Forex Technical Analysis Course for Beginner Traders
What is Forex Technical Analysis? How to conduct a technical market analysis? What are the indicators of technical analysis (Moving Average, Bollinger Bands, Parabolic SAR, ATR, Stochastic Oscillator, RSI, CCI, Volume)?
Forex technical analysis is a tool that traders use to predict prices by analyzing and understanding past price movements. Price and volume are key elements that traders consider to conduct a technical analysis of any financial asset, be it currency pairs , shares, or even cryptocurrencies. Technical analysis is universal and can be applied to any asset and timeframe.
Technical analysis includes many other aspects, such as behavioral, economic, and quantitative analysis. There are two types of technical analysis. The first type is based only on previous price behavior and psychological aspects, while the other is more stable. For the second type of technical analysis, Forex traders use indicators and oscillators in combination with support / resistance levels.
The vast majority of the trading community strongly believes in and relies on technical analysis. They think that external factors, such as economic, fundamental and news events, will have very weak influence on price behavior, and believe in trends and graphic models. Thus, they make extensive use of these oscillators and indicators to measure market trends.
We have prepared for you a technical analysis course for beginners using indicators and oscillators. We hope that he will help you in the development of Forex trading, and you can become a successful trader.
If you have not yet decided on the choice of broker, we recommend that you look at our Forex brokers rating with trader reviews.
Types of technical analysis indicators
- Late indicators (Moving Average, Bollinger Bands and others). This is more a trend confirmation tool. Late indicators help us confirm whether the trend is continuing or weakening. These indicators follow the movement of prices, in contrast to leading indicators.
- Leading indicators (Parabolic SAR, ATR, etc.). These indicators help us identify breakouts when the price is in a flat or not in a trend. Leading indicators are used to predict prices.
- Oscillators (Stochastic Oscillator, MACD, RSI, CCI and others). One of the most common types of technical indicators is oscillators. Oscillator values can range from a minimum of 0 to a maximum of 100, where 0 indicates oversold conditions, while 100 shows overbought conditions.
- Strength indicators. These indicators are hardly used, but they help to identify the strength or weakness of the trend, as well as identify buy and sell signals.
Consider these and other indicators of technical analysis in more detail.
1. Late Indicators
Moving Average indicator
Moving average is the most popular indicator. It shows where the price is moving, and can also serve as support and resistance. In a downtrend, a moving average can form a resistance level. This is because the moving average creates a kind of ceiling, so the price often bounces off of it. In an uptrend, the moving average can act as support, the price reaches a level and then starts to bounce up again. The Moving Average indicator helps reduce the market noise of price movements. Looking at the direction of the moving average, we get a basic idea of what the trend is now.
We will not dwell on the Moving Average indicator now, as you can find all the information about it in our article "Moving Average Indicator - Calculation, Periods, Strategies".
Bollinger Bands indicator
Bollinger Bands can show you not only the direction the asset is moving, but also the level of market volatility. Bollinger Bands consist of three lines - the central simple moving average, upper band and lower band, represented by moving averages with a standard deviation from the price. These three curves are plotted over the price movement of the chart. You can create different versions of this technical indicator by changing its period and standard deviation.
How to trade on the Bollinger Bands indicator
The use of Bollinger Bands is widely used among traders. Some traders buy when the price touches the lower Bollinger band and sell when the price touches the upper band, and exit the transaction when the price reaches the central moving average. This is a good strategy when the price moves around the average value of the Bollinger Bands indicator, but in the trend this strategy will lead to losses.
Some traders buy when the price breaks above the upper Bollinger band, and sell when the price falls below the lower Bollinger band. This is a great way to catch the trend.
When the bands are close to each other, for a certain period of time, this indicates a low volatility of the currency price. This occurs when the price consolidates or restores a previous trend. When the bands diverge, this shows an increase in volatility and, possibly, the development of a new trend.
The following is an example of buying and selling on the Bollinger Bands indicator.
Traders often combine Bollinger Bands with other indicators to get confirmation of the signal. The Bollinger Bands indicator can be used in combination with trend lines, they will help to filter out false signals.
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2. Leading Indicators
Parabolic SAR indicator
The Parabolic SAR indicator is used to determine the trend, as well as a manual trailing stop based on the tendency to move inside the parabolic curve during a strong trend. The indicator works well in trending markets, but creates false signals during lateral price movement.
How to trade using the Parabolic SAR indicator
When the price moves up, the Parabolic SAR appears as a point below the price. When the price is in a downtrend, the Parabolic SAR appears above the price. Below is an example of an uptrend using the Parabolic SAR indicator.
Let us dwell on the main points when you should buy / sell on this indicator:
- Parabolic SAR follows the price and can be considered as an indicator that follows the trend;
- Parabolic SAR follows prices like a trailing stop. You can manually rearrange your stop loss when a new point appears until the price will turn around;
- Parabolic SAR never decreases in an uptrend. It constantly protects profits as prices rise;
- As soon as the price stops growing and turns below the Parabolic SAR, a downtrend begins, and indicator points appear above the price.
Average True Range (ATR) is the average true range used to determine market volatility. The ATR indicator helps to understand the strength of the trend. It rises with the trend gaining and falls when the trend weakens. ATR can help us evaluate the movement that remains in the trend. ATR can also be used to assess the placement of stop loss and take profit areas. The most commonly used 14-bar ATR period.
