The basic principles of technical analysis in the FX market play an important role in currency analysis. Every trader needs to be able to carry out technical analysis. Read on for more on what technical analysis is and how you can make it part of the overall trade analysis for optimal marketing timing.
Technical Chart Analysis – What’s it?
FX technical analysis is an examination of paired currencies using charts in a bid to predict future price movements using the observable price patterns. To determine the potential resistance and support levels, the trader makes use of Forex data from the past. Where a Forex pair has previously bounced from a certain pivot point, then it could maintain this level in the future.
Technical trading is about combining tools such as diagonal and horizontal lines to take Forex pairs through chart analysis in greater detail. It also applies in Fibonacci forex trading.
How to Use Support and Resistance as a Primary Tool of Technical Analysis
Every chart has psychological levels known as support and resistance, and it is to this that pr ice action usually conforms. There are times when the price action will be at a maximum at a particular exchange rate. When it moves and returns to this level again, there is usually some hesitation in the price market. But the price could also break the level and continue marching upwards.
In most cases, the price may bounce when the already established level is reached. That’s why traders create trade entry and exit points using support and resistance levels. But is support’ different from resistance’?
1. Support Levels
The Price support level is just below the existing price action and is used to test prices when on a downward trajectory. When a downward price reaches a support level, it is likely to bounce back in a more bullish trajectory. However, where the price breaches the support level, then it is expected to keep going down until it reaches the next price support level. Either of this situations can help you know when it is time to exit or reopen your trade.
2. Resistance Levels
A resistance level is reached when the price is on an upward trajectory and stagnates somewhere. You can expect a future increasing price interaction between a currency pair to bounce from the same price level. In case the price goes beyond the support level, then it is expected to keep rising. Thus you can use the resistance level to know when to enter or exit the trade.
FX Technical Analysis by Trend Lines
Trend lines also play an important role in FX technical analysis. A trend line usually indicates a general price trend or tendency. It appears on a chart as a straight diagonal line connecting the bottoms and tops of the overall price action. It may slope upwards or downwards depending on the general trend. Here are the several types of trend lines:
1. Bullish Trend Line
A bullish trend line is used when the trend of the price movement is on an upward trend. It is usually drawn under the price action and the price often bounces off of it. In that case, the bullish trend line is support for price movements. Where the price keeps bouncing off the bullish trend live, then opportunities are open for a long-term trade. Since you expect the price to increase, you can go ahead and buy the currency pair. However, the trend could enter a bearish breakout if the price breaches the bullish trend line. In this case, the price is more likely to start moving downwards.
2. Bearish Trend Line
When the prices are on a general downward trend, bearish trend lines are used. Bearish trend lines usually lie above the prevailing price action. A downward moving price usually bounces from the bearish trend line thus indicating a further decrease in the price. If it breaches the bearish trend line, then it will break the trend upwards. The only logical consequence is for the trend to become bullish.
With this basic technical analysis, you will be better placed to make the right trading decisions. Using price behavior of a currency pair from the past, you will be in apposition to predict where the price will be moving next. Simply make use of the support lines, resistance lines as well as the trend lines. With these, you can never go wrong.