Forex Technical Analysis
What is Forex Technical Analysis?
Forex technical analysis is a method of predicting future exchange rate movements and determining entry/exit strategies by studying historical price data using technical tools. It aims to forecast market trends by analyzing patterns, charts, indicators, and market behavior (price and volume) through mathematical and statistical theories.
Core Theories of Technical Analysis
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Dow Theory
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One of the oldest theories, it states that prices reflect all available information, including unpredictable events.
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Prices move in three trends: primary (long-term), secondary (medium-term), and minor (short-term), with cycles ranging from <3 weeks to >1 year.
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Retracement levels: 33%, 50%, and 66%.
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Fibonacci Retracement
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Based on natural and mathematical ratios (e.g., 38.2%, 50%, 61.8%) to identify potential reversal points.
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Elliott Wave Theory
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Prices move in repetitive cycles of impulse waves (5 sub-waves with the trend) and corrective waves (3 sub-waves against the trend).
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A full cycle consists of 8 waves, with timeframes from 15 minutes to decades.
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Often combined with Fibonacci levels to predict peaks and troughs.
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Key Technical Analysis Methods
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Trend Identification
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"The trend is your friend." Use weekly/monthly charts for long-term trends and shorter timeframes for trading opportunities.
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Support and Resistance
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Support: Price levels where buying interest emerges (chart lows).
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Resistance: Price levels where selling pressure increases (chart highs).
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Broken support becomes resistance, and vice versa.
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Trendlines and Channels
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Uptrend line: Connects higher lows.
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Downtrend line: Connects lower highs.
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Channels: Parallel trendlines that define price ranges.
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Moving Averages (MA)
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Short-term MAs (e.g., 5-day, 10-day): React quickly to price changes.
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Long-term MAs (e.g., 40-day, 200-day): Smooth out noise but lag.
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Trading signals: Buy when a short-term MA crosses above a long-term MA; sell when it crosses below.
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