Introduction

Current technical analysis preserves a lot of the same indicators used several decades ago, but has also been modified greatly. In those days, to determine indicators on the base of close prices within a day, the traders had to estimate each indicator value manually and then manually plot the indicator on a chart. This type of technical analysis previously took a lot of time and effort.

Today, it takes 1-2 seconds and requires only a couple of clicks from the trader. Today, one CD contains all the knowledge of hundreds of great traders. This allows you to process the market information and make informed decisions on further action.

The primary tools of technical analysis are indicators. The indicator is a result of mathematical calculations. As a rule, it is calculated by a certain formula consisting of price values, volumes or results of other indicators. Indicators are divided into trend indicators and oscillators. Each of these types is used to analyze specific markets (trend indicators are used when trading on active markets while oscillators are used on more passive markets).

Likewise, technical analysis includes graphic and candlestick analysis. The graphic discipline studies trend lines, support and resistance lines that determine further price movement. Candlestick discipline studies various models that include one or several candlesticks (representation of price movement for a definite period of time) and when such candlesticks appear, the market behaves the same in most cases.

The most ideal variant of using technical analysis for trading is to study several parts of the disciplines and combine them. For example, if you want to trade on pullbacks in the time of sideways, it is first necessary to study the interpretation of oscillators as well as support/resistance lines of graphic analysis or candlestick reversal patterns. If trading in trend markets and long-term position opening is clearer to you, then you should pay attention to trend indicators along with trend lines or candlestick continuation patterns.

We wish you well in this difficult, but useful process of studying the foreign exchange market.

Trend indicators

The purpose of trend indicators is to indicate directional trend and then adhere to it. Moving averages and Bollinger bands as well as ADX and Momentum have gained the widest dissemination among trend indicators.

Each of the indicators has its own interpretation of signals. For example, a moving average is plotted directly on a price chart and signal for an opening is considered to be the crossing of the moving average by price in a certain direction. The ADX indicator conveys that there is a trend crossing level 20 and trend direction is determined by support lines DI+ and DI-.

Trend indicators provide a large field for research: testing several currency pairs, time period search, optimal period search of the indicator or finding of indicator combinations that provide the most exact signals.

A moving average is the simplest indicator, but is very profitable when it's used properly. It is based on an arithmetic average of close prices of several candlesticks. Its only drawback is the delay due to large sampling periods. Most false signals appear because of the moving average periods. For this reason, the connection of moving averages with large and small periods has become the most popular.

In the same way, the best combinations of other indicators are tested and determined. At first sight, FOREX seems to involve continuous testing and new information acquisition, new trade methods and the constant search for profit-making strategies. The learning process never stops, and you will constantly gain new information by acquiring useful information.

Oscillators.

Oscillators are the exact antithesis to trend indicators. Most of the time, the market is in non-trend conditions. For the rest of the time, the market is sideways or flat as price fluctuates in a trading range, changing from upper range limit to lower. Oscillators are used only for trading against the trend on pullbacks and short-term fluctuations. Today, the most popular oscillator is stochastic oscillator and RSI.

There are some special terms for oscillators. Overbought is the upper part of the indicator chart which shows that the price of the currency is inflated and warns of a decrease in price. Oversold is the contrary situation (i.e. when the indicator is in the lower part of the chart, this warns of a possible rate increase)e. Divergence refers to the appearance of maximum/minimum values on a price chart which are not verified by oscillator chart. Divergence is one of the important signals, but it may take a lot of time to investigate precisely where it falls on the chart.

In contrast to trend indicators, oscillators have a general model. The Oscillator line fluctuates near zero level and from time to time by gaining momentum gets to overbought/oversold band and in this manner gives a signal to position opening. For each oscillator, these levels are different -it can be 70 and 30, 80 and 20, 100 and - 100 and etc. In addition, zero level can be different (usually it's 0 or 50), but the principle of operating is common for all oscillators.

When using oscillators, you should beware of trend (directional movement) appearance. At that moment, a gap in trade range occurs, price bounces for a long time and there is no use of oscillators. To prevent such situations, traders must have on hand at least one more indicator besides oscillators to hedge against losses. Oscillators are considered more suitable for trading on passive currency pairs which are cross-rates (without US dollar). This fact affirms once more that it's not enough for the trader to know only a part of the discipline to trade successfully - you must be well-rounded and try to learn as many aspects of trading as possible.

Graphic analysis.

Graphic analysis is a component of technical analysis. It is based on the plotting of a price movement chart which identifies present market conditions and predetermines the next step forward. This is one of the oldest types of market analysis. In the early days of its development, there were no personal computers to determine the most complicated indicators. There were only drawing instruments - but this fact does not mean that graphic analysis is an archaic study.

The main instruments of graphic analysis are trend lines, support and resistance lines. Directional price movement moves at certain straight angle during the trend. During the trend, price tries to break through the trend line but backs off every time and gives the trend new momentum. At the moment the price breaks the trend line, the trend is over.

At first sight, everything is simple - you have identified the trend and can trade according to the trend direction until the line breakthrough occurs. But like any science, there are some details that are not apparent at first sight.

Candlestick analysis.

This type of technical analysis doesn't use indicators or oscillators, but determines direction of further movement by candlestick itself. Almost every candlestick or group of candlesticks has its own name and interpretation. All information that the candlestick can offer is used to determine the type of candlestick - open/close prices, maximum/minimum, size of the candle and also its color. Candlestick analysis bases analysis on a time-proven theory - history repeats itself.

The most simple models of candlestick analysis are "harami", "cloud cover", "hanging man" and "shooting star" candlesticks. This science came from Japan. In ancient times, rice traders used the candlestick model to reflect price changes in the market. There are also European styles of candlestick analysis. The European candlesticks are represented differently as bars, but the principle remains the same.

There are candlestick models which can be recognized on a chart even if you have seen it only once in a book. But there are also groups of candlesticks which can be studied for hours. Candlestick analysis is a complicated science, but even the simplest models consisting of one candlestick can offer you an advantage over other traders who rely only on oscillators or trend indicators.