Technical analysis in the Forex market requires traders to understand and use certain terms like support, channel, resistance levels, and trend. When you use information from the charts, you should be able to identify the right times for the position entry and exit, and be able to predict and recognize its continuation in time or when a trend fracture occurs. Here is an overview of the three basic concepts of Forex technical analysis:
The ‘trend’ is based on the assumption that participants in the market make decisions in herds, resulting in asset price movements becoming sustainable for some time. Depending on the leading direction of prices, the asset may be in a downward, upward, or sideways trend. It is possible for an absence of an apparent trend, too.
An upward trend is depicted by prices going higher local lows and higher local highs. The upward trendline linking the lows gets the positive slope. A downward trend occurs when the prices make lower local lows and lower local highs. The downward line that links the highs gets the negative slope. The sideways trend occurs when two horizontal trendlines are drawn, preventing prices from large downward or upward movements to keep the fluctuations at a particular range.
Support and Resistance Levels
The highs and lows of a trend are determined by appropriate names: resistance and support levels respectively. Resistance levels indicate the area where a selling interest is high, exceeding buying pressure. Traders may take a short position to sell the asset when price approaches that area. On the other hand, support level pertains to the area where buying interest is high and goes beyond the selling pressure. Here, the price is considered attractive for long positions, so most traders may buy an asset when price approaches this level.
Channel is the sustainable corridor of fluctuations in price with a roughly constant width. When you look at a chart, the channel is depicted as two parallel trendlines, with a support below linking the important lows, and a resistance above to connect the important highs. A negative slope is seen in a downward trend while a positive slope is seen in an uptrend.
A positive slope channel depicts that the forces of demand will remain greater than the supply’s forces, but a break beneath a lower trendline may depict a sign of a break in the channels. This may be considered as a sell signal. On the other hand, a negatively sloping channel shows that supply permanently overwhelms the demand and that a break above an upper trendline is a symptom of a channel’s break and may be considered as a signal to buy. Until a channel is broken, trendlines are known to keep the prices within the channel, serving as resistance and support lines.