Bases of the technical analysis
The technical analysis is used for a prognosis of the market movement, the alterations of the prices of the currencies, the volume of the deal and the overt interest, based on the information, taken from a previous period. In its basis, it comes down to the charts examination for the previous movement of the currency prices in order to predict their possible further movement. The technical analysis is one of the most powerful instruments for a prognosis of the currency market status.
The basic advantage of the technical analysis is its flexibility in relation to the initial instruments – markets and time intervals.
The trader, interested in several currencies, but specialized in the work with one, now can easily use the acquired habits in order to trade with all other currencies.
The trader, who comes as a specialist at the spot market, can easily accomplish deals with currency futures as far as the same technical practice could be used again and again, regardless of the market type. The same rule is quite appropriate for using by the different participants at the market, who own different market styles, intentions and have different time.
The technical analysis can easily be fulfilled with the help of the computers, which can be possible if it is known that the instruments of the technical service become more and more modern, as well as more expensive.
Before you move to this traditionally open market, the technical analysis provides you with various trade signals.
The initial principles of the technical analysis are based on the Theory of with the following basic features of the prices movement:
- The price comes as an effective reflection of all active forces at the market. In each moment, each market information and forces are being reflected on the running price.
- The prices movements periodically repeat each other.
- The price follows the trend.
- There are three trends at the market – primary, secondary and small. When there is a rising primary trend, the market is called “Bull”, and when there is a decreasing trend – “Bear”. The primary trend subdivides into three stadiums – “phases” of accumulation, a progress/drop and distribution. At the accumulation stadium, the most clear-sighted traders find new positions. At the progress/drop stadium, the majority of participants at the market see the derived movements and hurry to take advantage of them. In the end, at the distribution stadium, the most penetrating traders fix the profit and close their positions at this time, when the trade activity as a whole decreases and the market falls. The secondary trend comes as a corrective in relation to the primary trend and could reduce the achieved during the primary trend prices alteration with one third, in half or with two-thirds.
- The trend must be confirmed by the volume.
- The trend exists until its break is confirmed.
The purchase signals rise in the point A and B, where the price exceeds the coming maximum. The cycle alteration of the currency price expresses the inclination of the market events to repeat periodically at the same time and appears as an important substantiation of the Dow Theory.
The cycle’s identification appears as a powerful instrument which can be used at a position purchase (long), as well as at a position sale (short). The bigger the position is, the bigger role the cycle plays.
The cycle peak (C) is called crest while the bottom (T) – trought.
The cycles have their signal characteristics in the form of amplitudes, periods and phases. The amplitude – this is the height of the cycle, the distance from “crest” to “trought”, the periods – the length of the cycle, the distance between the neighbouring “trought”, and the phase shows the disposition of the wave height.
Volume and overt interest
The volume consists of the whole currency quantity – sold/bought for an unit time, usually during the day. For example in 2000, the whole day trading volume was $1.4 trillions. Still the traders are interested in the volume of the deals with definite currency for a definite time of trading, as far as the big volume of traded currency testify to the presence of interest in a given currency and in its liquidity at a definite market, while the small volume appears as a signal to the trader in order the risk of volume falling to be estimated or insured. Besides that, some figures on the graphic could be interpreted validly only when there are big volumes. An example of this is the figure “Head and Shoulders”. That is why, despite its obvious importance, the volume hardly gives in valuation in equal extent at al markets. One of the methods for volume valuation is the ciphers’ extrapolation. Other methods are the “sensation” of the volume quantity, based on the amount of telephone calls and signals of the Diligence System and also the broker market “noise”.
The overt interest – this is the whole volume of the suggestions or the quantity of a definite currency, situated at the trade turnover. Here there are the same problems as at the relative volume. As it was already mentioned, the data for the relative volume and the overt interest can be produced at the futures’ market. In the presence of access to printed or electronic graphics, there is a possibility these ciphers of the lower border on the futures’ graphic to be seen. Generally, this data is accessible to different sources even with the delay of a day, such as the telecommunication, the newspapers (“Bridge Information Systems”, “Reuters”, “Bloomberg”).