What You'll Learn
Technical analysis is the study of historical price movements to forecast future price direction. Unlike fundamental analysis (which examines economic factors), technical analysis focuses purely on price charts, patterns, and indicators. This lesson covers the foundational concepts every forex trader must understand.
What is Technical Analysis?
Technical analysis is a method of evaluating currencies by analyzing statistics generated by market activity, such as past prices and volume. Technical analysts believe that past trading activity and price changes can be valuable indicators of future price movements.
Core Premise
"Price discounts everything." All available information - economic data, political events, market sentiment - is already reflected in the price. Therefore, analyzing price action alone is sufficient for making trading decisions.
What Technical Analysis Studies
- Price Patterns: Recurring formations that suggest future movements
- Trends: Overall direction of price movement (up, down, sideways)
- Support and Resistance: Key price levels where buying/selling pressure increases
- Volume: Trading activity levels (less relevant in forex due to decentralized nature)
- Indicators: Mathematical calculations based on price/volume
- Candlestick Patterns: Visual representations of price behavior
Technical vs Fundamental Analysis
Technical Analysis
Focus: Price charts and patterns
Data: Historical prices, volume, indicators
Timeframe: Short to medium term
Question: "What is price doing?"
Best for: Timing entries/exits
Fundamental Analysis
Focus: Economic factors
Data: GDP, interest rates, employment
Timeframe: Medium to long term
Question: "Why is price moving?"
Best for: Understanding direction
Best Approach: Combine Both
Professional traders often use fundamental analysis to determine what to trade (which currency pairs to focus on) and technical analysis to determine when to trade (precise entry and exit points). You don't have to choose one or the other.
Three Core Principles of Technical Analysis
1. Price Discounts Everything
All known information - economic reports, political events, market sentiment, supply and demand - is already reflected in the current price. You don't need to analyze hundreds of variables; just study the price chart.
2. Price Moves in Trends
Prices tend to move in trends rather than randomly. Once a trend is established, it's more likely to continue than reverse. This forms the basis for trend-following strategies.
3. History Repeats Itself
Market psychology is remarkably consistent over time. Patterns that worked in the past tend to work again because human behavior doesn't change. Traders react similarly to similar situations.
Types of Price Charts
1. Line Chart
Description: Connects closing prices with a single line
Best for: Quick visual of overall trend
Limitation: Doesn't show high, low, or open prices
2. Bar Chart (OHLC)
Description: Shows Open, High, Low, Close for each period
Components: Vertical line shows high/low, left tick is open, right tick is close
Best for: Detailed price action analysis
3. Candlestick Chart (Most Popular)
Description: Japanese candlesticks show same data as bar charts but more visually intuitive
Components: Body shows open/close range, wicks show high/low
Color coding: Green/white = close higher than open (bullish), Red/black = close lower than open (bearish)
Best for: Pattern recognition and visual clarity
Recommended: Use Candlestick Charts
90% of forex traders use candlestick charts because they provide the most visual information at a glance. The color coding makes it easy to quickly identify bullish vs bearish periods. All examples in our lessons use candlestick charts.
Understanding Timeframes
Timeframes represent how much time each candle/bar covers on your chart. The same currency pair looks completely different on different timeframes.
| Timeframe | Each Candle Represents | Trading Style | Typical Holding Period |
|---|---|---|---|
| M1 (1-minute) | 1 minute | Scalping | Seconds to minutes |
| M5 (5-minute) | 5 minutes | Scalping | Minutes |
| M15 (15-minute) | 15 minutes | Day Trading | Minutes to hours |
| H1 (1-hour) | 1 hour | Day Trading | Hours |
| H4 (4-hour) | 4 hours | Swing Trading | Days |
| D1 (Daily) | 1 day | Swing Trading | Days to weeks |
| W1 (Weekly) | 1 week | Position Trading | Weeks to months |
| MN (Monthly) | 1 month | Position Trading | Months to years |
Multiple Timeframe Analysis
Professional traders analyze multiple timeframes to get complete picture:
- Higher Timeframe (Daily/Weekly): Identify overall trend direction
- Medium Timeframe (4H/1H): Find support/resistance levels and setups
- Lower Timeframe (15M/5M): Fine-tune precise entry points
Example: Multiple Timeframe Approach
- Daily Chart: Identify EUR/USD is in uptrend
- 4-Hour Chart: Find pullback to support level
- 15-Minute Chart: Wait for bullish reversal pattern, enter long
- Result: Trade with daily trend, enter at optimal price
Key Technical Concepts
Support and Resistance
Support: Price level where buying pressure overcomes selling pressure, preventing further decline
Resistance: Price level where selling pressure overcomes buying pressure, preventing further rise
These are the most important concepts in technical analysis. When support breaks, it often becomes new resistance (and vice versa).
Trends
- Uptrend: Series of higher highs and higher lows
- Downtrend: Series of lower highs and lower lows
- Sideways/Range: Price oscillates between support and resistance
Golden Rule: "The trend is your friend." Trade with the trend, not against it.
Chart Patterns
Recognizable formations that suggest future price movements:
- Reversal Patterns: Head and Shoulders, Double Top/Bottom, V-Top/Bottom
- Continuation Patterns: Triangles, Flags, Pennants, Rectangles
Essential Technical Analysis Tools
1. Trend Lines
Straight lines connecting swing highs (resistance) or swing lows (support). Show trend direction and provide dynamic support/resistance levels.
2. Moving Averages
Average price over specified period, smoothing out noise to reveal trend direction.
- Simple MA (SMA): Equal weight to all prices
- Exponential MA (EMA): More weight to recent prices
- Common periods: 20, 50, 100, 200
3. Oscillators
Indicators that fluctuate within bounded range, showing momentum and overbought/oversold conditions:
- RSI (Relative Strength Index): 0-100 scale, >70 overbought, <30 oversold
- Stochastic: Compares closing price to price range
- MACD: Shows relationship between two moving averages
4. Fibonacci Retracement
Based on Fibonacci sequence, shows potential support/resistance levels during pullbacks. Key levels: 23.6%, 38.2%, 50%, 61.8%, 78.6%
5. Candlestick Patterns
Specific formations showing shifts in buying/selling pressure:
- Doji, Hammer, Shooting Star, Engulfing, etc.
Avoid Indicator Overload
Beginners often add 10+ indicators to their charts. This creates conflicting signals and confusion. Start with 2-3 tools maximum: price action + one trend indicator + one momentum indicator. Master these before adding more.
Getting Started with Technical Analysis
Your Learning Path
- Master candlestick reading: Understand what each candle means
- Learn support and resistance: Most important concept
- Understand trends: Identify direction and strength
- Study basic patterns: Start with 5-10 common patterns
- Add one or two indicators: Moving averages and RSI are good starts
- Practice on demo account: Apply what you learn without risk
- Keep learning: Technical analysis is a lifelong study
Recommended Next Steps
- Learn Support and Resistance Levels
- Master Candlestick Patterns
- Understand Moving Averages
- Identify and Trade Trends
Important Reminder
Technical analysis is not magic. It doesn't predict the future - it assesses probabilities based on historical patterns. Combined with proper risk management, it provides an edge in the markets. But there are no guarantees in trading.