Learn Technical Analysis in Forex Trading

Last Updated : Monday 18th September 2017


Written By Tim Baudin, Forex Trading Instructor

 

Technical analysis is a very broad subject. Here we have to try to cover basics as well as some advanced topics.

It can provide you a good understanding of how to use technical analysis while trading forex.

Also, read our guide7 Steps to Getting Started In Forex Trading

Table of Contents

1. What is Technical Analysis for Forex Trading ? – An Introduction

Technical analysis is a method to analyze the future possible direction of price movement of currency pairs or securities or other financial assets by using past market data, primary price, and volume.

Technical analysts use charts, indicators, and other drawing tools to understand the future possible price movements and its direction.

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2. Fundamental Analysis vs Technical Analysis – Evergreen Debate

Fundamental analysis and technical analysis are two different methods of analysis. There is a major controversy between these two analytical methods. Some think the fundamental analysis more effective than technical analysis.

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3. Significance of Volume in Forex Market

Volume is always foremost in the case of financial trading or investing approach. The volume gives us idea about various things such as traders’ activity, volatility, buying or selling pressure etc. It is always better to trade when a large number of trading activity is happening.

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4. Various Methods of Charting

Technical traders require technical charts for forex trading. Technical charts are available in most of the trading platform offered by forex brokers. A technical analyst understands the movement of the market and takes a trading decision by observing these charts.

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5. Candlestick Charting Explained

Candlestick charts are probably the most commonly used charts by forex traders. This is the preferred method of displaying price action because these charts provide a quick and easy way to size up the market.

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6. What is Support and Resistance and How To Use it

Like the concept of trend, support and resistance are one of the major concepts in trading. Support and resistance are psychological price levels where forces of supply and demand meet.

At support line demand starts to increase and supply starts to decrease. This is a buying pressure. Inversely at resistance line, supply starts to increase and demand starts to decrease. This situation is a selling pressure.

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7. Trading Trend Lines – How to Draw Trend Lines While Trading Forex

Trade lines are a very important tool in technical analysis. It used for judging entry and exit timing while trading.

Trendlines are drawn with a diagonal line between two or more price pivot points.

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8. Understanding Chart Patterns in Technical Analysis

The chart pattern is the reflection of investors/traders psychology that appears in a bounded area. Charts patterns are identified by drawing trend lines and vertical support-resistance lines.

We can figure out the future possible price hikes by identifying chart patterns.

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9. Reversal Patterns – Head and Shoulders Top and Bottom

The head and shoulders pattern is a very famous and profitable chart pattern. Head and shoulders pattern is a complex pattern as it contains three distinct characteristics in one pattern.

These characteristics are trend lines, support or resistance lines, and rounding.

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10. Reversal Patterns – Double Top and Double Bottom

Double top and double bottom are simple, profitable and classic chart patterns. They are reversal patterns.

In a double top pattern; the upper trend line consists two similar or nearly similar high points and the lower trend line consist a low point. This low point of lower trend line lies between two high points that joined to draw the upper trend line.

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11. Trading with Hook Reversal Pattern

Hook reversal pattern is a candlestick pattern which also found in a bar chart. This pattern can be either bullish or bearish. Bullish hook reversal pattern is generally found after a downfall and it indicates a possible bullish reversal.

Bearish hook reversal pattern is generally found after an upward movement which indicates the possibility of bearish reversal.

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12. Continuation Patterns – Triangles (Symmetrical, Ascending, and Descending)

Triangles formed by drawing two converging trend lines. Each trend lines consist at least two or more price points; thus, upper trend line requires, at least, two or more high points in price and lower trend line require at least two or more points in price.

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13. Continuation Patterns – Rectangles (Bullish and Bearish)

Rectangles formed by drawing two horizontal lines, one horizontal line includes high points only, and another horizontal line includes low points only. This pattern also called “Box” or “Trading Range”.

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14. Continuation Pattern – Flags and Pennants

Flags and pennants are very effective and profitable continuation chart patterns. These two chart patterns found after a sharp price movement. These patterns require a short time to develop rather than other chart patterns.

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15. Theory of Gaps

Gaps are specific candlestick pattern and generally occur when there is a significant gap between two candles. In this case, the low and open price remains higher than the high and close price of the previous candle.

Gaps generally represent extreme conditions during any news release or price sensitive information.

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16. Volatility Indicators – Bollinger Bands Explained

Bollinger band is a volatility indicator developed by John Bollinger. This indicator measures volatility based on standard deviation. Bollinger band is most used volatility indicator and one of the widely used indicators in technical analysis.

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17. Trading Forex Using Price Channels

Price channel indicator is a volatility indicator which is similar to Bollinger bands. This indicator appears as two lines set above and below the price of a currency pair or other trading instruments.

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18. Understanding Moving Averages

Moving averages also called MAs in short, are the most widely used and oldest technical indicator used by traders because of its simplicity in both construction and uses.

It is among the “Lagging indicators” as it provides signals or direction of the price after a significant change in that direction.

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19. What is Relative Strength Index (RSI Indicator) ?

RSI (Relative Strength Index) is an extremely popular and widely used leading or momentum indicator developed by J. Welles Wilder. RSI gauges the speed and change of price movements.

Like most of the leading indicators, RSI has a range. It’s an Oscillator. This means it ranges between 0 to 100 levels. Due to this, the value of RSI can not be lower than 0 and can not be higher than 100. Traders use 3 psychological levels of RSI to take trading decisions. These levels are 30, 50 and 70.

