Learn to read price charts, identify trends, and use technical indicators to make informed trading decisions in the forex market.
Technical analysis is a method of evaluating securities by analyzing statistics generated by market activity, such as past prices and volume. Unlike fundamental analysis, which looks at economic factors, technical analysis focuses purely on price charts and trading patterns.
The core belief behind technical analysis is that all known information is already reflected in the price, and that prices move in trends that tend to repeat over time. By studying historical price patterns, traders aim to predict future price movements.
Technical analysis is based on three main assumptions: the market discounts everything, prices move in trends, and history tends to repeat itself.
Technical analysis is effective because it captures the collective psychology of market participants. When millions of traders see the same patterns and react similarly, these patterns become self-fulfilling prophecies. Price levels that have been significant in the past often remain significant in the future.
Understanding different chart types is fundamental to technical analysis. Each type presents price information in a unique way, offering different insights into market behavior.
Connect closing prices with a continuous line. Best for identifying overall trends at a glance. Simple but lacks detail about price action within each period.
Show Open, High, Low, and Close for each period. Vertical line represents range, horizontal ticks show open (left) and close (right).
Most popular among forex traders. Body shows open-close range, wicks show high-low. Color indicates direction (green/white = bullish, red/black = bearish).
Candlestick charts are preferred by most professional traders because they make it easier to spot patterns and understand market sentiment at a glance.
One of the most important skills in technical analysis is identifying the trend. Markets move in three directions: uptrend (higher highs and higher lows), downtrend (lower highs and lower lows), or sideways (ranging).
An uptrend is characterized by a series of higher highs and higher lows. Each peak is higher than the previous peak, and each trough is higher than the previous trough. Traders look to buy on pullbacks during uptrends.
A downtrend shows lower highs and lower lows. Each peak is lower than the previous one, and each trough is also lower. Traders look to sell on rallies during downtrends.
When price moves between a clear support and resistance level without making new highs or lows, the market is ranging. These conditions require different strategies than trending markets.
"The trend is your friend" is one of the oldest trading maxims. Trading in the direction of the trend significantly increases your probability of success.
Support and resistance levels are price points where buying or selling pressure is expected to be strong enough to pause or reverse a price movement.
Support is a price level where buying interest is strong enough to overcome selling pressure. It acts as a "floor" that prevents prices from falling further. The more times a support level is tested without breaking, the stronger it becomes.
Resistance is a price level where selling pressure overcomes buying interest. It acts as a "ceiling" that prevents prices from rising further. Like support, resistance levels strengthen with each successful test.
A key concept in technical analysis is that broken support often becomes resistance, and broken resistance often becomes support. This "role reversal" provides excellent trading opportunities.
Price points where multiple highs or lows have formed. These are the most reliable support/resistance levels.
Diagonal lines connecting higher lows (uptrend) or lower highs (downtrend). Act as dynamic support/resistance.
Psychological levels like 1.1000 or 1.2000 often act as support/resistance due to order clustering.
Technical indicators are mathematical calculations based on price, volume, or open interest. They help traders identify trends, momentum, volatility, and potential reversal points.
Moving averages smooth out price data to identify trends. The Simple Moving Average (SMA) calculates the average price over a specific number of periods. The Exponential Moving Average (EMA) gives more weight to recent prices, making it more responsive to new information.
Common uses include: 50 and 200-period MAs for trend identification, MA crossovers for signals, and dynamic support/resistance.
RSI is a momentum oscillator measuring the speed and magnitude of price movements on a scale of 0-100. Readings above 70 indicate overbought conditions (potential sell), while readings below 30 indicate oversold conditions (potential buy).
MACD shows the relationship between two moving averages. It consists of the MACD line, signal line, and histogram. Crossovers between these lines generate buy and sell signals, while divergence from price can indicate potential reversals.
Bollinger Bands consist of a middle band (SMA) and two outer bands set at standard deviations above and below. They help identify volatility and potential overbought/oversold conditions. Price touching the upper band suggests overbought conditions; touching the lower band suggests oversold.
Don't rely on a single indicator. Combine 2-3 complementary indicators (trend + momentum + volatility) for confirmation. Too many indicators lead to analysis paralysis.
Price action trading involves making decisions based on the raw price movements without relying heavily on indicators. It focuses on candlestick patterns, chart patterns, and market structure.
Open and close at nearly the same level, indicating indecision. Can signal reversals at key levels.
Large candle completely "engulfs" the previous candle. Bullish engulfing signals potential upside; bearish signals downside.
Long wick with small body shows rejection of prices. At support, suggests bullish reversal; at resistance, bearish.
Candle that fits entirely within the previous candle's range. Signals consolidation and potential breakout.
Chart patterns are formations created by price movements that suggest future direction. Common patterns include head and shoulders (reversal), double tops/bottoms (reversal), triangles (continuation), and flags/pennants (continuation).
Practice identifying these patterns on historical charts before trading live. Open a demo account and apply technical analysis to build your skills without risking real money.
Find a broker that offers great charting tools and technical analysis features.