How Can Technical Analysis Help You Predict the Direction of a Forex Market?
The forex market is evolving, and it is moving in a cyclical manner. It simply implies that there are times when the price behavior on Forex becomes as predictable as possible. We can profit on the market if we can forecast the price. One issue remains: on what basis can we forecast market movements?
What is the definition of technical analysis?
And now we’ve arrived at the technical analysis. The Just Forex staff is assisting you in this regard. Technical analysis is the study of the price chart’s previous movement in order to forecast price fluctuations. Articles in The Wall Street Journal from 1900 to 1902 about the fundamentals of technical analysis are outlined in a series by Charles Dow.
And, although being based on stock market findings, the theory he developed works well on the Forex market. There are three main postulates:
Everything is taken into consideration by the market (price). All trends, participant emotion, and other elements that may impact the development of the current price are already taken into consideration in the current quote and market movement.
History repeats itself. Market structures, such as the alternation of peaks and lows, are very stable and likely to reoccur over time, according to Dow’s findings.
Price patterns are ever-present and mutually beneficial. The price does not fluctuate at random, and there is a predominant movement at any given time: up, down, or sideways.
As a result, we may infer that technical analysis is the universal method for forecasting future prices.
So, how can you use technical analysis to forecast price movement?
From theory to application Technical analysis may be used to anticipate prices with a variety of instruments. However, we wanted to highlight the most popular and successful technical analysis tools.
Tools that is linear:
Vertical, horizontal, and trend lines are used to illustrate linear technical analysis tools. Vertical lines are a reliable indicator of the start of a new trading session and the publication of important news reports.
You may draw the trend price channel using horizontal lines (support and resistance lines). Breaking these levels frequently signals a shift in the Forex market’s trend. Trend lines are useful for determining the current trend.
The red and green lines in the graph below represent support and resistance levels:
It is a worldwide tool that not only enables you to automatically generate numerous lines, waves, and levels on a currency pair chart, but also calculates important characteristics such as market condition, trend direction and strength, and even warns you about an impending reversal.
Indicators are the most important instruments for technical analysis. Moving Average, Bollinger Bands, Stochastic Oscillator, MACD histogram, and RSI are the most effective, according to professional advice.
Let’s have a look at how the Stochastic Oscillator works as an example. It consists of two curving lines that travel up and down inside the vertical scale from 0 to 100 percent: the percent K line (solid one) and the percent D line (dashed one).
There are two horizontal levels between levels 20 and 80, below and above which are oversold and overbought zones, respectively.
The junction of the percent K and percent D lines is the primary indication to join the market. So, if the solid line crosses the dashed line from the bottom up, you should place a buy order, and if it crosses from top to bottom, you should place a sell order.
The percent K line has crossed the percent D line from top to bottom in the chart below, which is an ideal indicator to begin a short position.
It’s the most basic example of how to use indicators. There are several signals and uses for each of them. Before putting them into practise, the JustForex staff suggests that you understand how to utilise them.
Patterns of technical analysis:
Technical analysis patterns, often known as chart patterns, allow you to qualitatively assess and enhance your analysis. Currency pair charts, as you may be aware, follow specific tendencies. As a result, patterns may be used to forecast both the continuance and reversal of a trend.
As a rule, ten basic figures of technical analysis are applied: Triangle, Head and Shoulders, Double Top, Wedge, Triple Bottom, Triple Top, Double Bottom, Flag, Rounding Bottom, Pennant. There are certain restrictions applied to each one of them.
Let’s use Triple Top as an example. The Triple Top is a technical analysis figure that appears after a long advance in financial markets, particularly the Forex market, and suggests a likely trend reversal.
The model is deemed complete when the price goes below the support level (a certain variance is permissible). When a sell signal arises, the trend is predicted to shift. As you can see, technical analysis offers a variety of approaches for putting its instruments to work and predicting price fluctuations. Everything is under your control.
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