What is Technical Analysis
“Technical analysisâ€‌ is an industry term that more often than not sounds much more complicated than the actual process is. Really, it ought to be referred to as “price analysisâ€‌, as this would be a more accurate description. Through the use of charted data traders around the world analyze their market of choice. The objective: determine future price movement. The means: understanding price movement patterns of the past.

The charting of price movements creates a visual tug-of-war between buyers and sellers. The large majority of Technical traders in the Forex market focus their attention on candlestick data, a method of charting that offers a visual interpretation of the high, low, open and close of a currency price within a certain time frame. Combined with various forms of pattern recognition (which will be covered later in the course) candlestick charting offers traders a visual look at the market’s past prices and trends. Analyzing this historical data in order to predict the movements of future prices is the process known as “technical analysisâ€‌.

Why Does Technical Analysis Work?

Technical analysis is often dispelled as a myth, even a fool’s errand. There are those who believe that price movement is completely random and completely unpredictable. True, technical analysis is never an exact science (predicting the future never is). However, the true fool would be he or she that ignores the power of technical analysis, particularly in the Forex market.

Analyzing price patterns is actually very similar to analyzing human behavior. While humans can at times be unpredictable in nature, humans are typically considered to be creatures of habit. The average human adheres to certain paradigms, paradigms that are rarely broken. Do you brush your teeth or shower first? Do you comb your hair before or after you shave? The point: if one were to observe an average person’s daily routine before leaving the house for work their behavior may seem random or without purpose. However, if one were to observe the same human day after day, within a relatively short amount of time it would not be hard to outline that person’s morning routine. In fact, nine times out of ten you would probably be able to predict with impressive accuracy how your observed creature would prepare for their day, perhaps even down to the minute.

The Forex market is also a creature of habit. Analyzing price movement is effective because the past can teach us how human beings (the real living and breathing organism of this market) will react to certain situations. History does repeat itself. Technical analysis offers the Forex trader a certain level of expectancy when considering future price movements. In a sense, accurate technical analysis is a trader’s true edge. There is no crystal ball for predicting the future of the market, though there are keys to understanding patterns, past, present and future.

Charting & charting styles
â€کCharting’ is essentially the most basic component of technical analysis. As such, some would argue that the more raw and basic data plotted on a chart is of little use to the technical trader. Instead, they might argue that a technical trader needs more advanced indicators as a means of determining price direction. Indicators such as moving averages, momentum indicators, oscillators and so on… will, ultimately be of grand use to the technical trader, but not without first learning the basics!

Line Charts
There is nothing more basic than a line chart. A simple visual representation of data, the Line Chart plots the closing price of a single day and over the course of weeks and months connects the dots. The below image shows an example of a basic line chart:
The line chart’s simplicity is often seen as its strength. Or so it may be in other markets. In the Forex market the line chart offers very little insight into the market’s volatility or movement within the time frame of a single day. As most Forex traders are â€کday traders’ (often in and out of positions in a 24 hour period) a line chart, even if plotted by the hour, would still leave much to be desired. As we continue to explain other charting methods, the previous point will make more sense!

Bar Charts
Bar charts are in essence the less visually appealing version of Candlestick charts. Candlestick charting is the most popular method used by today’s Forex traders. However, it might be important to understand the one before the other. A Bar Chart displays a price’s open, high, low and closing prices. As shown in the image below the top of the bar chart represents the highest price of the period, and the bottom of the bar represents the lowest price of the period. To the left and right side of the bar are “ticksâ€‌, the left tick represents the open price of the period and the right tick represents the close price of the period.

Candlestick Charts
Really the only choice for today’s Forex traders, the candlestick chart offers the same information as does a bar chart, but does so in a much more ascetically pleasing manner. As is illustrated in the two images below the candlestick is comprised of a “bodyâ€‌ and an upper and lower “wickâ€‌. The body of the candle is typically a dark color when the close is at a lower price than was the open (a bearish candle). Conversely, if the close is at a higher price than was the open the candle will be a light color (a bullish candle). The wick of the candle represents the entire range of price for that period. The top of wick of course represents the price at its highest point, while the bottom of the wick represents the price at its lowest point. A quick glance at a candlestick will tell a trained eye literally everything they might want to know about a price within a certain time frame, i.e. what was the high and low price, was it bullish or bearish, where was the open and close. A trader can also quickly glance at a series of candles and with little thought note how many consecutive candles have been bullish or bearish; which in conjunction with other technical analysis often serves as an appropriate timing method to enter a trade.

