Using the Basic technical analysis tool helps investors determine potential buying/selling times. This is one of two schools of market evaluation chosen by many traders. Below, Forex Trading will learn with you about effective technical chart analysis as well as detailed practice procedures.
What is technical analysis? Principles when applicable
Along with fundamental analysis, technical analysis provides investors with an effective solution to evaluate market trends. This is the method of using charts, data, price graphs, past transaction volume data… to make comments about market supply and demand. From there, traders will have a basis to predict future prices.
Technical analysis is based on the following three main principles:
- Market prices never stand still: The nature of the market is to always move. Even while sideways, it is calculated based on an overall trend. There are still waves of prices fluctuating up and down.
- Price always has a trend: The market will increase or decrease, or move sideways between two support and resistance lines. On average 60% of the time the market will have a clear trend.
- History will repeat itself: Past historical events may take place in the future. Therefore, this is an important basis for traders to apply past price direction to evaluate future market prices when similar events occur.
Learn 2 Basic technical analysis tools
The core of the Basic technical analysis is: “Price is the main factor that reflects the entire market”. To identify price trends, traders introduced to technical analysis often use two main tools:
Price patterns – The most specific technical charts
Price models are price charts, showing price movement over a specific period of time. Through that, investors can determine the price trend. At the same time, identify turning points where prices will reverse.
When learning what technical analysis is, traders will see the importance of price patterns. They show us how the market is doing. Not only that, it also shows the most effective entry point, profit-taking point, and stop-loss point.
Some popular price models and quite reliable signals:
- Reversal patterns: 2 tops/2 bottoms, positive/reverse head and shoulders model, 3 tops/3 bottoms, diamond model.
- Continuation patterns: Rectangle pattern, triangle pattern, pennant pattern, cup and handle pattern, isosceles triangle pattern, wedge pattern…
All price patterns appear when the price is in motion. Traders need to pay attention to this to properly identify and classify, as a basis for analysis.
See more: Be more successful through this technical analysis
Technical indicators
Along with technical charts, technical indicators are also important technical analysis tools. This is a tool built based on mathematical formulas. Price data and trading volume determine the trend and direction of future prices.
Some common technical indicators include:
- Moving Average (MA)
- RSI
- MACD moving average
- Stochastic Oscillator
- Bollinger Bands
These are all extremely important support and resistance indicator or price trends. Investors need to learn and practice how to use indicators fluently to be able to effectively analyze market techniques.
Detailed Basic technical analysis instructions
Trading with technical analysis is especially suitable for breakout trading, and scalpers… To optimize efficiency, traders need to know:
Correctly understand the charts in Basic technical analysis
Charts and graphs are important tools for traders to determine market scenarios. You may not need to use multiple charts, but you should be sure to use one. This is the first rule of successful technical analysis.
In each market condition, price charts will appear accordingly. Traders need to learn how to identify chart shapes on price charts. At the same time, determine whether the chart is a continuation or a reversal. Combining a basic chart such as MA or RSI will help you identify the corresponding situation.
Forex technical analysis with 4 basic schools
In Forex in particular and the financial market in general, there are 4 main schools of technical analysis :
- Classical and neoclassical schools: Focus on chart patterns and statistics to predict price trends.
- Harmonic School: Focus on price movements, not too much on trading volume. Traders following this school of thought believe that prices will move according to natural and spiritual laws. Technical analysis according to this school will be mainly based on Elliott and Fibonacci waves.
- VSA school (Volume Spread Analysis): Focuses on the flow of money into the market. At the same time, pay attention to the trading volume of the “Sharks”.
- Japanese school: Price analysis based on investors’ psychology.
Of the four schools above, the Japanese school is the forex technical analysis method that is most used by many professional traders.
Do not apply too many technical charts
Many traders believe that the more technical indicators they use, the higher their accuracy. However, when using too many indicators, the situation becomes complicated. Judgments may be inaccurate. Not to mention, traders can “go crazy” because they don’t fully understand all the tools.
Therefore, just master 1-2 tools that suit your analytical style and you can trade effectively.
4-step trading process in technical analysis
At this point, traders basically understand what technical analysis is. So how do you get started? Below is the 4-step process that experts recommend you apply:
Choose appropriate technical analysis tools and charts
There are dozens of different charts and indicators to analyze the market. Choose for yourself the most accessible tools. Because you have no experience, you should prioritize choosing the simplest tools to start. After a while, you can flexibly combine a number of other tools to diversify your analysis methods.
Evaluate the market through forex technical analysis
Through the chosen tool, the trader conducts market research in the past, present and future:
- Is the current market trending up, down, or standing still around the support-resistance area?
- How was the previous trading session?
- Is the buyer or seller dominant, how will market psychology potentially change?
- Is there a price pattern forming? How long have they been forming? When can it be completed? Is the pattern in the reversal or continuation group?
Determine buy/sell points
After determining the market trend, the trader will make a decision to enter an order. If the market is at risk of falling, place a Sell order. Conversely, if the market continues to increase or reverses to increase, place a Buy order. Buying and selling points will be determined through the models and price charts that traders have used to analyze.
See more: Discover Exness – The world’s leading Broker
Setting stop loss/take profit – Important factor when trading with Basic technical analysis
In any position, traders need to set a stop loss and take profit. This is an important principle to preserve capital and get the most optimal profit. Depending on risk appetite as well as the R: R ratio, traders will have to set appropriate parameters.
Conclude:
It can be seen that Basic technical analysis is not simple, especially for new traders. Therefore, constantly learning and accumulating experience will help traders take the most solid steps. Follow more great content about technical analysis at Forex Trading to get more effective trading tips.
FAQs:
Is technical analysis or fundamental analysis more effective?
Each school of Forex analysis has its own advantages and disadvantages. Traders can take advantage of both to have the most effective investment strategy.
Does technical analysis only apply to forex?
In addition to Forex, technical analysis is also effective with any financial market: stocks, indices, gold, cryptocurrencies, ETFs…
Which price model gives the most reliable signal?
Each price model will appear in each specific market condition. Therefore, traders need to understand all price patterns to accurately confirm them on the chart. Only then can trading signals be found.