The following is an example of using the ATR indicator to determine take profit and stop loss.
The ATR indicator is just a number. What he basically does is calculate the average price movement for the last 14 candles and give us a certain number. Based on this figure, we must assume how many points the price can move in both directions.
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Stochastic Oscillator indicator
Stochastic Oscillator is the most popular indicator among oscillators. It identifies overbought and oversold areas. If the value of the Stochastic Oscillator reaches 80 or more, then the currency pair is in the overbought zone, and if the oscillator value is 20 or lower, then the currency pair is in the oversold zone. You can read more about using the Stochastic Oscillator indicator in your strategy in our article "How to use the Stochastic Oscillator indicator?".
Relative Strength Index (RSI) is commonly used by traders to receive buy and sell signals on the side market. Using this indicator in a trending market is more complex. RSI can be used in three types of market conditions, namely: an uptrend, a downtrend and a limited range or side market.
The strength of this indicator lies in its use to calculate the price movement speed. The RSI periods of 14 and 21 are usually used. Technical signals are obtained by setting two levels, usually a high level of 70 and a low level of 30, where RSI above level 70 is considered an overbought condition, while RSI below 30 is considered an oversold state. In cases where there is a steady trend in the market, overbought and oversold levels should be changed to higher, for example, 90 and 10. This is due to the fact that RSI, being an oscillator that moves between 0 and 100, will remain for a long time high in an uptrend and low in a downtrend. And if you open a deal for sale immediately after the RSI value rises above 70, then you will receive a loss, since the price can continue to grow. To avoid this, it is necessary to adjust the period and RSI levels depending on the state of the market, and also use it with other indicators.
The following is an example of using the RSI indicator.
Also, the RSI indicator can be used as a guideline for profit taking. So, if the RSI value rises above 70, this is a sign of overbought, and you should take profit if you are in a buy position. If the RSI drops below 30, you should also take profits if you are in a sell position.
RSI can also act as support and resistance. An overbought area acts as a resistance level, and an oversold area can act as a support level. However, you cannot use this indicator as a separate one. You should use other technical analysis indicators in conjunction with RSI.
Commodity Channel Index (CCI) is a trading channel index that has recently become very popular with traders. It is used to determine cyclical trends not only in the commodity market, but also in Forex. CCI indicator ranges from -100 to +100.
Traders typically use CCI to determine price reversals and trend strengths. CCI should be combined with other indicators of technical analysis, as well as other price forecasting tools. It is used to identify deviations from price trends as an indicator of overbought or oversold.
In this respect, it looks like Bollinger Bands, but is presented as an oscillator. Typically, the CCI moves up and down with respect to the zero line. Normal fluctuations will occur in the range from +100 to -100. A reading above +100 means an overbought state, while values below -100 mean an oversold state.
Example of a sell signal:
Example of a buy signal:
The CCI indicator can be used to determine overbought and oversold levels. A buy signal can be given from oversold levels when the CCI returns above -100. From overbought levels, a sell signal can be given when the CCI drops below +100. The CCI indicator can also act as support and resistance (the overbought area acts as a resistance level, and the oversold area can act as a support level), but you cannot use this indicator as a standalone one. You should use other technical analysis tools in conjunction with CCI.
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The term “volume” in financial markets refers to the total number of transactions of a certain currency that have occurred in the market over a certain period of time.
Important positive or negative news can significantly affect the amount of currency. A high volume of currency is an indicator of high liquidity.
When analyzing the volume, there are recommendations on how we can determine the strength or weakness of movement. As traders, we are more likely to join strong movements and not take part in movements that show weakness, or we can observe the entrance in the opposite direction of weak movement.
Volume and market interest
The market is considered growing when volume growth is observed. Buyer participation must be on the rise in order to keep pushing prices up. An increase in price and a decrease in volume show that interest is less, and this is a warning about a strong reversal.
Falling or rising prices on small volumes is not a strong signal. A fall in prices or an increase in large volumes is a strong signal that there have been changes in the fundamental policy of the currency.
Example of buying and selling:
The Volume indicator cannot be used separately from others. It should be combined with any of the indicators to determine the transactions that occur during the price movement. You can ignore the deal if the price momentum is high and the volume is less than the previous volume.
A volume with candlestick momentum patterns will give you much more additional information about the price when it reaches the support / resistance level. A large volume with a high momentum will give you confirmation of the purchase or sale.
Volumes are more useful when trading stocks or commodities, as they are based on a central exchange. But when it comes to currencies and cryptocurrencies, there may be several brokers who provide liquidity for buyers and sellers.
Volumes may be negligible in the Forex markets, but you will have an idea of what percentage of buyers or sellers the market controls with your broker.
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Thus, the technical analysis of the Forex market is an important component of trading. In this article we examined only a small part of the technical analysis, the tip of the iceberg. Having mastered all his tools, namely technical analysis indicators, support / resistance levels, candle patterns, graphic models of the market and so on, you will learn how to predict the price for the coming hours, and for weeks and months. This will give you a huge advantage in Forex trading. It just seems complicated, but if you devote only a couple of hours a day, in a month you will achieve the first results, and after a while you will start to earn stable income on Forex.
See also the article “How to trade with the Price Action strategy?”.