Definition and function of technical analysis
Technical analysis is one of the most important and widely used methods in financial markets, including the Forex market. In this method, analysts identify market patterns and trends using historical price and volume data and make trading decisions based on them.
Technical analysis examines and analyzes price movements and trading volumes in the past to predict future market trends. This analysis is based on the assumption that all the available information is reflected in the current market prices and predictable patterns can be obtained by examining past price behavior.
Technical analysis uses various tools and methods, some of the most important of which are:
Price Charts
The most important types of price charts are as follows:
- Line chart: Show the closing price in each time frame.
- Candlestick: Display a range of open, close, high and low prices in a certain period of time.
- bar chart: similar to candlestick chart with more details in price range display.
Indicators
The most commonly used technical indicators are as follows:
- Moving Averages: such as Simple Moving Average (SMA) and Exponential Moving Average (EMA).
- Relative Strength Index (RSI): to measure the saturation level of buying or selling in the market.
- MACD: moving average convergence/divergence to detect changes in strength, direction, momentum and duration of a trend.
Price patterns
The most important price patterns are:
- Continuation patterns: such as triangles, rectangles and flags.
- Reversal patterns: such as head and shoulders, double tops and bottoms.
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Trend lines and support and resistance levels
Which include:
- Trend Lines: to identify the general direction of market movement.
- Support Levels: points where the price tends to stop or return.
- Resistance Levels: points where the price tends to decrease.
Technical analysis in forex helps traders identify appropriate entry and exit points. This is done by identifying different trends, patterns and indicators. The advantages of this analysis include quick and easy access to historical data, the ability to adapt to different types of markets and time frames, and the possibility of using advanced analytical software and platforms. In general, technical analysis is one of the powerful tools in the hands of forex traders who can make effective trading decisions by combining knowledge and experience.
How can we learn technical analysis of financial markets?
Learning technical analysis in financial markets requires going through different stages and using various resources. In the following, several methods and resources for learning technical analysis are introduced:
learn the basic concepts
Get to know basic concepts such as types of charts (line, bar, candle), trends, support and resistance, price patterns and indicators.
Reputable Books
Books like “Technical Analysis of Financial Markets” by John Murphy and “Technical Analysis from A to Z” by Steve Neeson can be a good start.
Online and face-to-face training courses
Sites like Coursera, Udemy, Investopedia and BabyPips offer comprehensive and various courses in the field of technical analysis. In many cities, different schools hold face-to-face courses in the field of technical analysis.
Reading articles and blogs
Many financial and trading websites publish free educational articles in the field of technical analysis. Sites like Investopedia, TradingView, and DailyFX are great resources.
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Using software and trading platforms
Platforms such as MetaTrader 4 and 5, TradingView and Thinkorswim are good tools for practicing technical analysis and viewing charts and indicators.
Demo Accounts
Many brokers offer some type of trading accounts where you can practice technical analysis without risking real capital.
Following daily analysis
Websites like Bloomberg, CNBC and Forex Factory publish daily analysis and market news that can help you understand the market better. Following famous analysts on social networks such as Twitter and LinkedIn can also be a good source of learning.
Practice and review of past transactions
Recording your transactions and analysis in a journal will help you to identify and improve your strengths and weaknesses. Re-examining past trades and analyzing mistakes will help you learn and improve your skills.
Learning technical analysis takes time and practice. By using various resources and continuous practice, you can gradually strengthen your skills in this field.
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The difference of technical analysis and fundamental analysis
The two analytical methods, technical and fundamental, have major differences from each other in terms of application, the most important of which are mentioned below.
Period of time
Fundamental analysis is very useful for a long-term buy and hold approach with an investment objective. Positions are held for months or years based on long-term value and growth potential. However, technical analysis is useful for short-term swing trading and day trading where positions are only held for days or weeks to capture small price changes.
Trends
Fundamental traders aim to profit from long-term market trends as stock prices converge to intrinsic value over time, while technical traders aim to take profit of
short-term price trends and momentum before quickly closing positions. They try to catch the turning points of trends.
Risk management
Fundamental traders determine trade volume and stop loss based on risk tolerance and long-term volatility. Their goal is to balance risk and reward. Technical traders use short stop-losses and take profits to take small profits while controlling losses. Due to the shorter holding period, they have a higher risk tolerance.
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Number of transactions
Fundamental traders rarely enter new trades or change positions based on significant changes in the company’s value or growth prospects. The goal of technical traders is to repeatedly enter and exit positions to consistently capture short-term price changes.
Triggers
Fundamental traders rely on events such as economic data releases, earnings news, production rates or macroeconomic changes that drive asset valuations and prices. Technical traders rely on signals from technical indicators, breakouts, pivot points, or candlestick patterns that can reveal short-term price changes regardless of news or events.
Back test
Fundamental trading strategies cannot be easily tested or automated because each asset and its associated news is unique. But technical trading strategies are tested and automated using historical data to determine the profitability of a strategy before using it in live trading. Automated trading systems are also built based on technical rules.
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Introducing the best technical analysis books
Technical analysis in the forex market is one of the important and widely used topics for traders and investors. In the following, we introduce some of the best books in this field:
“Technical Analysis of the Financial Markets” written by John J. Murphy
This book is one of the basic and reference books in technical analysis. In this book, John Murphy explains the basic concepts of technical analysis, price patterns, indicators and charts.
“Japanese Candlestick Charting Techniques” written by Steve Nison
This book is one of the important sources for learning Japanese candlestick charts, which are widely used in technical analysis. Steve Neeson thoroughly and comprehensively explains candlestick patterns and their use in predicting market movements.
“The Complete Guide to Technical Analysis for the Futures Markets” written by Jon Markman
This book deals comprehensively with the concepts and techniques of technical analysis in the futures markets, many of these concepts can be used in the forex market as well.
“Technical Analysis Explained” written by Martin J. Pring
Martin Pring’s book is one of the best sources for a deep and comprehensive understanding of technical analysis. This book explains various methods and tools of technical analysis and their application in predicting market trends.
“A Complete Guide to Volume Price Analysis” written by Anna Coulling
This book focuses on the importance of trading volume in technical analysis and shows how volume analysis can help improve the accuracy of forecasts.
“Trading for a Living” written by Alexander Elder
This book combines technical analysis with trading psychology and money management and is one of the good sources for learning successful trading strategies.
“The Little Book of Currency Trading” by Kathy Lien
In this book, Cathy Lane has introduced the basic concepts and practical strategies for trading in the forex market. This book is very useful for those who are looking to learn technical analysis in the currency market.
Each of these books can help you improve your knowledge and technical analysis skills in the forex market. Depending on your level of knowledge and experience, you can use different books to get a more comprehensive view of the market and technical analysis tools.
