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What is Technical Market Analysis?
- 2 Types of Market Analysis
- What is Technical Analysis?
- Major Principles of Technical Analysis
- Main Indicators of Market Charts
- What is “Trend Indicator”?
- What is Oscillator Indicator?
- Use oscillator and trend indicators properly
2 Types of Market Analysis
Generally, there are two types of analysis – the technical and fundamental.
Although these two differ in many aspects, they both serve as useful tools to any Forex trader based on similar principles.
These principles are on the existence of price patterns and price trends in the market which can be identified and considered as opportunities to earn profit.
Either one or both may be used but it’s more common that the successful ones normally use a mix of the two methods for best results.
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What is Technical Analysis?
Technical analysis is a technique used in forecasting the movement of prices and trends of future market.
It entails the study of charts of previous market action.
Specifically, technical analysis focuses on the past market action instead of future happenings. It also takes into consideration the price of financial instruments and trading volume and then comes up with charts based on that data gathered.
With this method, analysts have an edge in tracking many markets and market instruments at the same time.
An “indicator (technical indicator)” is a tool that is used when analyzing the market price of FX, and is useful for finding points for trading.
You can think of indicators and technical indicators as having the same meaning.
Specifically, RSI, stochastic, MACD, Bollinger band, etc. are all called “indicators”.
There are roughly two types of indicators, and they are classified into “trend indicators” and “oscillator indicators”.
Major Principles of Technical Analysis
Three major principles govern technical analysis which are markets discount, prices move in trends and history is repetitive.
1. Markets discount
Markets discount refers to the actual price being a result of factors known to the market that could cause an effect on it.
These factors include supply and demand, political situations and market sentiment.
It is, however, important to note that technical analysts are only after price movements rather than the factors that cause such movements.
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2. Prices
Prices are never constant and so, they move in trends.
They can move up, down or sideways.
A trend is created when any movement takes effect.
A market trend, therefore, refers to the direction of prices which is crucial in the technical analysis of currency trading.
In determining trends, a price chart is normally used.
The chart will show a certain trend through a series of waves with highs and lows.
An upward trend is described as bullish, a downward trend is considered bearish while a move sideways means that the market is in consolidation.
3. History
History is a cycle and therefore, it repeats itself.
This holds true as well in price patterns.
Using this concept of history enables a technical analyst in currency trading to forecast the movement of prices.
This forecast, in turn, helps traders in deciding what action to take to gain profit.
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Main Indicators of Market Charts
In the Forex technical analysis theory, price trends are important.
When a currency is affected by various factors, it is reflected in the so-called price action as shown in a Forex chart.
There are actually five categories involved in a Forex chart — the indicators, number theory, waves, gaps and trends. Of the five, the indicators are the most commonly used by traders.
Several indicators have proven to be effective in the technical analysis of currency trading.
Trend indicators refer to the persistence of price movement for a period of time and are shown in trend lines.
Support and resistance indicators show the price levels based on supply and demand.
Volatility describes the size of daily fluctuations in price while cycle indicators refer to the repetitive patterns of market movement based on recurring situations.
Other general indicators are momentum and sentiment.
What is “Trend Indicator”?
“Trend Indicator” is a tool for grasping the trend of large market trends.
It is mainly used as a timing measure when making “normal” transactions.
Since the “Trend Indicator” is used to find out the direction of the overall market price, it is considered that it is easy to exert power when analyzing and forecasting medium- and long-term market prices.
However, the “Trend Indicator” give a signal after the market flow, so that signal tends to be issued later.
Specifically, the following trend indicators are available.
- Moving Average
- Bollinger Bands
- Ichimoku Kinko Hyo
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Trend Indicator is useful for predicting market direction
The “Trend Indicator” is used to search the direction of the overall market price, so it is considered to be effective when analyzing and forecasting medium- and long-term market trends.
It can be said that it is effective when you want to carry out transactions that follow the market flow in the big picture without being disturbed by temporary fluctuations in market prices.
