Principles of Technical Analysis
Most novice Forex traders underestimate the role of technical analysis and begin their trading
solely on intuition; only after the first failures do they move on to a deeper study of the theoretical foundations of analysis.
When starting to study the basics of technical analysis, it is important to understand the basic principles on which it is based; there are not so many of them, so getting to know them will not take much of your time.
The principles of technical analysis reveal its essence and make it possible to understand what you should pay attention to first.
By its behavior, the price reacts to both external and internal factors affecting the exchange rate.
Any event is immediately reflected in a price change. Therefore, according to techies, it is not at all necessary to track fundamental news, but rather to closely monitor the price. 2. The trend has a clear direction - even when there is no change in the exchange rate of the currency pair, the trend still moves in time, parallel to the time axis.
Therefore, in practice, there are three types of trend directions: upward, downward and horizontal.
• Uptrend – displays a positive change in the exchange rate over a certain time period.
• Downtrend – indicates a predominant price decline in the analyzed time period.
• Flat Forex – the price does not have a clearly defined vertical direction and moves along a horizontal plane.
It is the correct determination of the direction of price movement that is the basis of a profitable position.
You should not confuse the main trend with a correction or take a reversal for another trend correction. 3. The trend moves along a curve - if you learn to take this principle of technical analysis into account when trading, you can consider that the profit is in your pocket.
This fact is the reason for most unsuccessful transactions. The price almost never moves in a straight line; after each movement in the direction of the existing trend, a correction or reverse fluctuation occurs. The ability to distinguish a correction from a major movement is the basis of Forex trading.
Identifying the main movement is not so easy, especially if you are trading on medium-term or long-term time frames; tracking the latest news will help here. 4. The principle of time frames - taking into account the duration of time frames is quite important, since the direction of the trend at different time periods can be completely opposite.
You should always clearly know in which direction the main trend is moving and, based on this, open trades on shorter time periods. 5. History repeats itself - most technical indicators and automatic advisors operate on this principle.
The exchange rate reacts equally to certain market conditions, so identifying historical patterns always brings good results. 6. Everything has a relationship - technical analysis widely uses the concept of correlation, its essence lies in the fact that there is a certain relationship between each of the currencies and when the price of one monetary unit increases, the exchange rate of another currency associated with it changes.
7. You cannot be sure of anything -
even an already open transaction constantly requires control; you should trade according to the market, and not according to forecasts. And if the market situation changes, immediately react to it. These principles of technical analysis are used in almost any of the known Forex trading strategies , so knowing and understanding them will greatly facilitate the trading process.