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Technical Analysis
Technical Analysis
is probably the most common and successful means of making trading
decisions and analyzing forex and commodities markets.
Technical analysis
differs from fundamental analysis in that technical analysis is applied
only to the price action of the market, ignoring fundamental
factors. As fundamental data can often provide only a long-term or
"delayed" forecast of exchange rate movements, technical
analysis has become the primary tool with which to successfully trade
shorter-term price movements, and to set stop loss and profit targets.
Technical analysis consists primarily of a variety of
technical studies, each of which can be interpreted to generate buy and
sell signals or to predict market direction. Please see our Technical
Studies page for a detailed description of these studies and their
uses.
Support
and Resistance Levels One
use of technical analysis, apart from technical studies, is in deriving
"support" and "resistance" levels. The concept
here is that the market will tend to trade above its support levels and
trade below its resistance levels. If a support or resistance level
is broken, the market is then expected to follow through in that
direction. These levels are determined by analyzing the chart and
assessing where the market has encountered unbroken support or
resistance in the past. For
example, in chart below EURUSD has established a resistance level at
approximately .9015. In other words, EURUSD has risen up to .9015
repeatedly, but has been unable to move above that point:
 The
trading strategy would then be to sell EURUSD the next time it gets close
to .9015, with a stop placed just above .9015, say at .9025. This
would have indeed been a good trade as EURUSD proceeded to fall sharply,
without breaking the .9015 resistance. Hence a substantial upside
can be achieved while only risking 10 or 15 pips (.0010 or .0015 in EURUSD). On
GCI's integrated charting system (GCI
Multi-Currency Charts), the red support line shown above
can be drawn by clicking on the "Trend" button at the top of the
chart window, and then drawing a line by clicking the mouse once at the
beginning of the line, and again at the end of the line. |
