Classical technical analysis of the international currency marketTechnical analysis of the foreign exchange market is a method of predicting the exchange rate using the charts of market dynamics in previous periods of time. The main purpose of technical analysis is to determine the trend, i.e. direction of the currency market: up, down or aside.
Under the term market movement analysts understand three types of information: price (mainly spread), volume (the flow of orders), open interest. The latter is understood as the number of positions not closed at the end of the day, and the first two were considered in paragraph 10.2. These three indicators are unequal, although the change in the exchange rate can be calculated as a function of these three indicators. The first indicator for the analysis is the price of the currency asset (the actual exchange rate, the price of currency assets, the values of foreign exchange and other indices). Data on the price are available in all currency markets and are received without delay. Volume (order flow) is the second most important indicator for technical analysis. But it is difficult to define it unambiguously in all markets, and data on it come with a delay. Basically, this indicator is used as an additional indicator to the price index. The indicator of open interest is used explicitly in futures trading, but it is mainly used to determine current market liquidity, participants' interest in it, and the validity of certain price movements.
Technical analysts of the currency market in forecasting proceed from three axioms.
1. The movement of the market takes into account everything. Any factor affecting the price of a currency asset (economic, political, social, psychological, force majeure, etc.) must be taken into account and is reflected in the graph of its dynamics. Therefore, the study of price charts of currency assets (the exchange rate for the currencies themselves, the exchange rates of foreign securities, etc.) is sufficient for analysis and forecasting. Specialists who use technical analysis clearly realize that the dynamics and trend of prices are caused by specific fundamental reasons.
2. The chains move in a trend (in a trend). This axiom is the basis of all techniques of technical analysis of the currency market. In real practice of the currency market functioning, its dynamics is a series of various curves: rise, fall, lateral rebounds. & Quot ;. The general direction of these ups, downs and lateral "bounces" forms a certain temporary trend - trend. The trend in the foreign exchange market occurs when the rate keeps growing or falling. With uptrend ("bullish" or rising), each rise reaches a higher value than the previous one, and each decline stops at a higher level than the previous one. With a downtrend ("bearish"), each decline reaches a deeper minimum than the previous one, and each lift stops at a lower level than the previous one. On the exchange rate chart, the trend lines are drawn through the highest and lowest levels, or through the price consolidation areas, avoiding extreme values. With a lateral trend, price fluctuations are insignificant compared to previous movements up or down. Specialists and practitioners of currency markets use the term "trend markets", meaning upward ("bullish") or bearish ("bearish") market. Side directions are considered non-trivial .
On the charts of the exchange rate, the trend lines are constructed in the form of straight lines inclined to zero level no more than at an angle of 45 °. This level is considered the limit of the level of reliability of the line (Figure 10.3).
Fig. 10.3. Trend graphic lines
In addition to the trend line, the technical analysis of the exchange rate uses support and resistance lines. Support is the level of market prices at which buy positions are strong enough to stop or reverse the current trend in the market in the opposite direction. When a downtrend reaches a support level, it pushes away from it. Support is depicted on the graph as a horizontal or near-horizontal line connecting several minima. Resistance is the price level at which the positions for sale are strong enough to stop or reverse the upward trend in the opposite direction. When the uptrend reaches a resistance level, it stops and falls. The resistance is depicted on the graph as a horizontal or almost horizontal line connecting several maxima (Figure 10.4).
Fig. 10.4. Support and resistance
As is obvious from Fig. 10.4, if the resistance line is passed, then it becomes a support level. The levels of support and resistance make it possible to open the most accurate positions in foreign exchange transactions, which reduces the risk of losses on the movement of the exchange rate. These lines also serve as a basis for forecasting the further movement of the exchange rate.
All methods of technical analysis of the foreign exchange market are based on the fact that the trend does not change until it gives special signs of movement in the opposite direction.
3. The history of the currency market is periodically repeated. The technical analysis, in fact, is engaged in studying the history of certain events related to the currency market, and, consequently, the study of human psychology. The main "engine" changes in the exchange rate is a change in the social-mass sentiment. It repeats along a spiral time curve and is reflected in the traffic patterns of the market. Technical analysis is based on an understanding of the future based on the study of the past. Technical analysis closely interacts with theoretical mathematics, as a result of which it becomes possible to predict rates in any market for any period of time (from one minute to several years).
Technical analysis of the currency market includes two types of analysis: graphic and computer (indicator). Graphical Analysis - is an analysis of the situation in the foreign exchange market by plotting the movement of prices for foreign currency assets (exchange rates). For the first time, US scientists began to build price charts in the late nineteenth and early twentieth centuries. (J. Doe, W. Hamilton). Graphical methods are considered, in which images of all changes taking place at a market exchange rate are used for forecasting. These methods, due to their simplicity and clarity, arose earlier than others.
