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.
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:
1. 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").
market information and forces are reflected in the currency prices ("The market knows
everything").
2. Price movements are trend followers ("Trend is your friend"); trends are classified as
up trends (bullish), downtrends (bearish) and flat (sideways). Examples of mentioned
trends are given on Figures 4.1 – 4.3.
up trends (bullish), downtrends (bearish) and flat (sideways). Examples of mentioned
trends are given on Figures 4.1 – 4.3.
3. Price movements are historically repetitive ("The history repeats") which results in the
same patterns periodically emerging on the charts.
same patterns periodically emerging on the charts.
4. 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. The structure
of a bullish trend is shown on Figure 4.5.
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. The structure
of a bullish trend is shown on Figure 4.5.
5. Trends exist until they are broken (See Figures 4.2, 4.3) and their reversals are
confirmed. Figure 4.4 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.
All training material found in this manual and provided by Trading Intl. L.L.C. are held proprietary to Trading Intl.
confirmed. Figure 4.4 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.
All training material found in this manual and provided by Trading Intl. L.L.C. are held proprietary to Trading Intl.
6. Volume must confirm the trend. Volume consists of the total amount of currency traded
within a period of time, usually one day. Large trading volume suggests that there is
interest and liquidity in a certain market and low volume warns the trader to close
positions. Open interest is the total exposure, or outstanding position, in a certain
instrument. Volume and open interest figures are available from different sources,
although one day late such as the newswires (Bridge Information Systems, Reuters,
Bloomberg), newspapers (the Wall Street Journal, the Journal of Commerce), weekly
printed charts ( Commodity Perspective, Commodity Trend Service).
within a period of time, usually one day. Large trading volume suggests that there is
interest and liquidity in a certain market and low volume warns the trader to close
positions. Open interest is the total exposure, or outstanding position, in a certain
instrument. Volume and open interest figures are available from different sources,
although one day late such as the newswires (Bridge Information Systems, Reuters,
Bloomberg), newspapers (the Wall Street Journal, the Journal of Commerce), weekly
printed charts ( Commodity Perspective, Commodity Trend Service).
Percentage measures of price reversals. The price of a foreign currency even on the strongest
trends is never moving constantly up or down. Traders watch possible reversals (a change in the
movement direction) at certain points of charts. There are three following typical points of a
possible reversal that can be marked on a chart in percents against the preceded movements
(percentage retrenchments):
1. Along Charles Dow a reversal up traditionally is occurring after the price has passed
down 1/3 (33%), ½ (50%) or 2/3 (66%) of the latest rise up. The reversal after 66% is
considered as a trend correction.
2. Using Fibonacci constants (See Chapter 5) one may wait for a reversal up at the
downtrend points at 0.382 (38%), 0.5 (50%) and 0.618 (62%) of the latest rise up.
3. Along Gann one has to wait for a reversal up after each 1/8 of the latest rise up on the
path down.
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