What am I Looking For?
More often than not, traders in the Forex market doom their own technical analysis. The reason is simple; they look at a chart and try to remember everything that they have ever studied about technical analysis. Before long it seems that one philosophy only contradicts another, an obvious entry becomes a source of confusion and so on. Some of the best traders in world have a bit of a mental check list that is always considered when analyzing a chart. However, they also know that too many technical indicators used in conjunction with one another is a fast track to a certain demise.
There are certainly a few things that you are going to want to consider when looking at a chart. As the course continues you will be better prepared to compile your own trading style. For the time being, consider the following a check list for the novice. Ask yourself what the chart on your screen is telling you, and which of the following considerations are worth considering:
• Is there an obvious trend or direction of the market within the time frame that you are viewing?
• Are there any basic chart formations such as ascending or descending triangles, wedges, pennants, double tops or bottoms or otherwise that might suggest a pending breakout or trend reversal.
• Is the market trading within the walls of any obvious support and resistance levels, or is the market trading within a channel?
• Have you considered at least two technical indicators, i.e. two technical indicators that complement each other well?
• Have you ignored the impulse to consider every technical indicator that you have ever read a paragraph or two on?
You should now understand at least the basics of what a technical trader is looking for when analyzing a chart and the market. As we continue to dissect various technical indicators and forms of pattern recognition your skills will be refined, for the time being it is enough to know, if nothing else, what it is that you will ultimately be looking for.

Support & Resistance Trends
Fortunately for traders in the Forex market, dealing in this market is often about dealing in trends. It is often said that â€کthe trend is your friend’; there is truth to this, but only when a trader understands why the market trends and the underlining factors that can often disassemble a forming trend (these factors will be covered throughout the course as we further analyze technical analysis).

The image above shows an example of an upwards trend. Notice that the trend line was drawn by identifying the lowest low of the trend and connecting the line to the following low preceding a new high. A solid trend line should continue in this manner until at least four lows followed by new highs are plotted. This trend line can also be referred to as a support level. In other words, think of this line as if it were the roof of a house. During this trend period the price range is going to crawl along the roof of the house. In an upwards trend we are obviously looking for an opportunity to buy. It is generally taught that a trader’s best buy entry point during an upwards trend would be at the lowest low of the candle on the third touch of the support level, as shown below:

Just the opposite of an upwards trend, in a downwards trend our trend line can be referred to as a resistance level. Now as opposed to trading along the outside of a roof we are trading along the top of the ceiling. During this trend a trader can assume that the price is often going to reach the ceiling, but never push through it. A trader following a well developed downwards trend is looking for an opportunity to sell on the third touch of the resistance line at the highest possible point of the candle, as shown below:


Timing an entry point within a trend is as key as recognizing a trend, as obviously they will not last forever. First consider the time frame of the chart that you are viewing in relation to the likely continuance of the trend. As mentioned earlier, we are usually looking to buy or sell on the third touch of a support or resistance level within a trend. Using historical data in your charts, you will notice that the average trend will not provide more than 3 to 4 additional touches of the support or resistance after the first 3 that would have inspired you to note the trend to begin with. Thus, depending upon whether you are viewing a 1 minute chart, a 5 minute chart, or so on you will need to gage an estimated time frame within which you will trade.

Double Tops & Double Bottoms
Double Tops do not only provide technical traders with a firm indication of a beginning downward trend; they also prove that price movement is not random, but rather is a clear indication of market sentiment. Double Tops occur when a new high is plotted, raising the resistance level. The price then retraces and declines, only to rise again and reach the same high or resistance level.

