Course Terms & Concepts - Technical Analysis 1

1. Intro To Technical Analysis

Technical Analysis

The study of historical price patterns and data; usually used in an effort to predict future price movement patterns.Price patterns are plotted on charts that can vary in time frame and charting style. Most commonly seen in the Forex market are bar or candlestick charts.

Charting

Charting describes the process of plotting price data for the purpose of creating a visual history of a market’s (specific currency, commodity or stock) price movement. Modern charting is of course not done by hand, but rather is done with the aid of computers. Traders monitor price action across different charting time frames in order to understand a market’s history, and in turn its likelihood for a bullish or bearish future.

Candlesticks

Candlestick charting is a method of charting very common in the Forex market. A candlestick is composed of a body and an upper and lower wick. The candlestick gives traders a quick visual look at the open, high, low and closing price of a currency in a given time period. Traders monitoring a 4 hour candlestick chart are being shown the open, high, low and closing price of a currency 4 hours at a time; in other words, each candlestick represents 4 hours of price data (other time frames are also used and range from 1 minute charts to monthly charts).

Price Patterns

Price data plotted onto charts often forms unique and distinct patterns; patterns that often precede very specific bullish or bearish price moves. Also referred to as ‘chart patterns’; these formations can be very helpful to technical traders when analyzing the market. Pattern recognition is covered in depth in Chapter 2.

Price Movements

Price movement or price volatility occurs in the Forex market as a result of varying factors that include, but are not limited to the following: political and geopolitical events, the flow of money in and out of the world’s investment markets, economic stability or the lack there of within specific countries, action taken by the Federal Reserve or the equivalent government bodies of other nations to raise or lower interest rates, and the overall market sentiment derived from the study of technical analysis. For more on price movement suggested IBFXU sections include both Technical Analysis and Fundamental Analysis.

Fundamental Factors

When describing market analysis most professionals segregate the topic into two separate categories: Technical Analysis & Fundamental Analysis. While technical analysis focuses on the study of historical price data and price patterns, fundamental analysis focuses on global economics. A fundamental analyst is abreast of fundamental indicators released from governments, indications such as a nation’s Gross Domestic Product, Unemployment Rates, Interest Rates and so on. Fundamental factors generally tend to impact currency prices less quickly than do technical factors; though the opposite is often true in the minutes immediately following the release of any major fundamental indicator.

2. Basic Concepts

Indicators

Fundamental and technical indicators are comprised of statistical or mathematical data. Technical indicators are generally used to track the patterns of historical price data. The calculations and methods behind technical indicators vary depending on the purpose - be it to track price averages, price ranges, or repeated price cycles. Common technical indicators include moving averages, MACD, Oscillators and so on. Fundamental indicators are more often referring to statistical economic data published relating to the money flow and health of a given economy. Common fundamental indicators include GDP, Nonfarm Payroll, Producer Price Index and so on.

Bullish

The term bullish refers to a market in which prices are moving up continually. The term can also be used to describe the price direction of a single candle or bar within a chart. If the stock market has been trending upwards, traders will refer to it as a 'bullish market'. If a single price candle closes at a higher price than it opened, it can be referred to as a 'bullish candle'. Professional traders also often refer to 'the bulls' or the 'the bears' of a market, in this case 'the bulls' would represent the buyers in the market.

Bearish

The term bearish refers to a market in which prices are moving down continually. The term can also be used to describe the price direction of a single candle or bar within a chart. If the stock market has been trending downwards, traders will refer to it as a 'bearish market'. If a single price candle closes at a lower price than it opened, it can be referred to as a 'bearish candle'. Professional traders also often refer to 'the bulls' or the 'the bears' of a market, in this case 'the bears' would represent the sellers in the market.

Trend

In any given market, prices can essentially trend in one of three directions: up, down, or sideways. A trend is formed when prices maintain one of these three directions for a specified period of time, whether it is an hour or a week. Most traders attempt to trade with the trend when it can be easily identified, thus good trading opportunities often come when traders are able to time entries in conjunction with market trends.

Chart Formations

Price data plotted onto charts often forms unique and distinct patterns; patterns that often precede very specific bullish or bearish price moves. Also referred to as ‘chart patterns' or 'price patterns'; these formations can be very helpful to technical traders when analyzing the market. Pattern recognition and chart formations are covered in depth in Chapter 2.

Support & Resistance Levels

Support and resistance levels are used by traders to gauge points at which prices are not able to either rise higher (resistance) or decline lower (support). when prices range within these levels a 'channel' is formed. Traders generally attempt to time entry points based on a push past one of these two levels, or a push away from one of these two levels, thus indication that either the market is going to set a new high or low, or that it is going to continue to trade within the established levels.