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Getting Started in Currency Trading, by Michael Archer and Jim Bickford

December 30th, 2008

Page 87 – Technical Analysis

While fundamental analysis can provide long term forecasts for currency movements, technical analysis provides guidance for shorter term price movements.  Technical analysis uses supply and demand data to identify oversold, overbought, resistance, and bullish and bearish signals.  These signals can provide short term guidance for entry and exit points for traders. A great advantage of technical analysis is that data can be observed visually through charts.

A technical trader believes that all market fundamentals are depicted in the actual market data, so actual market fundamentals do not need to be studied in detail.  They believe that history repeats itself and that markets move in predictable patterns and waves.  Technicians use charts and market data to identify trends and waves to optimize entry and exit points.

Traders should familiarize themselves with chart patterns such as Trend Lines, Support and Resistance Lines, Reversal Patterns, such as the Double Top, Double Bottom, Head and Shoulders Top, and Head and Shoulders Bottom, Continuation Patterns, such as the Flag or Pennant, Symmetrical Triangle, Ascending Triangle, Descending Triangle, or Rectangle, Gaps, such as the Breakaway Gap, Runaway Gap, Exhaustion Gap, or Island Reversal Gap.

Trend Lines. If a trend line for a downward trend crosses through the most recent prices, a buy signal is generated. Conversely, if the trend line for an upward trend passes through the most recent prices, then a sell signal is generated.

Uptrend Trend Line gets Broken

Uptrend Trend Line gets Broken

Support and Resistance. Support levels indicate a price at which most traders think the price will move higher.  There is sufficient demand at that particular price to halt further downward price pressure and negate any forced selling. Resistance levels are the opposite.  They are usually levels where traders feel the currency is over-priced or where they previously ‘bought-in’ and where they now want out to recoup their losses on a losing position.

Support and Resistance Lines

Support and Resistance Lines

Reversal Patterns. These are important because they show ‘shakeouts’ and ‘flushouts’ of weak and/or strong and/or speculative hands and that the currency can now move convincingly in a new direction.

Double Top:

Double Top

Double Top

Double Bottom:

Double Bottom

Double Bottom

Head and Shoulders Top:

Head and Shoulders Top

Head and Shoulders Top

Head and Shoulders Bottom:

Head and Shoulders Bottom

Head and Shoulders Bottom

Continuation Patterns. A continuation pattern implies that while a visible trend was in progress, it was temporarily interrupted, and then continued in the direction of the original trend. The proper identification of a continuation pattern can prevent the trader from prematurely liquidating an open position that still has profit potential.

Flag or Pennant:

Flag Continuation Pattern

Flag Continuation Pattern

Ascending and Descending Triangle:

Ascending and Descending Triangle

Ascending and Descending Triangle

Gaps. A gap can be an indication of a new price trend.  It occurs when the trading range of a given day gap up or gap down above or below the previous days trading range.  This is often the result of an emotional response to overnight news or new information.

Breakaway Gap:

Breakaway Gap

Breakaway Gap

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