As can be seen in the image above Double Tops can be thought of as true market sentiment. Traders around the globe push the price to a new high; because the new high is a tad extreme the price is subsequently brought back down. Again traders push up to the same level, testing it just one more time; again the price feels too extreme. The market has decided that an upwards trend is just not in the cards, twice a new high was tested and twice the market sold to push it back down. After noticing a Double Top a trader is very safe to assume that for the time being the market will move in a downwards trend, thus affording an opportunity to sell, or exit a soon to be falling long position.
Of course, Double Bottoms are just the opposite of Double Tops. Twice the market will test a new low, and twice the market will refuse the idea of pushing beyond that point. The buyers will rally and an uptrend will follow.

There are three types of triangles that technical traders focus on:

1. Ascending Triangle
2. Descending Triangle
3. Symmetrical Triangle

Ascending triangles
Are considered bullish pattern formations, though depending on whether they are formed during an up-trend or a down-trend they may have different implications towards future price movement. Spotted within an up-trend an ascending triangle is typically considered an indication that the upwards trend will continue. Just the opposite, if an ascending triangle forms during a downwards trend it is considered an indication of a trend reversal. Essentially, ascending triangles are comprised of a series of candles that, in accordance with the pattern’s name, form the shape of a triangle. The term ascending triangle refers to the fact that the triangle’s two trend lines are not created equally; the top line of the triangle will represent a fairly even level of high prices, while the lower level of the triangle will represent a continued series of higher lows. The consolidation between buyers and sellers at an upward slant suggests pressure from the buyers. The resistance line can typically only hold for so long before the buyers get the best of the sellers and the price breaks out in an upwards trend, at which point the resistance level often becomes the new support level; or for a seasoned trader, a wise level to place a stop loss. The image below shows an example of an ascending triangle. As can be seen, it is generally safe to assume that the triangle will break out at least five candles before the actual point of the triangle would form.

Descending triangles
Naturally, are just the opposite of ascending triangles. In a downwards trend the triangle forms as an indication that the trend will continue downwards. In an upwards trend the triangle forms as an indication of a trend reversal. Descending triangles are formed when there is a series of progressively lower highs and relatively even lows. As can be seen in the image below the top line or resistance line of the triangle will be angled down, while the lower line or support level will appear as a level horizontal line

The concept of support and resistance in the charts is basic to the understanding of price patterns and their implications. Edwards & Magee defined support as the “buying, actual or potential, sufficient in volume to halt a downtrend in prices for an Appreciable period. Resistance, of course, is the antithesis of this and consists of selling, actual or potential, in sufficient volume to keep prices from rising for a time. “Support and resistance, as thus defined, are nearly but not quitesynonymous with demand and supply, respectively."

