- Ascending trend
- Descending trend
- Flat Trend
- Reversal trend
Technical analysis holds that because every possible bit of information is included in the price of a security, it is not necessary to explicitly analyze the fundamental, economic, political, etc. factors that might influence that price. Because all available information is already included in the current price, only a study of the price movement is required. While it is not explicitly proven that prices must trend,
technical analysis relies on empirical evidence and simple common sense to assert that prices do trend. Dow Theory provides much of the empirical time-tested support that prices trend to a technician.
For example, if homeowners believed that interest Forex rate increases will erode the value of their homes, they will be inclined to sell. If there were three similar homes in a neighborhood up for sale, the first house could be sold for $100,000, the second could be sold for $97,500 and perhaps the third could sell for $95,000. Rather than immediately drop down to some formulaic price based on interest rates and other inputs, prices will move consistently over time in one direction. (In a large market like global equities with many participants, prices will move in a zig-zag fashion in one direction.) Prices will continue to decline until there is a balance between buyers and sellers. This gradual (but sometimes quick) directional movement in prices (the trend) is what technical analysis attempts to identify and exploit. If a technical analyst could enter this market, he or she would likely sell short a house because the price trend is downward. A person who does not believe that prices move in trends will find little use of technical analysis. The idea that prices trend is probably the most important concept in technical analysis. Moreover, a person who disagrees with Dow Theory will also likely find fault with technical analysis.
Technical analysis believes that investors en masse display much of the same behavior as the investors that preceded them. "Everyone wants in on the next Microsoft," "If this stock ever gets to $50 again, I will buy it," "This company's technology will revolutionize its industry, therefore this stock will skyrocket,"--these are all examples of investors' attitudes repeating. To a technical analyst, the human characteristics of the market might be irrational but nonetheless they exist. Because investors' attitudes often repeat, investors' actions in the marketplace often repeat as well. I.e., patterns of price movement will develop on a chart that a technical analyst believes have predictive qualities. It is important to understand that the realm of technical analysis is not limited to charting.
Technical analysis is always primarily concerned with price trends. Anything that can influence the price trend is of interest to a technician. As an example, many technicians monitor surveys of investor enthusiasm. These surveys attempt to gauge the general attitude of the investment community to determine whether investors are bearish or bullish. Technicians use these surveys to help determine whether a trend will reverse or whether a new trend will develop. A technician would be alerted that a trend might change when these surveys report extreme investor reactions. When surveys are overly bullish, for example, a technician will look for evidence that an up trend will reverse. The logic being that if most investors are bullish, then they would have already bought the market (anticipating that the market will move higher). But because most investors are bulllish and have invested, it is safe to assume that there are few buyers remaining in the market. With most investors long, there are more potential sellers in the market than buyers despite the fact that the overall attitude of investors is bullish. This implies that the market is set to trend down and is an example of a technical analysis concept called contrarian trading.
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When currency demand become exceeds the currency offer the exchange rate grows on Forex. Otherwise the rate falls if participants of the market with more volume of currency intend to sell under the given concrete price which other participants of the market intend to buy .
The growth of a rate sooner or later will be saturated when demand exceeds the offer long time. Since some moment the offer starts to exceed demand. It leads to sale of currency that is expressed in some decrease of its rate - trend correction.
Trend correction: the against movement directed of the previous trend. The given movement does not surpass the previous trend. If to consider a trend is the phenomenon which returns the prices in "a correct channel" and does not allow market movement to deviate fundamental factors.
There are three kinds of trend: ascending , descending trend and flat trend
An ascending trend is denoted by the systematic and extended rise in the price of the given currency pair over some prolonged period of time. This does not mean that the price of the given currency pair never recedes, but merely that in the overall picture the price rises more than it falls in the given timeframe. A theoretical sketch of an ascending is presented on the right.
Ascending trend - the higher value in exchange rate achieved in comparison with previous rate - price movement at which each subsequent local maximum and local minimum above previous.
The bottom points of waves (local minima) join a direct line - trend line:
Descending trend - each time Forex rate achieves lower value - price movement, at which each subsequent local maximum and local minimum below previous.
A Descending trend shares all the characteristics of the Acsending trend but in the reverse direction, thus denoting the fall in the price of a given currency pair.
Trend line is drawn by joining of the top points of local maxima:
The more points of Forex rate values get on a straight line, the more trend is especially confirmed. One of the trend force criteria is its reaction to support and resistance levels. Break of support/resistance level means, that the dominating trend keeps the force. The more trend encounters the resistance or support, being unable to overcomes them, the more strong signal about weakness of a trend we receive, and the more probability of a turn in the future.
There is a number of the general rules of trend force definition:
- The longer the trend is kept, the stronger it is, however it has a limit;
- The more abruptly and more quickly trend, the stronger it is;
- The long flat trend has an every prospect of the continuation;
- Very abrupt trend can abruptly turn over also;
- Any trend slackens, however probability of continuation of a trend in its any point above probability of its turn.
Flat trend or sideways trend is also known as a trendless, ranging or flat market. Though similar to the other two types, the sideways trend shows no major difference in the price values between the beginning and the end of a specific time period. The sideways trend denotes market conditions in which prices may be moving back and forth between levels of support and resistance (covered next).
Reversal trend
Change of a trend (reversal) is expressed in change of a rate movement direction after a break point (penetration point). However it should be distinguished from a simple non-standard rate deviation which doesn't lead to change of a trend.The break point forms a sell signal for the confirmed change of an ascending trend, the confirmed change of a descending trend forms a buy signal on Forex.
The best confirmation of change of a trend can be received when the former resistance line becomes a support line of a trend and on the contrary.
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