Technical Analysis (TA) is the study of historical price movements to predict future trends. Unlike fundamental analysis, which focuses on economic factors, TA relies on charts, patterns, and indicators to identify trading opportunities.
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Basics of Technical Analysis
Core Principles:
- Price Discounts Everything: All known information (news, sentiment) is reflected in price.
- History Repeats Itself: Patterns tend to recur due to market psychology.
- Trends Persist: Prices move in trends (up, down, sideways) until reversal signals appear.
Types of Charts:
| Chart Type | Description | Example Use Case |
|---|---|---|
| Line Chart | Connects closing prices over time. | Quick trend identification. |
| Bar Chart | Shows OHLC (Open, High, Low, Close). | Analyzing daily volatility. |
| Candlestick Chart | Visualizes price action with wicks and bodies. | Best for spotting reversals. |
Example of a Candlestick Chart (EUR/USD):
- Candlestick Chart Example (Green = Bullish, Red = Bearish)
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Key Chart Patterns
A. Reversal Patterns (Trend Change Signals)
- Head & Shoulders: Signals a bearish reversal after an uptrend. Neckline break confirms the pattern.
- Head and Shoulders Pattern
- Double Top/Bottom: Two failed attempts to break a level (resistance/support).
- Double Top Pattern
B. Continuation Patterns (Trend Resumes)
- Flags & Pennants: Short consolidation before trend continues.
- Bullish Flag Pattern
- Triangles (Ascending/Descending/Symmetrical): Breakout in trend direction.
- Essential Technical Indicators
A. Trend-Following Indicators
| Indicator | How It Works | Trading Signal |
| Moving Averages (MA) | Smoothes price trends. | Golden Cross (50MA > 200MA) = Buy |
| MACD | Shows momentum shifts. | MACD line crosses signal line = Entry |
Example (EUR/USD with 50 & 200 MA):
- Moving Averages Example
B. Oscillators (Overbought/Oversold)
| Indicator | How It Works | Trading Signal |
| RSI (Relative Strength Index) | 0-100 scale. | RSI > 70 = Overbought (Sell), RSI < 30 = Oversold (Buy) |
| Stochastic Oscillator | Compares closing price to range. | Cross above 20 = Buy, Cross below 80 = Sell |
Example (GBP/USD with RSI):
- RSI Example
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Support & Resistance Levels
- Support: Price floor where buyers step in.
- Resistance: Price ceiling where sellers dominate.
- Breakout Trading: Enter when price breaches key levels.
Example (USD/JPY Support & Resistance):
- Support Resistance Example
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Combining TA with Price Action
- Candlestick Patterns (e.g., Doji, Engulfing) + Support/Resistance = Stronger signals.
Example Trade Setup:
- Price bounces off support.
- Bullish engulfing candle forms.
- RSI shows oversold (<30).
- Enter long with stop-loss below support.
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Common TA Mistakes to Avoid
- Overloading charts (too many indicators = confusion).
- Ignoring higher time-frames (daily/weekly trends matter most).
- Chasing breakouts without confirmation (false breakouts happen).
Final Tips for Forex Traders
- Start with higher time-frames (H4/Daily) for reliable trends.
- Use 2-3 indicators max (e.g., MA + RSI).
- Back-test strategies before trading live.