Further expounding this concept, Edwards & Magee tell us:
“A support level is a price level at which sufficient demand for a stock appears to hold a downtrend temporarily at least, and possibly reverse it. i.e., start prices moving up again. A resistance zone by the same token, is a price level at which sufficient supply of stock is forthcoming to stop, and possibly turn back, its uptrend. There is, theoretically, a certain amount of supply and a certain amount of demand at any given price level... But a support range represents a concentration of demand, and a resistance range represents a concentration of supply.â€‌
Notice the angle of the moving average shown above at various points across the chart. Moving averages not only give traders a much smoother look at the true trend of the market, they also offer keen directional insight found in the angle of the moving average line. Erratic sideways markets tend to be represented by moving average lines that are flat or sideways, whereas markets that are beginning to trend strongly in one direction or another will begin that trend with a very angled moving average line. Remember, it is one thing to look at a completed moving average line and determine at what point would have been an excellent entry into the market, it is another thing to spot the angle of the line as it is developing and at that point wisely enter the market. A true technical analyst is after what the moving average can tell him or her about the coming hours or days of the market, not what the moving average can prove about what should have been done in the past. That said, look for angles!
Support and resistance – in their basic forms – are represented on the charts as follows:
In a trending market, especially one in which prices travel within the confines of a clearly defined channel, the support and resistance lines will tend to keep prices within the channel, bouncing from support to resistance in an alternating “zigzagâ€‌ pattern.
Support and resistance are more than just an upward trending or downward trending channel lines. They may be encountered from a variety of chart patterns and other places of price congestion on the charts.
One rule of thumb for determining where a market or security will meet with either support or resistance on the charts is to find previous chart areas where consolidation has occurred. If, for example, a particular stock has stalled out in a net sideways or other congestion pattern at a certain level in the recent past before falling to a lower level, it is all but likely that the stock will encounter difficulty in penetrating that same level later on as it rallies and tries to overcome it. This, of course, does not necessarily mean the former area of consolidation (in this case, resistance) will prove impenetrable; to the contrary, it will probably be overcome eventually. But not without considerable effort on behalf of the buyers. The greater the congestion, the greater the effort required to overcome that congestion, whether it is in the form of support or resistance. Thus support and resistance serve as checks in the development of a trend (be it a rising or a falling trend) to keep the trend from moving too far, too fast and thus getting out of hand and eliciting violent reactions. (This does not apply, of course, in market crashes or “buying panics,â€‌ in which case support and resistance levels become meaningless. But such instances are fortunately quite rare.
This leads us to the next related principle of support and resistance which Edwards & Magee elucidate for us:
“…here is the interesting and the important fact which, curiously enough, many casual chart observers appear never to grasp: These critical price levels constantly switch their roles from support to resistance and from resistance to support. A former top, once it has been surpassed, becomes a bottom zone in a subsequent downtrend; and an old bottom, once it has been penetrated, becomes a top zone in a later advancing phase.â€‌
Thus, if a certain security breaks through an overhead resistance level at, say $50, then the moment prices are above the$50 level, it automatically becomes a support. Conversely, if the $50 in our hypothetical security had been a support checking prices from moving below it and the $50 level is suddenly penetrated then $50 automatically becomes resistance. This principle, which we call the “principle of interchangeability,â€‌ hold true for older levels of support and resistance as well, not just recent levels.
Other instances of support and resistance can be found not only in areas of chart congestion but in geometric chart patterns as well. The symmetrical triangle affords just such an example. Throughout the formation of the triangle, the upper and lower boundary lines serve as resistance and support, respectively. However, an even stronger level of support level of support and resistance (depending on which direction prices take upon breaking out from the triangle) is provided by the apex of the triangle. By drawing a horizontal line from the apex and extending it across the chart an analyst will be provided with a reliable support/resistance level. However, such levels usually become weak as time passes. Thus, a chartist will want to regard this as a strong support/resistance only in the days/weeks immediately following a price breakout from the triangle.
Concerning volume, it is sufficient merely to point out that the power of a resistance (or support) range is estimated by using the criterion of volume. In other words, the greater the amount of volume was recorded at the making of a top (resistance) or bottom (support) in a given market or security, the greater the strength of that top or bottom will be and the more effort will be necessary to penetrate it in the future. As Edwards & Magee put it:
“In brief, a single, sharp, high-volume bottom offers somewhat more resistance than a series of bottoms with the same volume spread out in time and with intervening rallies.â€‌
Another criterion Edward & Magee discuss that is worth noting here is the extent of the subsequent decline from a resistance zone. Or, to phrase it differently, how far will prices have to climb before they encounter the old bottom zone whose resistance potential the analyst attempt to appraise? “Generally speaking,â€‌ Edwards & Magee write, “the greater the distance, the greater the resistance.â€‌
In other words, the higher that prices must travel before breaking the previous top, the stronger the resistance that top is likely to hold.
Finally, in answer to the oft-asked question as to what exactly constitutes a legitimate “breakâ€‌ of either support or resistance, we would refer the analyst back to the old Edwards & Magee “three percent rule,â€‌ which states that a break above a support or resistance level (or through a corresponding chart pattern) by distance of at least 3 percent, and accompanied by increased trading volume, should be viewed as the start of a new trend and therefore followed

Most literature written on technical analysis, more specifically technical indicators, begins with Moving Averages. The reason for this is simple; they are considered by most analysts the most basic and core trend identifying indicators. As its name would suggest a moving average calculates an average of price range over a specified period. For example, a 10 day moving average gathers the closing prices of each day within the 10 day period, adds the 10 prices together and then of course divides by 10. The term moving implies that as a new day’s closing price is added to the equation, the day that is now 11 days back is dropped from the equation.

The example above outlines what would be considered a Simple Moving Average. There are at least 7 varieties of moving averages, but generally the average Forex trader is focused on just one of the following three: Simple Moving Averages, Exponential Moving Averages, and Weighted Moving Averages.

