Forex Technical Analysis Strategies

Technical Analysis Strategy

Technical analysis is the most useful tool a trader can rely on. It helps predict price movements by examining historical data - what is most likely to happen based on past information. Though, the vast majority of investors use both technical and fundamental analysis to make decisions. But before we start, if you are new to Forex trading, it is best to start with the basics, “What is Forex trading”.

Before diving into the technical analysis strategies, there is one more thing traders usually do - there are generally two different ways to approach technical analysis: the top-down approach and the bottom-up. Basically the top-down approach is first a macroeconomic analysis and then a focus on individual securities. The bottom-up approach focuses on individual stocks rather than a macroeconomic perspective.

Forex Technical Analysis Strategies

The first most important strategy to keep in mind when choosing a Forex technical analysis strategy - following one single system all the time is not enough for a successful trade.

• Forex Trend Trading Strategy - Like in any other field trend is the direction in which the market moves. The foreign exchange market does not move in a straight line, but more in successive waves with clear peaks or highs and lows.
• Forex Range Trading Strategy - is usually associated with a lack of market direction and is used when there is no trend, it could be implemented at any time, but the strategy, again, is most useful in cases where market is lacking direction. Also there are different types of ranges that stand behind the strategy, here they are:
  • Rectangular Range - the price of a security is trading within a bounded range where the levels of resistance and support are parallel to each other, resembling the shape of a rectangle. This model has pros and cons: Pros - rectangular ranges indicate a period of consolidation and tend to have shorter time frames than other range types, which can lead to faster trading opportunities. Cons - these ranges can be confusing for traders who are not looking for long-term patterns that can influence the formation of the rectangle.

  • Diagonal Range - the price descends or ascends via a sloping trend channel, this channel can be rectangular, broadening, or narrowing. This model has pros and cons as well:

    Pros - with diagonal ranges, breakouts tend to happen on the opposite side of the trending movement, which gives traders an edge in anticipating breakouts and earning a profit.

    Cons - although many diagonal range breakouts take place relatively quickly, some can take months or years to develop, which makes it tough for traders to make decisions based on when they expect a breakout to occur.

  • Continuation Ranges - is a graphical pattern that unfolds within a trend. Pros - continuation ranges can occur frequently in the middle of ongoing trends, and they often result in a quick breakout, which bring profit quickly. Cons - because continuation patterns take place within other trends, there is added complexity to evaluating these trades, it makes continuation ranges a little tricky, especially for novice traders.
  • Irregular Ranges - In an irregular range, determining support and resistance areas can be difficult, but possible. Pros - irregular ranges can be a great trading opportunity for traders capable of identifying the lines of resistance making up these ranges. Cons - the complexity of irregular ranges often requires traders to use additional analysis tools to identify these ranges and potential breakouts.

• Support and Resistance Trading Strategy Guide - Support and resistance refers to price point beyond which stock does not have tendency to fall or rise. Levels are used to determine which direction to trade and at which price level traders should enter or exit positions. In order to grasp the core of the support and resistance trading strategy, traders should understand what a horizontal level is.

  • Support levels - represents the lowest price that has stock tends to trade at.
  • Resistance level - represents the highest price that has stock tends to trade at.

  These terms are used to refer to price levels on charts that tend to act as barriers, preventing the price of an asset from getting pushed in a certain direction. Support line formation is subjected to laws of supply and demand - when stock price drops demand increases, thus support line forms, same happens with resistance line only viceversa.

  When the zone of support or resistance is identified, those price levels can serve as potential entry or exit points because, as a price reaches a point of support or resistance, it will do one of two things—bounce back away from the support or resistance level, or violate the price level and continue in its direction—until it hits the next support or resistance level.

• Forex Charts Trading Strategies - are developed on chart patterns analysis. Charts analysis give traders opportunity to look at the historical data and see price movements tendencies overall, spot same patterns overtime etc. Depending on what information trader is looking for and has on hands he/she can choose the most convenient chart for the analysis.

  There are certain types of charts: the bar chart, the line chart, the candlestick chart and the point and figure chart. By using the following technical Forex patterns traders are able to make more precise trading decisions:

  Continuation Patterns - price pattern that denotes a temporary interruption of an existing trend.

  • Pennants - key characteristic of pennants is that the trendlines move in two directions — one will be a down trendline and the other an up trendline. The two trendlines do eventually come together and that represents a signal to trade.
  • Flags - constructed from two parallel trend lines that can slope up, down or sideways - a flag that has an upward slope appears as a pause in a down, a flag with a downward bias shows a break during an up trending market.

  • Wedges - are using two converging trend lines - a wedge is characterized by two trend lines moving in the same direction, either up or down.

    A wedge that is angled down represents a pause during an uptrend, a wedge that is angled up shows a temporary interruption during a falling market. During the formation of the pattern volume typically narrows with the purpose to increase once price breaks above or below the wedge pattern.

  • Triangles - are the most popular chart patterns among others used in technical analysis since they occur more frequently in comparison to other patterns.

    There are 3 most common types of triangles - symmetrical triangles (occur when two trend lines converge toward each other and signal only that a breakout is likely to occur—not the direction), ascending triangles (characterized by a flat upper trend line and a rising lower trend line and suggest a breakout higher is likely), and descending triangles ( have a flat lower trend line and a descending upper trend line that suggests a breakdown is likely to occur). These chart patterns can last from a couple of weeks to several months.

