Technical analysis is used for the prediction of market movements (that is alterations in currencies prices, volumes and open interests) outgoing from the information obtained for the past. The main instruments of technical analysis are different kinds of charts, which represent currencies price change during a certain time preceding exchange deals, as well as technical indicators. The latter are obtained as a result of the mathematical processing of averaging and other characteristics of price movements. The instruments of technical analysis are universal and applicable to any Forex sector, any currency and any time span.
Technical analysis is easy to compute what is important while the technical services are becoming increasingly sophisticated and reasonably priced. They are available to all Forex participants independent of their trade plans, strategies applied and the time of position continuance.
DOW Theory
The fundamental principles of technical analysis are based on the Dow Theory with the following main thesis:
- The price is a comprehensive reflection of all the market forces. At any given time, all market information and forces are reflected in the currency prices (“The market knows everything”).
- Price movements are trend followers (“Trend is your friend”); trends are classified as up trends (bullish), downtrends (bearish) and flat (sideways).
- Price movements are historically repetitive (“The history repeats”) which results in the same patterns periodically emerging on the charts.
- The market has three trends: the longest (about 1 year) major, or primary, less enduring (1 month and more) intermediate, or secondary, and rather short (several days or weeks) minor. The primary trend has three phases: accumulation, run-up/run-down, and distribution. In this way, in the accumulation phase of a bullish market the shrewdest traders enter new positions. In the run-up/run-down phase, the majority of the market finally "sees" the move and jumps on the bandwagon. Finally, in the distribution phase, the keenest traders take their profits and close their positions while the general trading interest slows down in an overshooting market. The secondary trend is a correction to the primary trend and may retrace one-third, one-half or two-thirds from the primary trend. In frame of a major trend may be any amount of secondary or minor trends.
- Trends exist until they are broken and their reversals are confirmed. It shows examples of reversals in a bearish currency market. The buying signals occur at points A and В when the currency exceeds the previous highs.
