Moving average method

Moving Averages are of three types:

  • Simple Moving Average (MA);

  • Weighted Moving Average (WMA);

  • Exponentially Moving Average (EMA)

Fibonacci Levels

Fibonacci numbers.

Leonardo Fibonacci is a great mathematician who lived in the XI-th century. Observing rabbits breeding the scientist derived a series of natural numbers, which was subsequently named after him. Every number in the series was the sum of the two previous numbers: 1+1=2; 1+2=3; 2+3=5 etc. As a result he received the following series of numbers:
1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144 etc.

Trading volumes

Trading volume is a very important indicator in the market analysis. A growing volume confirms the existing trend. A decreasing volume shows that the movement is at the end and that there is a possibility of fast trend changing. The volumes gradually fall by the end of the trend (the market is saturated).

 

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