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Introduction to technical analysisFxPro Education

FxPro Education

Introduction to technical analysis

Introduction to technical analysis

Technical analysis aims to identify patterns in markets through the use of charts which can then help a trader anticipate future price movements. The vast majority of successful traders use technical analysis as one of the major tools in their trading toolbox, alongside fundamentals, positioning and psychology.

Currency Markets

Technical analysis works well in FX trading because currency markets are generally quite liquid, especially for the major currencies. As a result, there is often a great deal of price information available over a short space of time.

Apart from helping to determine currency direction, technical analysis also helps traders to set the stop-loss and take-profits levels for their trades, through the identification of support and resistance levels for individual currency pairs.

Because technical analysis is the only tool that actively analyses price action, it is often used in isolation by some traders, especially those with short time horizons.

One of the basic tools used in technical analysis is trend lines. A trend line smoothes out price action in order to clarify the underlying trend. These trend lines can slope upwards, downwards, or sideways. If a trend line is repeatedly threatened but not broken, this often provides a trader with comfort that a particular position is worth holding. Trend lines can remain active and relevant for many years (see below).

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US 10yr Treasury yield

Source: Bloomberg, FxPro

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Introduction to FX markets





Common trend lines calculated by currency traders include 50-day, 100-day and 200-day moving averages. These moving average trend lines can be used in different ways – some traders use them to set tiered stop-loss or take-profit levels, others look for the points where faster-moving averages cross slower-moving averages as a signal of a change in price direction.

Those traders with a shorter time horizon will look more closely at 50-hour, 100-hour and 200-hour charts for similar reasons. Those with very long time horizons will look at 50-week, 100-week and 200-week moving averages.

Long-term moving averages are more critical for assessing changes in trend than short-term moving averages. Conversely, the latter are more helpful for setting stop levels.

For the more advanced trader, there are a variety of sophisticated technical analysis techniques that use the methodology of moving averages such as Bollinger bands, slow stochastics and MACD (moving average convergence/divergence).

Another technical analysis tool in common use is momentum indicators. In principle, momentum indicators attempt to capture the strength of a price move and show whether a trend is accelerating or decelerating in strength. If a particular price move is losing momentum, this may be a sign of an imminent change in direction.

Momentum indicators can also be used to determine whether a market is oversold or overbought. For example, an overbought market may be one where the price has continued to reach new record highs, but more slowly on each occasion. This could indicate that a change of price direction is due.

The most common momentum indicator is the Relative Strength Index, or RSI. It is quite simple to calculate an RSI for a particular currency pair. Often, momentum indicators such as RSIs are used in conjunction with moving average techniques to provide a trader with critical information on how a currency pair looks from a technical perspective.

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EUR/USD

EUR 50d MA 100d MA 200d MA

Source: Bloomberg, FxPro

The main points to remember about technical analysis:

Technical analysis aims to identify patterns in markets through the use of charts which can then aid in anticipating future price movements.

The vast majority of successful traders use technical analysis as one of the major tools in their trading toolbox, alongside fundamentals, positioning and psychology.

Technical analysis works well in FX trading because markets are generally quite liquid, especially the major currencies.

Apart from helping to determine currency direction, technical analysis also helps traders to set the stop-loss and take-profits levels for their trades.

There are a multitude of different tools that can be constructed as part of technical analysis. Two of the most common are moving averages and momentum indicators.

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Disclaimer & Risk Warning

Disclaimer: This material is considered as a marketing communication and does not contain and should not be construed as containing investment advice or an investment recommendation, or, an offer of or solicitation for any transactions in financial instruments. Past performance does not guarantee or predict future performance. FxPro does not take into account your personal investment objectives or financial situation and makes no representation, and assumes no liability to the accuracy or completeness of the information provided, nor for any loss arising from any investment based on a recommendation, forecast or other information supplied from any employee of FxPro, third party, or otherwise. This material has not been prepared in accordance with legal requirements promoting the independence of investment research, and it is not subject to any prohibition on dealing ahead of the dissemination of investment research. All expressions of opinion are subject to change without notice. This communication must not be reproduced or further distributed without prior permission of FxPro. Risk Warning: CFDs, which are leveraged products, incur a high level of risk and can result in the loss of all your invested capital. Therefore, CFDs may not be suitable for all investors. You should not risk more than you are prepared to lose. Before deciding to trade, please ensure you tunderstand the risks involved and take into account your level of experience. Seek independent advice if necessary.





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