To start trading Forex, beginners need to learn two basic things: technical analysis and graphical analysis. Both analyzes provide the graphical figures that help to predict how the market will move.
Technical and graphical analysis figures may look very similar, but in fact they represent two very different concepts.
Technical analysis is used to predict the future trend of prices through the study of historical data of a given market.
Graphical analysis on the other hand is a part of technical analysis which expressly refers to the graph, as well as the formation of graphics which will be represented on the Cartesian.
To know when to enter the market there are graphical representations that come to help, so it is essential that a trader deepen the study of the graphics, and in particular the interpretation of the classic figures.
In Forex trading there are stages in which the changeover takes place from a trend to another, in these intervals are inserted precise figures, formed by the movement of prices. The appearance of these formations is the confirmation of a definite trend.
The most used graphical figures by Forex analysts are: the Japanese candlesticks, line charts and bar charts.
We can divide graphical figures in two groups.
- Figures that confirm the direction of the trend (triangles, rectangles etc…) develop in the course of a trend phase, or even during a settling of quotes.
Triangles allow making predictions to discover and enable to try to ride the basic trend. This figure looks at critical stages of the market when prices tend to move sideways.
When a triangle acts as the figure of determination, the average slope of the output trend is more or less equal to that of the threshold trends, regardless of whether it is a bullish or bearish trend.
The best known and used triangles by Forex traders are: the coil, the wedge and the flag (flag). The wedge is a fast triangle is formed in the middle of a very steep trend. Also the flag is formed in the middle of a steep trend, but it has the shape of a small trend delimited by straight lines and pointing in the direction contrary to the main trend. Usually the distance that is still to go after the appearance of the flag is at least equal to the flagpole (flag pole).
Rectangles are simple to interpret, as it locates a price congestion phase. Prices move within a fixed band, in landscape mode identified from a support and a resistance. In this figure, usually the volumes are interspersed through thick and thin, and traders, will exploit these oscillations to sell when they are high and buy when they are idle.
- Inversion figures are so defined because they indicate the change of direction of the market, and they usually meet at the end of a trend. This is the case of the head-shoulders figure and double bottom/double top.
Head and shoulders figure turns out to be one of the most reliable Forex technical analysis charts to represent a trend reversal. This figure is made up of three subsequent increases of the courses, divided by two reactions down. The second projection is the most consistent and represents the head (head). The completion of this temporal space will be only with the straight line joining the two minimum of the reaction, this line is called neckline (neck line).
Generally, after tracking the neck line, it generates a return of quotes (pull back) toward the head, which is followed by a continuation of the prices trend in the same direction of the break.
Double top and double bottom are lines that are formed when the price of a cross strikes twice the support and resistance levels before changing its direction.
The double top is a bearish figure, while the double bottom is a bullish figure.
Forex analysts distinguish three types of movements, which correspond to three trends: upward, downward or neutral.
Up Trend forms when prices succession leads to higher highs and lower training. The waves of the trend of the mean are formed from smaller waves.
Down Trend is generated when maximum and minimum are decreasing. The line connecting the maximum is parallel to the line joining the minimum.
Sideways Trend (neutral) happens when the maximum and minimum tend to remain on the same level.
It is important to note that these graphical figures, in most cases, will form in long periods and in conditions of high volatility. This means that to make money in trading Forex, graphical analysis is not enough. It is recommended to use fundamental analysis with a large dose of money management and choosing the right stop loss levels.