Technical Analysis

The main way to study the Forex market is forex technical analysis, which helps to forecast future price movements based on their past behavior. One of the most popular methods of technical analysis of the financial markets is graphical analysis.

The main instrument of graphical analysis is the figure, so-called chart pattern. On its basis, it is possible to determine the current behavior of the financial market, as well as forecast the development of this situation in the future. Graphical analysis uses such tools as resistance and support levels, trend lines. Their various combinations form chart patterns. They appear regularly on charts and many traders use them to predict the future exchange rate.

Main figures of Forex analysis

• Continuation patterns – indicate that the current price movement may continue after consolidation. Chart patterns pointing to the continuation of the trend are triangles, a flag, a pennant.
• Reversal patterns – say that the trend is likely to change and it is worth looking for reversal signals. Chart patterns that signal the reverse include head and shoulders, double bottom or double top, triple bottom or triple top.

Head and shoulders

A reversal formation, the Head and Shoulders, is often observed after a strong uptrend. This chart pattern represents three consistent peaks. The shoulder is formed by 2 side peaks (shoulders) and the central peak (head). The so-called "head" leans on the support zone.

When "head and shoulders" appear, it is recommended to open positions to sell. The head is treated as the peak of an upward trend, after which the trend reverses.

Double top and Double Bottom

Double Top and Double Bottom are reversal formations. Double Top is the bearish pattern that appears after an uptrend. If you have noticed this figure, you should look for entry points to the market to open sell positions.

The pattern is formed as follows: the price reaches the first high, then returns to the support level and rebounds of it, creating the second high on the same level. When the price breaks through the support level and fixes below, we can say about the reversal.

The double bottom is a mirror image of the double top and signals the change from downtrend to an uptrend.

Many traders expect the final completion of the pattern formation since the Double Top and Double Bottom can move to a completely different pattern – Triple Top or Triple Bottom.

Triangle

• descending – is a sign of a continuation of the downward trend. If the price breaks through the lower boundary of the triangle, the downtrend is likely to continue. In this case, sellers are more active than buyers.
• ascending – is usually formed in a bull market and is a figure for the continuation of the uptrend. If the price breaks through the upper boundary of the triangle, the uptrend will continue. The figure indicates a greater activity of buyers than sellers.
• symmetrical – displays a balance between buyers and sellers. This figure is a kind of triangles when the lower and upper boundaries of the pattern converge with each other.

It should be noted that the Triangle pattern can act as a reversal formation.

Flag

In the graphical analysis, the Flag and Pennant patterns point to a slight consolidation in the market and the further continuation of its movement in the direction of the current trend.

The flag is considered to be one of the most common continuation formations. The pattern is formed after strong price movements. Then the price is consolidating in a small inclined range. The upper and lower boundaries of the rectangle are formed by parallel support and resistance levels.

Pennant

Pennant is also formed after strong moves. It is a sign of the continuation of the current trend. Pennant is a convergent symmetrical triangle. It is not recommended to trade inside the pennant, as there are high chances to get a loss. Wait until the pattern will be finally formed and the price will break through one of the boundaries. Usually, after the pennant, there is a fairly strong impulse.