Home > Education center > Basic knowledge of forex > Forex basic

Basic knowleage of forex

“Technical analysis” sounds much more complicated than the actual process. It can be called "price analysis" because it may be a more accurate description. Using cartographic data, global traders can analyze the markets they choose. Objective: Try to determine future price changes. For technical analysts, this means understanding the past price changes.

The chart of price changes illustrates the visual game between buyers and sellers. Note how the price patterns formed in the graph tend to repeat; technical traders attempt to determine the type of these properties and lay the groundwork for their transactions.

Does the technical analysis work?

Analyzing price patterns is actually very similar to analyzing human behavior. Although human beings are sometimes unpredictable in nature, humans are generally regarded as habitual creatures. Ordinary humans follow certain patterns. To observe the daily routines of an ordinary person before going out to work, their behavior may seem random or purposeless. However, if the same person is observed day after day, it is not difficult to outline the routine of this person every morning in a relatively short period of time. In fact, you can fairly accurately predict how the creatures you observe will prepare for their day's activities, even to the minute.

The foreign exchange market is sometimes seen as a habitual creature. Analyzing price changes may be effective because in the past we can tell us how the market will respond to certain situations. History itself will repeat itself. Technical analysis provides traders with a degree of expectation when considering future price changes. We don't have a crystal ball to predict the future of the market, but traders identify key factors that can be used to understand patterns, past, present and future.

Will technical analysis fail?

Technical analysis will fail when a trader fails to consider fundamentals. Fundamental factors such as political events, interest rate hikes, and unemployment rates will affect the foreign exchange market, which may be significantly more prominent than any other market. Fundamental factors often drive significant price changes. Traders who focus on technical analysis are unlikely to ignore the US non-farm payrolls data released on the first Friday of each month, and expect their technical indicators to be as accurate as the previous day. Prices may react violently shortly after the announcement of non-agricultural employment data; during this period, it may not be possible to rely on technical analysis. Purely technical traders understand that certain political factors leave all other price forecasts out of the window.

Three basic types of charts

Line Chart
line chart is the simplest type of chart. The advantage of a line chart is that it is simple and easy to use, providing an orderly and easy-to-understand overview of the price of a security for a specific period of time.

Line Chart

Bar Chart
chart shows the opening price, high price, low price and closing price of each period of a security. A bar chart is the most common type of securities chart. As shown in the bar chart below, the top of each bar represents the highest price at which the security is traded within the time limit, and the bottom of the bar represents the lowest price traded. The closing "minimum lifting unit" is displayed to the right of the bar, indicating the last price of the trade during the term. If the opening price is available, it will be indicated by the "minimum lifting unit" on the left side of the bar.

Bar Chart

Candlestick Chart
Candlestick chart displays the opening price, high price, low price and closing price in a format similar to today's bar chart, but underestimates the relationship between the opening price and the closing price. The candlestick chart is just a new way of observing the price and is not used for any calculations. Each candlestick represents data for a period (eg, one day). The figure below shows how to read the candlestick chart:

烛柱图表

Basic analysis tool

In technical analysis, the first thing I hear is often "Trend is your friend." Grasping the big trend can help traders understand the overall direction of the market. Daily, weekly and monthly charts are best used to judge long-term trends. After determining the overall trend, technical traders generally begin to identify trends within the trading period they choose.

The Trend

TrendOne In the technical analysis, the first thing I hear is often "Trend is your friend." Grasping the big trend can help traders understand the overall direction of the market. Daily, weekly and monthly charts are best used to judge long-term trends. After determining the overall trend, technical traders generally begin to identify trends within the trading period they choose.

Support and Resistance

Support and ResistanceSupport Support points and resistance points refer to price points in the chart where upward or downward pressure is repeated. The support point appears at a low level and the resistance point appears at a high level. Once the point is broken, the two tend to transform each other. For example, if the support point breaks down and then shows a downward trend, the support point will usually become a new resistance point. During the market's rise, the resistance point can be a support point for the upward trend; while during the down market, the support point may become a new resistance point for the downtrend.

Trend Lines and Channels

Trend Lines and ChannelsThe Trend trend line is simple and helpful in identifying the direction of market trends. An up straight line needs to connect at least two consecutive lowest price points. The more points, the better. Each successive point must be higher than the previous point. This continuous line helps determine the trajectory of market movement. The upward trend line is a practical method for judging the support line/support point. Connecting two or more points in the opposite direction forms a down line. Whether the trend line is valid depends in part on the number of connected points.

Moving Averages
moving average is useful for determining overall trends. The moving average reveals the average price of the currency at a given point in time for a given time period. Call it "mobile" because they reflect the latest average price for the same period of time.

The weakness of A moving averages is that they lag behind the market and therefore may not be able to reflect trend changes at the most favorable point in time. The best way to solve this problem is to use a shorter period of time, because shorter periods are more likely to reflect recent price changes than longer periods. At the same time, however, short-term average moving lines are also prone to false trend-changing signals. Therefore, when using moving averages, it is best to combine the average lines of two different periods. When the short-term moving average is higher than the long-term moving average, it is generally a buy signal. Conversely, when the short-term moving average is lower than the long-term moving average, it is a sell signal.

In terms of methods, there are three main types of moving averages in mathematics: Simple Moving Average (SMA), Exponential Moving Average (EMA), and Weighted Moving Average (WMA). Among the exponential moving average and the weighted moving average, the latest price data has a larger proportion; while in the simple moving average, all data have the same proportion. Therefore, many traders prefer to use exponential moving averages and weighted moving averages to offset the hysteresis of moving average signals.