Trend indicates the direction of movement of the market.
The characteristic of the exchange rate is that it moves in a certain direction while repeatedly performing fine vertical movements.
A “Trend Indicator” is designed to capture this flow and analyze where the market moves.
Disadvantages of “Trend Indicators”
The downside of trending is when there is a fake or incorrect sign.
Expansion means a breakout in one direction at a stretch from a narrow range price range for a certain period of time.
So, in case of “fake expansion”, the market price moves in the opposite direction to the market price, even though there is a trading sign in the technical analysis.
This happens relatively often.
When using a “Trend Indicator”, it is also important to check the trend momentum.
Even if there is a trend, it is still necessary to determine if the trend is just beginning or is it almost over.
When a trend occurs, it is better to buy and sell with the sign shown by the trend indicator.
If there is a strong trend, the same trend may continue for a long time.
But the trend with less momentum will soon end. Therefore, you also need to know how much momentum the market has.
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What is Oscillator Indicator?
“Oscillator Indicator” can be used in various situations, both short-term and long-term, but they are a tool that exerts its power mainly in box prices.
Signals tend to be emitted later with “trend indicators”, however Oscillator Indicator tends to show current market conditions in a timely manner.
Therefore, it is an “Oscillator Indicator” that is often used by investors mainly for short-term trading because it can quickly respond to market movements.
Specifically, the following “Oscillator Indicator” are available.
- RSI (Relative strength index)
- MACD (Moving Average Convergence Divergence)
“Oscillator Indicator” indicates “overbought” or “oversold”
“Oscillator Indicator” is a tool to determine whether the currency is overbought or oversold.
As such, it is a technical indicator that suggests high price alert and low price alert.
“Oscillator Indicator” is named after showing the movement of moving back and forth within a certain range like a pendulum.
“Oscillator Indicator” is drawn in a separate frame below the price and move like a pendulum within a certain range.
It is mainly used to know the state of “oversold” or “overbought” in the market price, and is represented by a numerical value of “0 to 100” or “-100 to +100”.
In addition, it is also useful in measuring the strength and weakness of the market.
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Disadvantage of “Oscillator Indicators”
The disadvantage of Oscillator Indicators is that they may not be useful if there is a clear trend.
This is because the market price sometimes moves greatly in one direction.
When the oscillator-based technical indicators are completely useless, the overbought and oversold signs remain on hold.
What is Stochastic indicator?
Stochastic is a technical indicator that judges whether the latest exchange rate is tending to be bought at a higher price or is being sold at a lower rate.
It is suitable for identifying trading points in the range market because it expresses the trend of high price/low price within a certain range as a percentage.
Conversely, Stochastics are not very useful in trend markets where prices continue to rise or fall above a certain range.
In Stochastics, in the market where prices fluctuate up and down, 0 to 100% represents whether the latest rate is expensive or cheap.
The closer it is to 100%, the more expensive it is, and the closer it is to 0%, the cheaper it can be said.
Also, it is effective for identifying trading points aiming for the reverse point of the market price.
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Use oscillator and trend indicators properly
It is necessary to select one from each of the trend indicator and the oscillator indicator and use each indicator properly according to the market price.
Of course, each indicator is not limited to one, so you can use multiple trend indicators and oscillator indicators.
If it is a trend market, the trend indicator is mainly used to analyze the quote and the oscillator indicator is used as a support.
On the contrary, in the case of raged market, the oscillator indicators are mainly used to analyze the quotes, and the trend indicators are used to support.
The important point is not to use only trend indicators for trend market, but to look at oscillator indicators even during a trend market.
By using both trend indicators and oscillator indicators, you can make more accurate judgments in the “trend market”.
Therefore, we need multiple indicators.
There are dozens of types of indicators available on trading platforms.
The fact that there are many indicators also means that there are actually no absolute indicators.
Each indicator has its strengths and weaknesses, and each has its own uses.
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