Technical Analysis: A Quick Overview

The movement of the financial markets is influenced not only by classic supply and demand, but also due to technical and fundamental influences.

When a trading decision is made based on an economic news release indicator, it is considered a fundamental; triggered only by this information alone. For example, if the NFP (Non-Farm Payroll) number in the United States is released with better-than-expected results, it is viewed as positive for the value of the US dollar and an influx of currency purchases would usually be the outcome. Traders who favour fundamental analysis would place their predictions accordingly.

Yet, the fundamental influence can sometimes be better understood when backed by technical analysis (which has its own fan base), or vice-versa. Technical analysis consists of charting the previous moves made in the market in order to figure out / forecast future price actions for a specific financial instrument – whether this be for stocks, currency pairs, indices, commodities, etc. There are numerous indicators, strategies, charting tools and techniques available for the facilitation of technical analysis, making it an advanced and sometimes complicated approach to trading. However, the most successful traders are dedicated to learning at least some of the most popular approaches.

Using the MetaTrader platform, almost all FX brokers offer the possibility to apply technical analysis on any given currency pair. The terminal makes the experience extremely straightforward.

Ensuring the Market Watch button is selected, you can right click on any currency pair and choose the Chart Window tab.

This will open up a new chart on your trading platform, displaying the historical moves that your chosen currency pair have made and according to the timeframe you require.

There are three styles of chart that can be used: Bar, Line and Candlestick. The differences between these are demonstrated in the images below:

Example of a Bar chart

Example of a Line chart

Example of a Candlestick chart

By far the most popular one is the Candlestick chart. It brings Japanese Candlestick Techniques into analysis, which have increased in popularity among traders in recent years.

The Western approach to technical analysis implies patterns (triangles, head and shoulders, double tops or bottoms, rising and falling wedges, etc). All these are visible and can be analysed both on line or bar charts, as well as on candlesticks. The use of indicators, such as trend indicators and oscillators, is also characteristic of the Western trading approach to technical analysis.

The Japanese approach on the other hand, shifts the focus to the use of candlesticks for clarity. Particularly when used on bigger time frames, such as weekly or monthly charts. Each candle represents a condition, with future price actions. Such support and resistance levels are then identifiable by the appearance of the candle, or small group of candles.

The biggest advantage of technical analysis is the fact that it provides a trader with a clear set-up; an entry, a target and a stop loss, regardless of the time horizon. Fundamental analysis is fantastic when used to trade within a bigger time horizon, and with a change in fundamental reasoning (e.g. the reason for closing a trade or even opening a new one, may be the opposing monetary/economic policies within both sides of a currency pair).

Both techniques offer enormous insight and strength to a trader’s strategy and overall analysis of an asset. However, as you will discover from our educational material for each school, one can sometimes offer value to the other.