There are two major ways for analyzing currency markets: technical analysis and fundamental analysis. The second one is based on the economic and financial factors, political news and determining the supply and demand forces. The main difference between fundamental and technical analysis in Forex is that the first one mainly studies the causes of the market movements, while the other one is concentrating on the effect of market movements.
Forex technical analysis is based on using different technical data of the price movements in the past in order to predict the further development of the market situation.
The theories FX technical analysis is based on different theories: the Dow Theory, Fibonacci Retracement and Elliott Low. Each one has the background and rules, which will be explained in the tutorial below.
Dow Theory is known to be the oldest one in Forex technical analysis. It states that prices are used to fully reflect all existing information. Knowledge that's available to participants has already discounted the price action. Forex analysis aims to the studying price action in order to make some conclusions on the future events. The Dow Theory was primarily developed to the averages of stock market, so it's holding the prices that are progressed to wave patterns, that consist of magnitude divided into three types - primary, secondary, minor. The time involved is ranging from three weeks and less to more than a year. Also retracement patterns were identified (those patterns represent the levels defining the pare moving of the trend) as 66%, 50% and 33%.
Fibonacci retracement represents popular series of retracement that's been based on mathematical calculated ratios, aroused from natural and human-created phenomena. It's used to determine the support and resistance levels amid the existing trend. Main retracement levels are 38.2%, 50% and 61.8%.
The last Forex technical analysis theory, Elliott Wave, classifies the movements of the price in waves that are able to indicate future reversals and targets. It's the trend that moves the waves called impulse, and corrective waves are those that move against the trend. With this theory, they are additionally divided into five and three, primary and secondary movements. A wave cycle includes eight movements. And the time frames vary from 15 minutes to decade.
Figuring out the relativity of the wave structure is the challenging part of Elliott Wave Theory. For example, corrective wave could be composed from corrective and sub impulsive waves. The key to this theory is to be able to identify the context of wave. To predict the tops and bottoms of future waves Elliott Wave traders also use Fibonacci Retracements.
It is the most common motto that can be heard about Forex technical analysis. This is true, because finding the trend can help the trader to get the better understanding of market situation. Trend trading is one of the most popular technics in forex trading. It is easy to learn and use, although, most of the traders prefer to combine it with the other technics.
The points where the chart experiences the upward or downward pressure are called Support and Resistance levels respectively. Support level tends to be the low point in hourly, weekly or annually chart pattern. Resistance level is the peak (high) point of the pattern. They are identified to be those levels when showing a tendency to reappear. The support and resistance levels are unlikely to break, so it is a good idea to buy or sell near them. But once they are broken, the levels tend to be the opposite obstacle. When the market is rising, the broken resistance level could serve as the upward trend support, the same for falling market and support level that can turn into resistance.
It is a classical method which is very simple and at the same time highly effective. Let's say, you can see that the currency price is going up for some time already, you might consider this as an upward trend. To confirm it, you have to choose two higher lows and draw the line through those positions. If the further lows keep being above that line, than you have just spotted the trend. In order to determine the downtrend you need to draw the line through two lower highs and see if the prices remain under it. The trend lines can tell you the way of further market development. And the longer the trend is held, the bigger the chance that it will continue.
Using moving averages is another commonly used technic in forex technical analysis. Moving average is one of the basic forex indicators. It is simply a line that connects the average prices for specific currency pair, calculating them depends of the set-ups. Moving average help traders to identify the trend or find the entry point for the trade.
Moving Averages generally divide into three: Simple Moving Average, Exponentially Smoothed and Linearly Weighted Moving Average.
This is the general view on the forex technical analysis. It will help you to find out which strategy you like the most and then learn more about the specific technics.