Technical analysis refers to the study of historic price action, with the aim of forecasting future price movement. Analysts chart a currency’s movement over a set period and attempt to identify a number of patters in order to extrapolate into future price movement. This allows traders to target specific price levels in order to enter or exit a trade.
The Synergy FX platform comes complete with a comprehensive range of technical analysis tools, indicators and charting so provide you with powerful technical analysis functionality.
Support and Resistance
Understanding support and resistance is key to your appreciation of technical analysis, as they are seen as barriers or target price levels. A level of support can be seen whereby a currency is seen as unlikely to immediately push lower, and conversely resistance is regarded when the price is likely to be capped for the time being, or unlikely to push immediately higher.
These support and resistance lines can form trend lines, where a trend can be defined by bouncing up off of a rising support level, or bouncing down off of a falling resistance level.
To draw a trend line showing support and resistance levels, at least 3 market points are needed to confirm the trend line. The more points a trend line has, the more confirmed and more important the trend line becomes.
Trend lines can be flat, whereby a level is drawn from previous lows or highs that have been made at the same exchange rate. In addition, support and resistance can be used to identify trends or price channels that the currency pair is trending within.
Uptrend - a market is trending up when there is a combination of higher highs and higher lows. Support and resistance can be applied to an uptrend to identify the price channel the currency is likely to trade within.
If the price fails to break previous highs, or the low falls below a previous low, the uptrend may be temporarily paused, or terminated.
Downtrend – a series of lower lows and lower highs have been made.
Range trading – if the currency pair is neither trading in an uptrend or a downtrend, it is known as range trading, or sideways trading.
The Synergy FX platform comes with a number of technical analysis indicators for you to use. The most popular indicator favoured by forex traders tends to be Moving averages.
A moving average calculates an average of price ranges over a specified period. A 30 day moving average gathers the closing prices of each day within the 30 day period, then adds the 30 prices together and divides the sum by 30 to determine the average.
As this is a moving average, it is updated daily as a new 30 day timeframe is used for the calculation. Days 31 and over are excluded as the moving average moves forward.
Why are Moving Averages so popular?
Gauge overall trend. Moving averages display a smoothed out line of the overall trend. The longer the term of the moving average, the smoother the line will be. In order to gauge the strength of a trend in a market, plot the 10, 20, 50 and 200 day SMA’s. In an uptrend, the shorter term averages should be above the longer term ones, and the current price should be above the 10 day SMA. A trader’s bias in this case should be to the upside, looking for opportunities to buy when the price moves lower rather than taking a short position.
Confirmation of price action. Traders should look at candlestick patterns and other indicators to see what is really going on in the market at the time. They should use their analysis to see if the price action achieves the targets implied through their analysis.
Crossovers. When a shorter moving average crosses a longer one (i.e. if the 20 day EMA crossed below the 200 day EMA), this may be seen as an indication that the pair will move in the direction of the shorter MA (so, in the aforementioned example, it would move down). Accordingly, should the short EMA crosses back above the longer EMA (i.e. the 20 day EMA crossed above the 200 day EMA), this may be viewed as a possible change in the trend (so, in the aforementioned example, it would move up). Historically, moving average crossovers tend to ‘lag’ the current market action. The reason being is that the moving averages give us an ‘average’ price over a given period of time. Therefore the moving averages tend to reflect the market’s action, only after at least some time has past. As the short moving average crosses over and above the longer moving average, this can be interpreted as a change in trend to the upside. The opposite also holds true, as the short moving average crosses down and below the long moving average, a new downtrend may emerge in the near future. Moving average crossovers tend to generate more reliable results in a trending market that tends to accomplish either new highs or new lows. In a range bound market environment, the moving averages may cross one another many times, and may tend to give us false trading signals. It is important for this reason, that we first identify the market as either trending or range bound.