Forex Technical Analysis

Technical Analysis is the study of how prices in freely traded markets behaved through the recording, usually in graphic form, of price movements in financial instruments. It is also the art of recognizing repetitive shapes and patterns within those price structures represented by charts.

Below you have an example of the EUR/USD chart, showing also pivot points (support & resistance) and other technical indicators such as trend index, ob/os index, volatility index and forecast bias.


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Back in 1934, Ralph Nelson Elliott discovered that price action displayed on charts, instead of behaving in a somewhat chaotic manner, had actually an intrinsic narrative attached. Elliot saw the same patterns formed in repetitive cycles. These cycles were reflecting the predominant emotions of investors and traders in upward and downward swings. These movements were divided into what he called "waves". 

According to his observations, a trending market moves in a five-three wave pattern, where the first five waves, originally called “cardinal waves” and later on “motive waves”, move in the direction of the larger trend. Following the completion of the five waves in one direction, a larger corrective move takes place in three consecutive waves. Letters are used instead of numbers to track this correction. The three waves forming the “corrective” pattern(labelled a,b and c) are also sometimes called the “threes”.
Finding the right trading strategy is one thing that can determine your daily results as a trader no matter which market you’re in. Some people will spend a lifetime searching for or creating a viable strategy and then not stick with it. This is the reason why when you find something that has potential you should give it enough testing as possible; in both directions, backward and forward. 

Candlestick charts have been around for many years. The patterns that form on the charts help a trader decide which way they want to take their trade. One popular style that we want to share with you is about trading based upon what you see on these charts. Wick Trading is what we like to call this particular method. The reason for this is because candlestick lengths and wicks tell stories. We use these stories to try and determine what the future outcome will be. Trades are determined based on the price action on the screen in front of you.

There are literally hundreds of technical indicators out there that a trader can use to help predict market direction. One of them is the Ichimoku Kinko Hyo, which was developed in Japan during the previous century and which is gaining increasing popularity in the West because of its ability to identify trends. The Ichimoku is actually a combination of different indicators that together form a formidable asset in many traders’ arsenals. With the help of this indicator it is possible to identify not only whether the market is in an up- or downtrend, but also where the vital support and resistance points can be found.

The indicator consists of five lines: The kijun-sen, tenkan-sen, senkou span A, senkou span B and chickou span. Fig. 11.05(a) is a candle stick price chart of the AUD/USD together with an Ichimoku Kinko Hyo chart. The Ichimoku Cloud is of paramount importance here. When the price is between the upper and lower levels of the cloud, i.e. inside the cloud, it is not recommended that the trader should enter into a new trade. When the price breaks out from the top of the cloud, such as was the case at point A in Fig. 11.05(a), this confirms that an uptrend is underway. This is a good point to enter into a long CFD trade.
The evolution of prices of an asset usually follows a temporal sequence. When we talk about timing, we are not necessarily referring to each of the cycles having a period of similar length, rather we only refer to the fact that there is a relationship between a set of data for a period of time. Once this period of time is finished, the behaviour of the following data will probably show a different distribution. 

Therefore, the key is to locate the beginning phases of each cycle, so you can take advantage of the information obtained from the study of the distributions. One of the existing methods to locate those phases would be the study of the price ROC (Rate of Change). Next, we will describe this tool and also the way to interpret it. Study of the Rate of Change in Prices The ROC, as the name suggests, shows the difference between the current price and the price given over a period of time, oscillating around zero depending on the direction taken by the price of the asset.  The interesting thing about this relies on the fact that, when a relevant change in the price movement occurs, the value of the exchange rate soars automatically. We consider that a new time cycle has started.

Support and Resistance lines conform the most basic analytical tools and are commonly used as visual markers to trace the levels where the price found a temporary barrier. In other words, where price had trouble crossing. These levels can be found on any chart and any time frame either 1 minute or 1 month. Some of these lines remain valid for years.
When trading Moving Averages are a very good example of how to best get into a trade and how to attempt to predict what the chart will do next. We talk to Darren Sinden, the Market commentator for Admiral Markets, about this subject. As a man that has been in the stock markets for over 30 years, this is a subject that Darren is very well versed on. So do not miss this video.
The Average True Range (or ATR) indicator is really rather simple, as the name suggest it is simply the average of the True Range of the past X bars. Ok, so then what is the True Range?. Well instead of just the range of a session which is simply the high – the low the True Range is actually calculated slightly differently (although some basic ATR indicators get this wrong).
In the first installment of this series, we introduced a random entry system that based its entries on a virtual coin flip (see “Guide to trading system development,” September 2012). The base system was backtested across four years of euro forex data to gather trade data for statistical analysis. As we saw, the base system was unprofitable. In mathematical terms, the base system has a negative expectancy of -0.81.
Let's say you took a position in the wrong direction. This happens to everybody. You see the market approaching your stop loss, and you keep a safer distance from it, moving further away from the market and deeper into your pocket. And then you do it again and again. This usually results in a safe loss of money. More money than you planned to risk on the trade.
The principle of intermarket analysis is based on the interplay between the four major asset classes: bonds, stocks, commodities, and currencies. By reading the “language of the markets”, the intermarket model provides a suitable analytical basis for effective trading. This article offers concrete applications for trading.

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