One of the best ways to forecast future price movements on the Forex market is to apply technical analysis. Using technical analysis, traders monitor the price fluctuations and determine its possible rise or fall.
What is a trend and how to define it?
The sentiment of market participants determines the direction of movement. Prices on Forex do not move in one direction, they grow or fall. If the direction of the price movement persists for some time, a trend is formed.
A trend is a directional price movement that is observed over a specific period. Price moves through highs and lows. There are three types of trend directions:
- Uptrend shows the rise in prices in a certain period. On the chart, it looks like a series of rising lows and highs. The uptrend is often called the bullish trend.
- Downtrend indicates a fall in prices. Each subsequent low and high is below the previous one. The downtrend is often called the bearish trend.
- The absence of a pronounced trend characterizes a sideways trend. Series of highs and lows located on the same level. Traders usually take into account the rule that any sideways trend sooner or later can be replaced by a strong movement.
Mostly, a trader should identify the current trend in time), determine its nature and open an order in the direction of the trend.
There should be at least two highs/lows on the chart to draw a trend line. If the price changes in the opposite direction to the trend, within the lines, a correction is possible, and if it overcomes it, the trend reversal is not excluded.
Support and resistance levels
Resistance and support levels are lines drawn through the extremum points on the price chart. In technical analysis, the resistance and support levels show demand and supply of the market.
The price may slow down, approaching these levels, and sometimes it may bounce and start moving in the opposite direction. If the price overcomes the level and fixes, it means that the trend is likely to change.
The line drawn through the maximum points is called the resistance level, it is located above the current market price. At this point, sellers enter the market. The line drawn through the minimum points is called the support level, it is located below the current market price. At this level, buyers enter the market.
You can use support levels for entry to the market to open long positions. When the price falls to this level, the price is likely to rise again. Stop loss should be placed below the support level. Resistance levels are used in the same way, but for entry to the market to open short positions. When the price reaches this level, we can assume that it will fall again.
On the chart, you can see the various chart patterns. There are two most popular chart patterns: reversals and continuations. The formation of a reversal pattern on a chart means a change in trend. Such patterns include Head and Shoulders, Double Top, Double Bottom. For example, “Double top” is a graphical pattern of an uptrend reversal. The pattern consists of two highs, in which the price twice tried to break through the resistance. Noticing this pattern, one should consider sales.
If continuation patterns are formed on the chart, this means that the trend is likely to continue. Flag, Pennant, Triangle, Rectangle are among the continuations. Quite often, these patterns act as reversal formations.
There is the “Technical Analysis” section at the JustForex website where the analysis of chart patterns is published.
Each indicator of technical analysis is based on a specific formula. Depending on the type of indicator or its purpose, the formula may vary. Using indicators a trader determines trends, overbought and oversold zones, trading volume, identifies possible reversals.
All indicators can be divided into Trend and Oscillators:
- Trend indicators are used to identify trends in a specific time interval. Most trend indicators are built in the same window as the price chart. The Moving Average is considered to be the most popular trend indicator.
- Oscillators work well when there is no pronounced trend. They help to determine overbought and oversold zones and predict the future direction of the price. Such indicators are built in a separate window under the chart. The most popular oscillators are Stochastic, RSI and MACD.
Using technical analysis of financial markets, it is possible to forecast price movements, thereby making a stable income. At the same time, JustForex recommends not to forget to take into account fundamental analysis, as well as risk management rules while trading.