Indicators and Oscillators

The price indicator and the swing indicator are very different in terms of use and source. Price metrics on price bars and candlesticks include moving averages, Bollinger Bands, Parabolic SAR and various other indicators. These are generally lagging indicators that reflect the historical trend of price behavior. They usually imply and confirm the direction of past trends and current momentum.

 

The oscillating indicator that appears above or below the price bar alone is also a lagging indicator. However, unlike the price indicator, the swing indicator is very effective for judging overbought and oversold conditions. Therefore, if the trader wants to judge the interval consolidation, rather than the unilateral market, then the most commonly used are these indicators. These oscillators include Stochastics, Smoothing Similarity Moving Average (MACD), Relative Strength Index (RSI), and a variety of other indicators.

Drawing Tools

Like, except for the above trend lines and channels, the technical drawing tools are similar to the analysis tools, and their use is common and varied. Because the drawing tools can present Fibonacci callback lines, Gann Fan, Andrew's Pitchfork and other indicators in different ways, they are highly regarded by traders. Most of these drawing tools are used to study important areas, including support points and resistance points. Trend lines are the most basic drawing tools, including diagonal and horizontal lines. In addition, other drawing tools are complex and often require complex mathematical calculations.

Reverse graphics - top and bottom graphics

Double Top and Double Bottom

When a currency pair is on the rise and encounters a resistance point, the double top is formed. After reaching the double top, the price began to fall back to the support level, and the neckline (Neckline) appeared, and the price will eventually continue to rise back to the resistance level. After failing to break through the resistance level, the price will fall for the second time. At the Neckline price, prices have started a new round of decline.

The opposite of the double top is called double bottom. The downtrend began to reverse when prices fell to support levels twice. If it fails to break through the support level, the price will start a new round of recovery. Sometimes the currency pair will reappear Neckline and then switch from support to resistance.

Triple Tops and Triple Bottoms

The top of the typical triple top graph is at the same price. The three highest price points can be connected into a line to form a resistance line. The neckline (Neckline) can be formed by joining the various support points. After reaching the third position, the price fell below the neckline (Neckline). The market may rebound in the short term, breaking through the previous neckline and entering a new round of decline.

The picture above shows an example of a triple top. Please note that the neckline is not in the normal horizontal line, but is inclined upward. As far as these figures are concerned, traders need to use their proficiency skills to refine them from theoretical forms into real-world operations.

Rounded Tops and Rounded Bottoms

Another graphic type of circular top and circular bottom, that is, its reverse line is "arc". The circular top pattern is formed when the market is expected to gradually transition from a bull market to a bear market, while the circular bottom pattern is formed when the market expects a smooth transition from a bear market to a bull market. When the market trend gradually changes from rising to falling, the price change will form a bowl shape.

Finishing graphics

The finishing type graphic indicates that the price represented by the graphic is only a small pause of the current trend, and will continue the current trend after breaking the pattern trend. We will analyze the inversion trends implied by the following figures: flag, rectangle, triangle, and wedge.

Flags

The flag map represents a short pause in an active, progressive market trend. Flag patterns are often formed by an obvious, nearly horizontal line. The two sides of the flag pattern consist of two parallel support bit lines and resistance bit lines. The appearance of this graph is usually accompanied by a significant breakthrough and the price rises to the current trend.

The flag pattern has a tendency to form a slope and is opposite to the market trend.

Rectangles

The histogram shows a period of stable price in the current trend, during which the price fluctuates back and forth between the two horizontal lines and eventually returns to the previous trend. This pattern is not significant for future trading trends – because the rectangular chart rarely accelerates the current trend of changes to past trends. Although the histogram is not a decisive feature of the reversal of the mainstream trend, it creates an opportunity for traders to trade in the region, because the trader can oscillate back and forth between the resistance level and the support level. Position.

The figure above shows the rising and falling trend of the price in the theoretical rectangular chart.

Triangle patterns and Wedges

The triangle pattern is usually a characteristic of a steady trend, followed by an accelerated price break that is opposite to the continuous trend. Triangular patterns include three basic types: isosceles triangles, ascending triangles, descending triangles, and another variant -- wedge triangles.

(1)Symmetrical Triangle

is a stable period in which the price trend rises or falls. The isosceles triangle consists of a straight upward support line and another oblique downward line. The isosceles triangle will also have a price break in the same direction as the previous trend, but this situation does not occur often.

(2)Ascending Triangle

rising triangle represents a stable period in which the price trend rises. It consists of a relatively flat, even horizontal resistance line and another oblique support line.

As the two lines meet, the probability of price breaks continues to increase. The pattern trend ends when the price rises far above the resistance level. The picture on the right is a rising triangle formed by a steady upward trend for nearly one month.

(3)Descending Triangle

descending triangle represents a stable period in which the price trend falls. It consists of a diagonally downward resistance line and another relatively flat, even horizontal support line. As the two lines meet, the probability of price breaks continues to increase. When the price falls sharply below the support level, the pattern trend ends and the downward trend continues. See the right side of the figure for an example.

(4)Wedges

Wedge triangles have most of the characteristics of isosceles triangles and flag maps. The formation of the wedge pattern is roughly the same as the triangle pattern, which indicates that there will be a large price break in the same direction as the current trend. However, similar to the flag pattern, the wedge itself will form a trend opposite to the current trend before a price break in the same direction as the current trend.

Risk warning:All foreign exchange, precious metals are accompanied with great risk, therefore is not suitable for all investors. Please be sure to fully understand the risks at your own can bear within the scope of the investment. More risk for details, please refer to the risk of WSG statement and deposit policy.