FOREX GRAPHIC ANALYSIS
If beginners want to get started on Forex, they need to learn two basic things: technical analysis and graphical analysis. Both analyses provide graphical data that helps traders predict movements of the market.
Graphical analysis in trading is considered a part and one of the directions of technical analysis, which helps traders interpret information on the chart in the form of graphical formations and identify repetitive patterns in them. All these actions will help you make a profit.
Let's talk about what graphical analysis is. Unlike a purely technical approach, graphical analysis will not answer questions what to do and how to doit, since in this case traders use more complex theoretical models. They may in some circumstances produce inaccurate results. For this reason, it is a harder task to set up your system so that it finds graphical patterns. This is a fine line between technical and graphical analysis.
Therefore, you need to choose trading tools with particular attention. The use of external tools contributes to objective perception and helps you avoid most erroneous primary conclusions made based on emotions. So, in graphical analysis, if you trust only your own perception and intuition, you can lose your money. Your decisions should be supported by additional measurements.
How does graphical analysis work?
Graphical analysis, like any other tool of technical analysis, is primarily aimed at finding patterns based on history. Let us draw a horizontal line on the chart in the places of the largest accumulation of prices. The chart shows the specific movement around the level. It seems that the price is testing the level, but it lacks the power to break through it and go further.
This gives us a reason to think that the price will continue bouncing off the level in the future. That is, we found a pattern. Of course, you cannot trade relying on this pattern alone. We do not know when the price will bounce off the level or when it breaks through it. But, nevertheless, this information is part of an objective view of the market.
Any other graphical analysis figures are verified in the same way. We look at the historical data and check what kind of reaction the market had to this or that figure and what trend followed.
There are several diagrams that can be deduced from graphical analysis. Some charts are reversal patterns (which indicate that the trend is over and is about to reverse), while others are continuation patterns that indicate that prices will resume in the direction of the previous trend.
There are two key methods of graphical analysis:
Manual graphical analysis involves the trader’s constant work. He looks through the charts to identify patterns that will help him choose which trade position to take.
Automated graphical analysis includes the use of software that independently identifies charts. Then the trader makes a decision based on the data obtained using the software. The question is whether you can trust anything but your eyes. But with properly selected and configured software, you will make your trading significantly easier. In addition, with large volumes of trade, you might lack time to act manually.
Various patterns are available for traders, from simple chart and candlestick ones to the golden ratio which is used to build so-called harmonic patterns and determine pivot points using Fibonacci lines. The principle is the same. But,hopefully, now you have understood that graphical analysis does not give an accurate result. This tool directly depends on the subjective perception of an individual trader. In part, this is true; there are even experts who try to confirm or refute this statement using different indicators.
The Dejavu indicator is one of them. It builds a forecast on the basis of past history beginning from the starting point, the section between two vertical lines (in the chart, they look like red dashed lines). Using the Pearson correlation coefficient (Pearson CC), the indicator finds areas similar to the original one, and if there is a high correlation, it gives a forecast of future movement.
The chart shows how the final forecast can change depending on the quantity and quality of input data. Once you move a gap a little, the forecast changes dramatically. Consequently, higher-quality results will be seen only when using the analysis of the quality of individual patterns. But this is a topic for a separate study.
Basic patterns in graphical analysis
We can divide graphical patterns into two groups:
- Ones that confirm the direction of the trend (triangle, flag, pennant, etc.). They develop during the trend phase or even when calculating quotes.
Triangles are divided into ascending, descending, symmetric, and divergent. The first two are the most popular.
How to distinguish between ascending and descending triangles? It is very easy! The ascending triangle's top line (resistance) is in a horizontal position, and the bottom level (support) is tilted down. You should enter a deal when the resistance level is broken. If the price breaks through the resistance from below, then you should expect a continuation of the uptrend.
The descending triangle's support line is in a horizontal position (bottom), and the resistance (top) looks like a tilted line. Accordingly, it is necessary to enter the transaction when the support level is broken. If the price enters the support level from above, then you should expect a continuation of the downward trend.
Every triangle must consist of at least five waves.
- Inversion indicators highlight a change in the direction of the market, and they usually occur at the end of a trend. This applies to the "Head and Shoulders" and "Double Top / Double Bottom" patterns.
Head and Shoulders is one of the most reliable patterns indicating a trend change. The pattern got this name, as it consists of three consecutive price highs. The first peak is the shoulder (not exceeding the level of the head), the second peak is the head (it is higher than shoulders), and the third peak is the shoulder (not exceeding the level of the head). The neckline is indicated by the lows of these peaks.
After the price crosses the support line, a trader should have no doubt that this is the Head and Shoulder pattern. Since the price breaks the support line from top to bottom and a trader sees a high trading volume, this indicates a new unsatisfied offer in the market. This offer is capable of pushing the price with such a force that it rapidly drops without reflections on the new resistance.
It is important to note that these graphical data in most cases will be generated over long periods and under high volatility conditions. This means that in order to make money, it is recommended to use fundamental analysis and set stop losses. In addition, graphical models can be considered as independent signals, as well as larger formations. In this case, you need to be more careful and confirm your decisions with trading volumes and other indicators.
Now you can monitor and analyze Forex charts, which will make your trading more efficient. We wish you profitable trading!
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