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Technical analysis is a price movement which is forecasted for the nearest period of time. Technical analysis is based on the analysis of price changes in the past. To obtain a stable profit, it is necessary to determine the current trend and close the trading position for it.

Principles of technical analysis

When forming prices, all the factors that somehow may influence their formation are taken into account. All these aspects are necessarily taken into account by the market, and initially included in the exchange value.
1
Price moves according to some trends
Price changes are not random, but they move according to certain patterns.
2
All price movements tend to repeat
Price fluctuations may reflect the current market sentiment.

Key Concepts of Technical Analysis

Trend is a direction in which the price moves.
There are three main types of such directions:
"Bullish" trend
Such a trend means that the upward price movement is always greater than the downward price movement.
"Bearish" trend
The main condition of this trend is that the downward price movement exceeds the upward price movement. This trend has a cyclicity of low and high values.
Sideways trend (Flat)
There is no price movement. Sustained flat indicates that soon a big jump in prices will happen on the market.
This suggests that if there are trends, then the basic laws of movement may be applied to them:
The active trend in the market will continue to move. In most cases, the trend will continue to move until it becomes weaker.

Classification of Technical Analysis Methods.

Chart Analysis
Analytical Method
Wave Analysis
Resistance/Support Levels
Channel as an element of technical analysis
Fibonacci levels
Types of Charts
Linear
This chart only shows the closing price for each subsequent period.
Japanese candlesticks.
The rectangle between the opening price and the closing price is the body of a candlestick. The lines coming from this body to the highs and lows of the price is a shadow.
Bar chart (bars)
This chart shows the maximum and minimum price, the opening price and the closing price.
Patterns of Technical Analysis
Confirming the trend reversal
Head-and-Shoulders Pattern
Triple and Double Top/Bottom Pattern
Confirming the continuation of trend
Flag Pattern
Pennant Pattern
Confirming the possibility of both a reversal and a continuation of trend
Converging Triangles Pattern
Divergent Triangles Pattern

Methods applying filtration or mathematical approximation of time series are called analytical. The main tool of this method is an indicator which is a set of features from one or more main time series.

The most popular platform for trading with indicators on Forex is MetaTrader4. It allows you to adjust the performance of indicators by certain parameters:

  • color of elements
  • line thickness
  • sizes of signs used
Methods applying filtration

You can configure the necessary parameters by right clicking on the chart and selecting “List of Indicators” in resulting menu. Next, select the desired indicator and click the “Properties” button.

Ralph Elliott suggested to use the wave analysis in 1938. According to his theory, the price movement can be represented by several waves:

  • 5 waves following the main trend (waves 1-5);
  • 3 waves in the opposite direction (A, B, C)

Waves can be divided into two types:

  • impulse which creates the dominant trend – (1, 3, 5, A, C).
  • corrective (pullback) which moves against the current trend – (2, 4, B).
Wave Analysis

According to the Elliott’s theory, any of these waves on the trading chart is a part of another longer one which can be subdivided into even shorter ones.

Usually, it is not always possible to indicate accurately the impulse waves 1, 3, 5, which consist of five other subwaves.

When analyzing the Elliott’s chart, you can pretty exactly determine the current state of the market, which will help you to make the most correct decision. The chart below shows that in the future the 3d wave will cause a small decline (4th wave), and then again will increase the growth of the current rate to the maximum value. After this, the decline will come next, before which it is necessary to lock in profits, and then close the long positions.

Resistance level is the price line from which the price increase starts. When the price falls to a given level, it starts out from it and moves in the opposite direction. Support level breakout may still happen, but not at the first attempt. Most often, after breakout the support level becomes the resistance level.

Resistance level is the limit from which the price starts to move down (opposite to the support level). Once the resistance level is broken, it is often transformed into the support level.

Support and resistance levels

To display the resistance and support levels on the chart, it is necessary to allocate the largest concentration of the highs and lows of the price. However, you should take into account the sentiment of the whole market, and not just its highs and lows.

Support and resistance levels are quite powerful tools in trading despite its simplicity.

In technical analysis, there is such element as a “channel” that is some kind of a corridor between support and resistance lines. The duration of the price stay in this corridor influences whether the price leaves it or not. There are three types of channels:

  • bullish – a channel with an upward trend
  • bearish – a channel with a downward trend
  • sideway

The signal for buying is a breakout of the resistance level in the bullish channel. The reverse situation is observed in the bearish channel. There are two basic rules for traders within the channel:

  • trading should be in the direction of the main trend
  • the longer the price is in the channel, the higher the probability that it will leave it soon
Channel as an element of technical analysis

The construction of the price channel for identifying the guiding trend is possible using inclined support and resistance lines. For this, you will need only three points, a maximum and two minimums (in case of an uptrend), or a minimum and two maximums (in case of a downtrend). Due to the fact that the maximum (minimum) indicators may depend on the news data or the long market inertia, the resistance and support lines on the chart should be drawn through the price clusters.

23.8%, 38.2%, 50% and 61.8% indicators are generally considered the Fibonacci retracement levels allowing for analysis and forecast of financial instruments dynamics

However, the key trend cannot always go up, and at some point, it pulls back.

The levels provide an opportunity to understand correctly the main objectives of correction.

Fibonacci levels

The price chart shows an uptrend that met with some resistance at 0.7800. After that, the correction was fixed to approximately 61.8%, which is a consistently high support level. At this level, the breakout was able to continue correction up to 50%. However, in the current situation, the currency quotations rebounded from 61.8% and retesting of the entire level took place.

In the event that the trend continues to move in the current direction, the main targets will be 161.8%, 261.8% and 423.6% Fibonacci levels.

Summarizing the above, it should be noted that the levels allow the trader to find timely correction moments and fairly strong support and resistance levels.