Before examining the various calculations and types of moving averages it is essential that we as traders understand what a moving average is trying to tell us. Its message is really quite simple, and is primarily focused on market expectations. A moving average calculating the last 30 days of prices in the market essentially represents a consensus of price expectations over that 30 day period. The example below shows a moving average line across a basic candlestick chart.

Understanding a moving average is at times as simple as comparing the market’s current price expectations to that of the market’s average price expectations over the time frame that you are viewing. The average gives us a bit of safe zone, or a range that traders globally are comfortable trading within. When prices stray from this safe zone, or from the moving average line a trader should begin to consider potential entry points into the market. For example, a price that has risen above the moving average line typically implies a market that is becoming more bullish, traders are on the up, and with such will come good opportunities to buy. Just the opposite, when prices begin to fall below moving average lines the market is becoming visibly bearish; traders should thus be looking for opportunities to sell.

Notice the angle of the moving average shown above at various points across the chart. Moving averages not only give traders a much smoother look at the true trend of the market, they also offer keen directional insight found in the angle of the moving average line. Erratic sideways markets tend to be represented by moving average lines that are flat or sideways, whereas markets that are beginning to trend strongly in one direction or another will begin that trend with a very angled moving average line. Remember, it is one thing to look at a completed moving average line and determine at what point would have been an excellent entry into the market, it is another thing to spot the angle of the line as it is developing and at that point wisely enter the market. A true technical analyst is after what the moving average can tell him or her about the coming hours or days of the market, not what the moving average can prove about what should have been done in the past. That said, look for angles!

Simple Moving Averages

Calculating simple moving averages is really quite simple (no pun intended). As was outlined in the beginning of this section the sum of all closing prices is divided by the number of days in the equation. With each new day the now oldest day that is no longer a part of the time frame is subsequently dropped from the equation. A simple moving average is considered a lagging indicator. In fact, the simple moving average perhaps epitomizes the meaning of lagging indicator in that its visual data often comes a bit after the fact, and can be hard to act on. Nevertheless, simple moving averages are key to understanding the markets general feel of where the price rage should be trading at, or the safe zone that we referred to earlier. When prices begin to break away from the moving average line in conjunction with a sharply angled moving average line – basic mathematics is predicting a move up or down in the market. The notable down side is that when observing lagging indicators, this prediction often comes too late; thus the reasons for other types of moving averages, averages that more heavily weigh recent data and can offer quicker predictions

What They are and How to Use Them for High-Impact Results
Using two moving averages – one of shorter length and one of longer length – to generate trading signals is commonly used among traders today. This method, known as the “double crossover method,â€‌ is especially suited for securities that happen to be in trending, as opposed to range-bound markets. (Trending markets are characterized by steady upward price movement in bull markets and steady downward price movement in bear markets. Prolonged sideways movement with little sustained progress up or down is characteristic of “range boundâ€‌ markets.)

There are many different ways in which this double crossover method may be used. The combination possibilities are endless. The two moving averages can be daily or weekly, but one must always be of a shorter time frame than the other. For example, you might consider using a 12- and 24- day moving average in conjunction with security’s price chart. Or a 10- and 30- day, or (as in the chart examples we provide here, a 30-day and 60-day average).The shorter moving average measures the short-term trend, while the longer MA measures the longer-term trend. Buying and selling signals are given whenever the two cross over or under one another.

Trading rules for the double crossover method are quite simple: whenever the shorter-term moving average crosses above the longer-term moving average – and the longer-term MA happens to be rising – a buy signal is generated. Conversely, whenever the shorter-term average falls beneath the longer-term average - and the longer-term average happens to be falling – a sell signal is generated.

BigCharts.com provides a free charting service through its internet site (www.bigcharts.com), which contains charting tools for constructing several varieties of moving averages. The daily and weekly bar charts on the BigCharts.com Web site can be modified to the time frame that best suites the trader. Included in this chapter are a number of BigCharts.com stock charts, and the buy or sell signals they generated based on the crossover method using the 30-day 60-day moving average. Bear in mind that the same rules that apply for interpreting the 30-day and 60-day moving average combo apply for all types of double series moving averages; and can be used for all time frames, including daily, weekly and monthly charts