The Four Stages of Forex Technical Analysis

Some traders find technical indicators obscure and difficult to understand, leading to a sense of apprehension. In reality, aside from technical indicators, we can observe price action patterns to identify optimal entry points.

The forex market operates 24 hours a day, constantly fluctuating without pause. Its movements are like the cycle of day and night on Earth, repeating endlessly. Correspondingly, we can divide exchange rate trends into four stages: accumulation (base-building), uptrend, distribution (topping), and downtrend. These patterns can be identified by observing price charts, such as the commonly used candlestick charts.

1. Accumulation Stage (Base-Building):
   Common base patterns include triple bottoms, head-and-shoulders bottoms, double bottoms (W-shaped), and rounding bottoms (saucer-shaped). The larger the horizontal base area, the more upward momentum is accumulated, and the greater the potential price increase. During this stage, traders can adopt a range-trading strategy (buy low, sell high). Conservative traders may choose to skip this stage and wait for the next.
   
   

2. Uptrend Stage:
   When the price breaks the neckline of the previous base, it signals the start of an uptrend. The upward movement typically matches the vertical height of the prior base. This stage is like an energetic young person sprinting forward—covering great distances and jumping high. While lacking endurance, a brief rest allows for another surge. Similarly, the uptrend is characterized by large, rapid price increases. Though short-lived, a minor pullback under resistance can quickly lead to another rally. The early phase of this stage is the best time to aggressively buy. The uptrend is also the primary source of profits.
   
   

3. Distribution Stage (Topping):
   This marks the late phase of the uptrend. Prices attempt to push higher, but bulls exhaust their strength and fail to surpass the previous peak. Eventually, the price breaks the neckline downward, completing the top and entering the downtrend. During this stage, medium- to long-term positions should be closed, while short-term traders can attempt quick, range-bound trades.
   
   

4. Downtrend Stage:
   The logic here mirrors the uptrend but in the opposite direction. Sentiment is weak, prices lack support, and declines are rapid until momentum fades and the cycle returns to the accumulation stage. Traders must decisively cut losses during this phase—stop-loss orders should be executed promptly to avoid significant losses.