Why Do You Need Technical Analysis?

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Why Do You Need Technical Analysis?
Why Do You Need Technical Analysis?

To make Forex trading successful, traders should be able to analyze and predict the price movement. We have already written about fundamental analysis, economic calendar and how to use it. In this article we will take a closer look at the Forex technical analysis.

Technical analysis is a method of forecasting the currency pair’s behavior based in the chart of its movement in the past. This type of analysis does not take into account other factors influencing the market, such as the world economic and political events.

Proponents of technical analysis believe that the price chart contains everything to make predictions. They think, it is not necessary to determine the reasons of such price behavior. However, an experienced trader always combines results of technical and fundamental analysis in order to build a proper trading strategy.

What is the trend?

Prices of trading instruments on the Forex market are constantly moving up and down under the influence of various factors. If price is moving in a certain direction for a long time, it’s said that the trend has formed.

Trend is a movement of the currency pair price in one direction in a certain period of time.

There are three types of trends: upward, downward and flat.

To build the trend, there should be at least two highs (if there is an uptrend) or lows (if there is a downwards trend) in the graph, through which a trader should draw the line. The more highs / lows are in the chart, the more reliable the trend is.

How to build a trend line in MetaTrader 4? To do this, select the “Trendline” button at the top of the trading platform graphic panel and drag a line segment between two extreme highs / lows, while holding the left mouse button.

Support and resistance levels

Other powerful tools of technical analysis are support and resistance levels. These lines form a corridor within which prices are falling and growing.

The level of support is lower than the current price level. When the price approaches this point, buyers dominate on the market, demand is growing, the price turns around and goes up.

The level of resistance, on the contrary, is higher than the market price. While approaching the line, the price turns around and begins to decline. The reason for this is that the sellers dominate on the market and the supply increases.

The level of support can be figuratively called a floor, and level of resistance – a ceiling.

On the chart the support level is indicated as a line drawn through the price lows, in which the price has turned around and started to grow. The resistance level is applied in a similar way, but the line is drawn through the highs.

Indicators

In technical analysis, the trader is not obliged to carry out all the calculations manually by himself. For this purpose there are a lot of indicators, which are based on a mathematical formulas. The indicators are used to analyze and predict the behavior of the financial instrument. With their help, traders can determine the direction of the trend, market volatility, oversold and overbought zones, entry and exit points, etc. You can use both standard built-in Metatrader 4 indicators, and downloaded from the Internet ones.

To use one of the indicators built into the MT4, click “Insert” – “Indicators” and select the one you need from the dropdown list.

Despite the huge variety of trading indicators all of them can be divided into two main groups: trend and oscillators.

Technical analysis can be done by yourself, but you can use forecasts and trading recommendations of independent financial analyst firms, such as Trading Central.

Also read daily forecasts for the four main currency pairs in our blog.