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20. How To Use RSI Indicator While Trading

There are several trading signals of RSI which can offer buy and sell signals. These signals are

  1. Overbought/oversold
  2. Centerline crossover
  3. Divergences

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21. How to Use MACD Indicator Explained

MACD or Moving Average Convergence Divergence is a very popular and widely used indicator in technical analysis. MACD can determine both trend direction and momentum change which has made this indicator very popular.

Most of the traders tend to trade in the short term method in the forex market.

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22. Stochastics Indicator – (Ranging Indicators / Oscillators)

Stochastic oscillator is a popular technical indicator that is used in the short term, midterm and long term trading. This indicator was developed by George C. Lane in 1950.

The stochastic indicator is a momentum indicator that actually follows the speed or momentum of price rather than following the price.

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23. Williams %R Indicator – (Ranging Indicators / Oscillators)

Williams % R is a leading indicator described in 1973 by Larry Williams. It is an effective and a famous technical indicator. This indicator is used mostly in case of short term trading methods.

Like many other leading indicators, this indicator has overbought and oversold levels.

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24. Commodity Channel Index (CCI) – A Popular Oscillator

Commodity channel index (CCI) is a popular oscillator which was developed by Donald Lambert. He described this oscillator in Commodities magazine in 1980.

Donald Lambert developed this indicator to identify cyclic turns of commodities, but this indicator has shown its effectiveness in currencies, stocks, indices, ETFs and other financial instruments.

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25. Parabolic SAR Indicator – Trend Indicator

Parabolic SAR is a trend indicator and generally used for the short term to midterm trading strategies. This indicator was first described by Welles Wilder in his book “New Concepts in Technical trading Systems”.

SAR has the quality to trail the price for a specific period of time.

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26. Trading the Rate of Change (ROC) Indicator

The Rate Of Change (ROC) is a momentum indicator that measures the price change percentage of a specific number of look back periods. ROC simply compares the current price with the price of n number of periods ago.

It is a popular technical indicator that is used mostly for short term trading approaches.

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27. Trend Indicator – Average Directional Index (ADX)

Average Directional Index (ADX) is a unique trend indicator. This indicator can measure the trend strength besides trend direction. In 1978, Wilder described ADX in his book named “New Concepts in Technical Trading Systems”.

ADX indicator consists three different lines; ADX line, +DI Line and –DI Line.

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28. Volume Based Indicator – On Balance Volume (OBV)

On Balance Volume or OBV is a volume based indicator that measures buying and selling pressure. This indicator focuses on the relation between volume and price. This indicator was described by Joe Granville in his book New Key to Stock Market Profits in 1963.

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29. Using Gann Fan Indicator in Trading

Gann Fan is a popular trading tool. It is basically a drawing tool developed by a financial genius William Delbert Gann. This incredible trading tool has used by traders for decades. The most well-known indicator or tool introduced by Gann is Gann Fan.

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30. Types of Japanese Candlestick Patterns

Japanese candlesticks are widely used in the technical analysis world. This is a vital part of charting introduced by Steve Nison. Steve Nison learned this charting technique from a Japanese broker and then he researched on it. In the 90’s, this charting technique becomes very popular in the trading world.

Japanese candlesticks are developed with 4 price data derived from the market. These data are the open, high, low and close price.

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31. Trading With Spinning Tops and Doji Candlestick Pattern

Candlesticks are the basics of charting and technical analysis. Most of the traders use candlesticks to analyze trading instruments such as currency pairs. There are many candlestick patterns different in formation, nature and result. Spinning tops and doji are candlestick patterns.

These are generally neutral candlestick patterns that indicate indecision between buyer and seller. The formation of spinning tops and doji patterns is almost similar.

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32.  Forex Pivot Points Trading Strategy Explained

Pivot points are levels of support and resistance in the market. They are calculated with a mathematical formula that uses the previous trading period data. Below video covers a strategy I’ll call the ‘’Big Dog Trading Strategy.’’
The system mainly focuses on trading pivot points.

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33. How to Use Fibonacci Retracement Levels in Forex Trading

Fibonacci is a series of numbers developed by Leandro Fibonacci. In this series, one number derives from the sum of two previous numbers. Here is an example of Fibonacci numbers,

1, 2, 3, 5, 8, 13, 21, 34 and so on.

After first two numbers, (1 and 2) all the numbers are the sum of two previous numbers.

How can these numbers help you in trading? These numbers can be used in trading. There are some trading tools developed using Fibonacci numbers. Such as, Fibonacci retracement, Fibonacci arc, Fibonacci fan. Fibonacci retracement is widely used and extremely popular among Fibonacci trading tools.

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34. Difference between Retracements and Reversals

In a major trend,  a pair tends to retrace and bounce back. Sometimes these retracements turn into reversals. Retracements are just a small and temporary reversal in a prolonged trend.

In many cases, traders get confused about retracement and reversal in a major trend.

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35. Simple Guide to Elliot Wave Trading

Using Elliot Wave for trading is probably the most confusing way and hardest type of technical analysis for newer traders. Even after trading for a few years I don’t use this method because of the subjectivity and complexity attached to it.

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36. Positive Volume Index (PVI) and Negative Volume Index (NVI)

Positive Volume Index (PVI):

Positive volume index (PVI) is a volume based indicator which is based on days where trading volume has increased from the previous day. PVI indicator was developed by Paul Dysart in 1930s. This indicator helps traders to understand the activity of smart money.

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