  • Cup and Handles - is a bullish continuation pattern where an upward trend has paused, but will continue when the pattern is established. First comes "V" shape with equal highs on both sides of the cup, then the "handle" in a more settled trend - flatter and restrained pattern with slower increase.

• Reversal Patterns - price pattern that signals a change in the prevailing trend is known as a reversal pattern.
  • Head and Shoulders - patterns can appear at market tops or bottoms as a series of three pushes: an initial peak followed by a second and larger one and then a third push that mimics the first.
  • Double Top - where the market has made two unsuccessful attempts to break through a support or resistance level. Acts in a similar fashion as double bottom and can be a powerful trading signal for a trend reversal. The patterns are formed when a price tests the same support or resistance level three times and is unable to break through.
  • Gaps - occur when there is empty space between two trading periods that’s caused by a significant increase or decrease in price.

• Forex Volume Trading Strategy - Volume Trading is the number of securities traded for a certain time. The higher the volume, the higher the degree of pressure, which, depending on number of nuances, can indicate the beginning of a trend. Volume analysis can help understand the strength in the rise and fall of individual stocks and markets in general.

  To determine that, traders should look at the trading volume bars, presented at the bottom of the chart. Any price movement is more significant if accompanied by a relatively high volume + a weak volume. Not all volume types may influence the trade, it’s the volume of large amounts of money that is traded within the same day and greatly affects the market.

  There are a few general steps to take, before making trading decisions.

  • Trend Confirmation - traders need increasing numbers and increasing enthusiasm in order to keep pushing prices higher. Increasing price and decreasing volume might suggest a lack of interest, this might be a warning of a potential reversal. A price drop (or rise) on little volume is not a strong signal. A price drop (or rise) on large volume is a stronger signal that something in the stock has fundamentally changed.
  • Exhaustion Moves and Volume - in a rising or falling market, we see movement exhaustion typically, sharp price movements, combined with a sharp increase in volume, signal the potential end of the trend.
  • Bullish Signs - Volume can be useful for spotting bullish signs. For example, volume increases when the price falls, and then the price moves up and then down again. If the price does not fall below the previous low when it moves back, and volume decreases during the second decline, then this is usually interpreted as a bullish sign.
  • Volume and Price Reversals - If, after a prolonged price move higher or lower, the price begins to fluctuate with little price movement and large volume, this may indicate a reversal and prices will change direction.
  • Volume and Breakouts vs. False Breakouts - On the initial breakout from a range or other chart pattern, a rise in volume indicates strength in the move. Little change in volume or declining volume on a breakout speaks of lack of interest - higher probability for a false breakout.
  • Volume History - Volume should be looked at relative to recent history. Comparing today's volume to 50 years ago might provide irrelevant data. The more recent the data sets, the more relevant results are likely to be.
• Multiple Time Frame Analysis Strategy - analysing security's price during different time frames and detecting "trading circles", in other words discovering repetitive patterns and taking advantage of it. It could be done either on smaller or bigger timeframes scales.The process starts from exact determination of market direction on longer timeframes, then drilling down to shorter - f.e. 5-minute charts.
• Technical Indicators in Forex Trading Strategies - are based on patterns signals formed by price, volume and open interest of a securities. Technical analysis is trading that helps to evaluate investments and identify trading opportunities by analyzing statistical trends gathered from trading activity. There are two basic types of technical indicators.
  • Overlays (are applied over the prices on the exchange chart)
    • Moving Average - the reason for calculating the moving average of a stock is to help smooth out the price data by creating a constantly updated average price. Random, short-term fluctuations on the price of a stock over a specified time-frame are soften.
    • Bollinger Bands - tool defined by a set of trend lines, applied two standard deviations (positively and negatively) away from a simple moving average (SMA) of a security's price. It gives investors a higher probability of properly identifying when an asset is oversold or overbought.
    Oscillators (are applied above or below a price chart)
    • Stochastic Oscillator - is a momentum indicator comparing a particular closing price of a security to a range of its prices over a certain period of time. Stochastic Oscillator is used to generate overbought and oversold trading signals, utilizing a 0–100 bounded range of values. The general idea is that in a market trending upward, prices will close near the high, and in a market trending downward, prices close near the low.
    • Moving Average Convergence/Divergence (MACD) - is a trend-following momentum indicator that shows the relationship between two moving averages of a security’s price. MACD indicator triggers technical signals when it crosses above (to buy) or below (to sell) its signal line. It helps investors understand whether the bullish or bearish movement in the price is strengthening or weakening.
    • Relative Strength Index (RSI) - is a momentum indicator used in technical analysis that measures the magnitude of recent price changes to assess overbought or oversold conditions in the price of a stock or other asset. RSI indicator is displayed as an oscillator, a line chart that moves between two extremes and can range from 0 to 100.

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Technical Trading Strategies

The idea behind technical trading strategies is to find a strong trend followed by price rollback. Rollback should last for a short period of time, as soon as price retracement pauses trend will resume and continue moving in the direction of prevalent trend.

Technical analysis trading is useful for any type of market from stock trading, Forex trading and, even cryptocurrency trading. For example, an investor could use technical analysis on a stock like (S-GOOG) Alphabet Inc. - get a report to decide if it is a buy or not in 2021. The chart could show Alphabet's price and trading volume.