Technical analysis is a type of analysis based on the price action of an asset or forex pair on a chart.
The justification for using technical analyses is that charts can reveal trends, market sentiment, and important price zones, which may reveal future prices of the instrument being traded.
When conducting technical analysis, traders will look at the kinds of candlesticks that have/are presenting themselves as well as patterns that several candlesticks form when considered together. For example, candlesticks that present very long wicks may indicate indecision in the market, as the price of the instrument could not sustain a certain price over a certain time and eventually closed closer to where it opened. Theories exist for what certain candle types and formations made up of multiple candles mean for future price action. A good baseline knowledge of these theories is essential in forex/ CFD trading.
Popular timeframes that traders perform technical analysis include:
- 5-minute chart
- 15-minute chart
- Hourly chart
- 4-hour chart
- Daily chart
- Monthly
To aid their technical analysis, traders will also employ ‘Indicators’ on their charts.
Indicators, such as moving average lines, are pattern-based signals that are informed by historical and emerging data. Technical indicators can be overlaid on a chart’s price candles or appear in their own pane below the chart. There are four main kinds of technical indicators: Trend following, Oscillators, Volatility, and Support/Resistance.
Examples of popular indicators that technical analyst use include:
- Exponential and Simple moving averages
- Relative Strength Index (RSI)
- Stochastics
- Moving average convergence divergence (MACD)
- Bollinger Bands
Traders will typically employ several indicators at once to support a trading hypothesis.
