What is Technical Analysis?
All traders should look to technical analysis to support their trading. In fact, some traders would see it as necessity before placing trades.
Technical analysis involves the study of prices to predict future financial movements. It is not so much an exact science nor does it provide absolute forecasts. Technical analysis is more of an accompaniment requiring much practice. It is also important to note that not all techniques of technical analysis will work for every instrument or product.
The following section will cover the basics of the technical analysis of trending – a very useful technique and processes for any beginner Forex trader.
Identifying A Trend
Identifying a trend is important as it provides a general outlook to the movement of the market. More specifically it signifies the direction of the market as affected by supply and demand.
As simple as this may appear, trends do not always stand out – especially at times of great fluctuation and change! As you will see, prices do not move in a singular, straight line in any one direction but rather in a series of highs and lows.
The two trends to look for will be an uptrend or a downtrend. An uptrend occurs when there is an overall collective of higher highs and higher lows. A downtrend is identified as one where there are a series of lower lows and lower highs.
Below is an example of each. In the first line, looking from left to right, you will see a series of numbered points at each directional change point. Point 2 is a high as the price falls after this point. Point 3 is a low falling from a high price point. For this instrument line to remain an uptrend, each successive low must not fall below the previous lowest point. If it does the trend is then deemed a reversal.
Trendlines are useful in determining trends over a longer series of highs and lows.
A trendline is simply a line that is added to the chart to represent the general direction of the market. These lines clearly show the trend and are also used to identify trend reversals.
How to add a trendline in MT4
On your MT4, make sure the chart window you wish to add a line to is active. Click on the ‘line button’ and drag out a line in the general direction of the graph’s movements. Try to align it so it touches most of the lowest lows if you’re looking at uptrends or the highest highs if you’re looking at a downtrend. You will notice that little white dots appear on your line. Grab these dots to adjust the angle or to move your lines. Experiment with these dots. You will see that each will have a different way of moving your line.
How to use trendlines
In the chart below, a trendline has been drawn at each of the lowest lows and it is moving in a general upward direction. This chart represents a general uptrend.
This line also represents the support level the instrument does not move below. A support level acts like a pricing floor preventing it from being pushed downward. This type of trendline helps traders to anticipate the point at which a stock’s price will begin moving upwards again.
Conversely, a downward trendline is drawn at the highs of the chart (as seen the chart below). This line represents a resistance level in which the instrument price does not go above. Every time the price moves from a low to a high, there appears to be a ceiling which the price rarely ever exceeds.