Technical analysis is an essential tool for determining the positions of opening and closing. Forex has a strong, clear trends of changes in prices, where the technical analysis can be used. This means that with its help can be quite likely find the changes of the trend.
In addition, due to the specifics of currencies, the investor opens and closes positions many times during the day. Playing at such short lengths of time, technical analysis seems to be practically the only effective tool that allows to obtain a good results.
Remember anyway that the rules of technical analysis are not infallible laws of science. Technical analysis is more art than science. On the other hand, technical analysis, however, is based on many years experience in all financial and capital markets. Certainly its use can achieve much higher average return than investing only based on intuition.
In practice, the biggest problem is not the failure of technical analysis, but the lack of consequence and disregard of signals flowing from it by investors. Ignoring the basic principles of technical analysis is the most exposure to loss or at best to reduced profits.
Technical analysts use data from the past. Rate of turnover and volume are only necessary information. These data is regarded as the full information, which means that technical analysis is the internal assumption that everything what has an impact on the market is reflected in rates and volume.
The level of quotation and sales responds to any response of investors, including psychological, that particularly in the short horizon of investment are important. Therefore, the superiority of technical analysis over fundamental manifests mainly in the short term.
Basic principles of the technical analysis can also include three statements:
- Rate movements are a consequence of fluctuations in supply and demand on the market,
- It is possible to determine the direction of the change (trend), which always takes a long time,
- Fluctuations in the price level are arranged in a certain, repeated and a regular cycle.
On the Forex market, the chart is a visualization of the market situation of the currency. On any trading platform you can find a service dedicated to the graphs, so it is possible towatch the current market situation and react appropriately.
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According to the Dow – the end of bull market is also beginning of a bear market and a major downward trend is divided, like the bull market, also in three phases. The first period is known as distribution phase. This is the final phase of speculation of the smaller investors. Long-term investors begin to sell a choosen currency, whose exchange rate is highly inflated. Demand is gradually decreasing, and supply is increasing.
This all means that the panic on the market started as the next phase of the bear market. The largest investors have already sold their shares, and yet do not intend to re-enter to the market. A major demand from their part dies, and small investors are starting to get rid of the currency. Demand, however, does not allow them to achieve their original goals, so the discount rate becomes accelerated. Sometimes at this stage beginsa panic with sales at every, even very low, price.
After the panic phase there is often short-lived boom. But this is not the end of bear market, rather the pause between second and third wave of the bear market. Investors saw the weakness of grow withdraw their funds from the market by agreeing to only a slightly reduced losses compared to the bottom of the listing phase during panic.
In the third stage of the bear market, the main source of supply are those who purchased a choosen currency at a temporary boom, hoping that the boom is coming here again. Exchange rate begins to decrease again. Rate decreases, until finally all the bad news will be discounted. Then again can start a new boom. Cycle of a stock according to Dow closes at this point.
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Let’s think if the Dow theory aplies to the Forex market where people trade money instead of the stock shares.
The main assumptions of Dow Theory are universal for all markets, where there is a meeting of supply and demand and where the odds of exchanged shares, commodities or currencies will affect the psychological orientation of individual market participants. So regarding the forex market in the light of the Dow theory we can find three phases defined by Dow.
The first stage is defined as the accumulation. At a time when the former takes the fall of the currency, it moves slowly into the hands of “tough guys”. Forward-looking investors watching the economic crisis causing the weakening of the currency exchange rate find that in this matter it can be only better. Usually after the crisis there are coming a better times and as a result of improving the fundamental phenomena for a country – the currency exchange rate can begin to grow. In the top of depression and hopelessness, they proceed to buying at the lowest prices. As a result of their work the rate stops in place.
The next phase of the bull market is a consistent increase in prices. Usually, however, it is still calm and balanced. Indeed, potential investors become convinced to enter the market. In the economy of the country there is more information that promotes growth of the currency.
Last stage is called bullish phase of activity of smaller investors. In fact the small investors begin to speculate on a wider scale with less knowledge about the market. Mood of gold fever comes and demand is growing dramatically.
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