Basis of Technical Analysis

Forex School – 4th Lesson

The technical analyst

The technical analyst suppose that the price of a given instrument includes all known information. Because of this, the technical analyst doesn’t have to follow the market news, since these information incorporate into the price immediately. Influencing the price is not the task of the technical analyst, he just follows the price. The technical analyst suppose furthermore that the history repeats itself, therefore, among similar market condition, the market participants make similar decisions. Thus, he tries to conclude on the basis of the past events for the future and looks for entry point.

Technical analyst doesn’t risk unnecessarily, rather looks for the clear situations. Usually, the market participants start to sell/buy on the same price level. The trader looks for that situations, where either the sellers or the buyers will expected to be on clear dominance and according to it, he enters the market.

Important that don’t analyze after the position opening, but always before this. A common mistake, the traders make decisions rashly and find out only when it’s too late. The money of your account is a work tool. The trader makes money with the help of money. That’s why, if he finds a profitable situation and an entry point then doesn’t have to fear, he has to enter the market. The market entry should be prevented always by deep analysis. Another common mistake is that traders pay attention to too much instrument price. Concentrate on that much instrument at the same time, as much as you can pay attention comfortably. It’s not a problem, if at first you concentrate on only one instrument.

The Chart

The chart is that graph which the trader sees in front of him on the monitor, during trading. On the chart, the most important information is always the price action. However, besides this several other information can be on the chart such as: trend lines, support/resistance lines, indicators, etc. The chart doesn’t give answer to this question that what will happen tomorrow in the market. The chart gives answer that question, where the seller/buyers are going to enter the market. The more liquid an instrument, the more reliable the singals of the chart. Charts have 3 better known types, these are the followings:

Line Chart
The line chart is the simplest chart. Traders almost never use this, because it shows very few information and that is a disadvantage on the market. Its only advantage is that, it shows clearly that which direction the price is going to move.

Bar Chart
The bar chart is more popular then the line chart, many investors and traders use this. The bar chart shows much more information. The opening prices, the closing prices, the high prices and the low prices are visible on it. The bar chart is mainly useful, when large amount of data have to be displayed.

Candlestick Chart
The candlestick chart is the most popular chart type. More than 80% of the traders use this, during trading. Similarly to the bar chart, it displays every important information. The usage of candlestick chart is highly recommended during trading, because the most forex strategies are built on candlestick patterns and chart patterns. These patterns are difficult to notice on line chart or on bar chat.

Technical Analysis – Japanese Candlesticks

A Candlestick Chart consists of series of Japanese candlesticks. Each candlestick carries information. It shows that how the price of the instrument moved within a given period. The green and red candlesticks are differentiated from each other. The green candlestick shows that the price have risen, while the red candlestick shows that the price have fallen. The length of the candlestick bodies and the length of their shadows are important in trading. The most important information that can be read from the Japanese candlesticks are shown by the following pitcure:

Bull and Bear

On the market, sellers and buyers are always on the spot. Buyers become sellers and sellers become buyers. This is a never ending circulation. This is the proof that there is no sure trade, nobody can say in advance with 100% safety that sellers or buyers are going to dominate in a given market situation. On market, nothing is sure. In each situation, there are only probabilities.

Bull Market
This is the market condition when the price is rising permanently. In such a case, the bulls so the buyers control the market.

Bear Market
This is that market condition when the price is falling permanently. In this case, the bears so the sellers control the market.

Flat Market
This is a special market condition, when the market doesn’t have a definite direction. At this time, market participants are waiting for the price to start moving into any direction.