The linear graphs of the exchange rate are built on different time scales: hourly, day, week. The unit of time is plotted on the abscissa axis, and the value of the rate (price) is plotted on the ordinate axis. The ordinate axis is arithmetic, sometimes logarithmic (percentage). For the construction of linear graphs, the values of the rates of the same parameters are used (opening, closing, average for the period, etc.). Each value of the course reflects a consensus about the cost between all market participants. There is an image of graphs in the form of bar charts (vertical lines), which are the most common. The horizontal line represents the closing rate of this time period. The top point of the line is the maximum rate of the time period, and the lower one is the minimum. The distance between the upper and lower ends of the course line reflects the intensity of the conflict between the bulls and "bears". The line of medium length indicates a relatively quiet market. A line half the length of the middle points to an uninterested market. The line is twice as long as the middle one indicates "overheated" market.
If the exchange rate changes, its chart generates figures that are also used for technical analysis of the direction of the exchange rate movement. There are two groups of figures: appeals and continuations. The treatment figures are: head and shoulders (direct and reverse); double bottom; double top. To continuation figures are triangles. All the listed figures make it possible in the technical analysis of the exchange rate to determine the moment of the trend reversal in the opposite direction or its continuation.
Figure head and shoulders marks the end of the uptrend. A strong uptrend moves forward in separate steps. Most of the climbs reach higher highs than the previous ones, and most of the recessions stop at higher lows. Head This is the peak of the courses, reflected by two lower peaks - "shoulders". Throat Line indicates the lows after the left arm and heads & quot ;. The volume falls when prices (rates) reach the heads & quot ;; the decline after that breaks the trend line and says that this trend ends. This is a very strong signal for opening positions for the sale of foreign currency. Reverse head and shoulders are formed when the course is reversed from the downward trend to the upward trend (Figure 10.5).
Distance from the top of the head up to the line of "throat" gives an estimate of the depth of decline. The reverse figure is formed at the end of the downtrend and indicates the beginning of a new trend with the breakthrough of the line "throat".
Double bottom and double top are formed at the end of the descending and uptrend respectively. With an uptrend, prices reach a maximum twice, after which a depreciation begins, and a downtrend is formed. In a downtrend, prices double the minimum values - the "bottom" market, and then begin to rise, forming an upward trend (Figure 10.6).
Fig. 10.5. Head and shoulders in a straight and reverse figure
Fig. 10.6. Double top and double bottom
Triangle - is the consolidation area for courses whose boundaries intersect on the right. It can be a sign of the continuation of the trend: the market consolidates and with a large volume continues the course's movement. Each triangle is formed by two lines. The top connects two or more highs, and the lower one - two or more minimums. A triangle with a growing lower boundary is called ascending; it expects a breakthrough. The descending triangle has a falling upper bound; this suggests that the forces of the bulls (playing on the appreciation of the exchange rate) and the "bears" (playing at a lowering of the exchange rate) are balanced and the trend will continue (Figure 10.7).
Fig. 10.7. Ascending and descending triangles
With long directional trend movement, the participants carry out its adjustment, called "rollback". The level of adjustment is determined by the mathematical numbers of Fibonacci, which are embedded in computer systems serving transactions in the world foreign exchange market. The minimum exchange rate adjustment is 33%, and the maximum is 66% of the previous course movement. Rollback is formed by closing a number of participants of their positions to buy or sell currencies (Figure 10.8).
Fig. 10.8. Adjustment levels for an ascending or descending trend
With strong movement, the market is always adjusted by a third. Maximum rollback is 2/3 of the height of the previous movement, 66% is the critical level; if the trend continues, the rate will move away from this level.
In addition to the linear charts in the classical technical analysis of the currency market, so-called special types of forecasting are used: tic-tac-toe and "Japanese candles". For the construction of graphs on the type of crosses-zeros use the same data as for building a linear graph. There is no abscissa here, which distinguishes crosses and toes from other types of graphs. With the increase in the rate of the cross, and with a fall-by-zero, each fluctuation is noted at the stipulated scale (Figure 10.9).
Fig. 10.9. Tic-Tac-Toe
Japanese candles became one of the most popular methods of technical analysis in the late XX century. because of its simplicity and clarity. Most often candles are built on daily charts, since this method was designed specifically for analysis on a time interval in one trading day. To build a candle in the interval between the opening and closing courses, a rectangle is drawn, called the "candle body". Vertical lines above and below the body of the candle are called shadows, which cover the maximum and minimum zones in this time interval. Body of the Candle can be painted differently depending on the relative location of the opening and closing courses. In the practice of the world currency market the following methodology is adopted. If the trading day was closed at a higher price level than it opened, then white color (i.e., candle empty) is used. If the closing price is lower than the opening, then the quot; body candles it is colored black (Figure 10.10).
Fig. 10.10. Japanese candles :
a - "bullish"; 6 - bearish
Another method of classical technical analysis of the currency market, also related to graphical ones, is the construction of histograms. The histogram along the abscissa is the time, the y-axis is the exchange rate. A specific time interval (day, week, etc.) corresponds to a vertical line, the upper and lower part of which represents the highest and lowest value of the course for a given time interval. On this line there may be a small horizontal line showing the closing rate of the day for this time interval. It is this type of chart that is most popular among technical analysts of the currency market, since it reflects almost all events of the analyzed period of time.
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