Technical analysis of exchange rate analysis methods
Technical analysis is the study of market behavior for the purpose of predicting the future trend of investment product market price changes, using charts and technical indicators as the main means. Its greatest purpose is to grasp the rhythm and context of fluctuations in investment product prices.
Three basic assumptions of exchange rate technical analysis
Market behavior tolerates everything
This is the cornerstone of technical analysis. The meaning of this sentence is: any factors that may affect the price of securities, such as political, psychological, economic, and the company’s own, will actually be reflected in the price. The relationship between supply and demand affects price changes. When supply exceeds demand, prices fall, and when supply falls short of demand, prices rise. Therefore, it is enough to study the characteristics of price changes, instead of investigating the internal causes of price fluctuations.
Prices evolve in a trend
This is the core of technical analysis. The meaning of this sentence is: the market has a trend to follow, and the market trend has potential or inertia, only when it reaches the end of the trend, it will reverse its direction.
History repeats itself
This is the life of technical analysis. The meaning of this sentence is: the trading behavior of each investor tends to a certain pattern, investors in different periods will have similar reflections when facing the same environment and background, and even the past price trends and changes in the future will also Will happen constantly.
The graph is to connect each price in order to form a continuous curve. Most graphs are based on time and price. The advantage of the graph is that it is intuitive, and individual real foreign exchange customers can get some market feeling from it.
The international foreign exchange market is an open and invisible market. Advanced communication tools integrate the global foreign exchange market. Participants in the market can trade all over the world. (Except for foreign exchange futures) the foreign exchange trading volume in a certain period of time cannot be accurately counted. . Therefore, in the technical analysis of the foreign exchange market, the impact of trading volume is basically not considered, that is, there is no price-volume coordination. This is one of the significant differences between foreign exchange rate technical analysis and stock price technical analysis.
Commonly used bar charts in exchange rate charts reflect the changes in the market within a certain period of time (such as 1 hour, 1 day, 1 week, etc.). The top of the column represents the highest price reached during the period, the bottom of the column is the lowest price, and a short horizontal line on the left and right of the column represents the opening and closing prices of the period. The longer the bar, the greater the exchange rate fluctuation. If the closing price is higher than the opening price, it indicates that the buying momentum is more prosperous during this period; if the closing price is lower than the opening price, it indicates that the selling is more prosperous.
The candlestick chart is also called yin and yang chart or candle chart. A hollow white candlestick indicates that the closing price is higher than the opening price during the period; a black candlestick has a solid shadow, indicating that the closing price is lower than the opening price. The top and bottom of the candlestick reflect the highest and lowest prices in the period. According to the different situations between the opening price, closing price, highest price and lowest price, Yinxian and Yangxian will take different forms.
Support and resistance lines
When the power of the seller exceeds the power of the buyer in the foreign exchange market, the upward momentum of the price is blocked, and it turns downward to form a crest. This price is called the resistance level. When the buyer’s power is greater than the seller’s power, the price is supported and rebounds upwards, forming a trough, which is called the support level. In an up market, the previous highest price often becomes a resistance level. In a down market, the previous lowest price often becomes a support level.
Support and resistance
Generally speaking, as long as the price fails to effectively break through resistance or support levels, the more times it touches, the more effective and important these resistance or support levels are. Once broken by the price trend, these resistance or support levels will switch roles, the original resistance level will become a support level, and the original support level will become a resistance level. After the price fell below the support level and could not return to the support zone, the support level became a resistance level and entered another trend. On the contrary, if the price breaks through the resistance level upwards and can hold the price above that level and climb upward, the resistance level becomes a support level and a new market trend is entered.
Trends, bulls and bears
The trend reflects the general direction of changes in market exchange rates. The graph of the uptrend reflects that the exchange rate continues to hit high, and the short-term decline in the uptrend often becomes a good opportunity for buying into the market. If the uptrend lasts for a long time and the waves are higher than the waves, it becomes a “bull market.” There is strong bullish sentiment in the foreign exchange market, which is called the “bull market is booming.” The graph of the downward trend reflects that the exchange rate continues to push lower, and the short-term rebound in the downward trend often becomes a good opportunity for selling into the market. The downtrend lasts for a long time and one wave is lower than one wave, it becomes a “bear market.” When the exchange rate is strongly bearish, it is called a “bear market envelope.” Before the release of economic data or important news and on weekends, investors are worried about sudden changes in the foreign exchange market and weekend holidays. Most positions are closed and wait-and-see, market trading is quiet, and exchange rate fluctuations are minimal. Because of the lack of further direction, the exchange rate has hovered within a certain range for a long period of time, which is called the “cowhide market.” In this case, it is usually wisest to wait and see. When the exchange rate breaks the upper or lower limit of the horizontal trend, the market outlook may rise or fall sharply.
When the price rises or falls, the range of price changes is often confined to a narrow band. This area is called a “channel”. When the price stays within the restricted track, traders can predict the price change, thereby Determine the timing of buying and selling, that is, buy below the channel and sell above the channel.
Head and shoulders
The first is that the bullish force continues to push up the exchange rate; then investors see a profit and start to sell, the market price falls, forming the left shoulder part of the head and shoulders. The market price fell behind for a short time, and those who missed the last uptrend rushed into the market. The market price rose again, and the increase was even greater, past the last high point; on the surface, the market is still optimistic, but short-term speculative orders have been sold and profited. The market fell again, forming a head over head and shoulders. When the market fell to the last low point, it gained support and started to rebound; but investors were not interested in entering the market, and the rebound was weak. The market did not reach the high point of the head and turned down, forming the right shoulder part of the head and shoulders. After the formation of the head and shoulders, it indicates that the market will end the bull market. The head and shoulders bottom shape is the inverted shape of the head and shoulders. The appearance of the bottom of the head and shoulders is a reliable signal from a decline to an uptrend.
Calculate target price through head and shoulders
The height of the pattern is the basis for measuring the price target. Taking the top of the head and shoulders as an example, first measure the vertical distance from the head to the neckline, and then start from the point where the neckline is breached and project the same distance downward. If the crown of the head is at 100, the corresponding neckline is at 80, and the difference between the two is 20. Starting from the breakthrough point on the neckline, measure down 20 points and the target price is 60. Another easy way is to double the head down.
Once the head and shoulders are confirmed, this method can be used to calculate the minimum downside target and expected return, and then with the expected risk, the ratio of risk to return can be obtained to examine the success rate of this market entry.
Double top type and double bottom type
The double top is usually called “M top” and the double bottom is called “W bottom”. They are the most common reversal patterns and appear very frequently. The ideal double top has two significant peaks, and the price level is roughly the same. At the first peak, the trading volume rises, and at the second peak, the trading volume falls. The price is unable to break through the last high. When the price closes decisively Below the trough, the double top pattern is completed, marking a downward trend reversal.
From the perspective of market psychology, when the market wants to turn back, it is often unwilling to try to return to the original trend, and only after a complete failure, will it turn around willingly. Generally, the longer the duration between the double peaks, the greater the height of the pattern, and the greater the potential for the upcoming reversal.
Operation strategy of flipped form
Whether it is a head-and-shoulders pattern or a reversal pattern such as double tops and triple tops, many investors prefer to make multiple market entries and exits within the head channel, which carries certain risks. After breaking the neckline and the reversal pattern was confirmed, the market really turned around. Therefore, after the price breaks through the neckline, it is much more likely to enter the market actively. The disadvantage of entering the market cautiously is that you wait to enter the market after breaking the neckline, and the entry price is often not ideal. Investors can enter the market when the market price drops below the neckline and wait for the market price to rebound after confirmation of the pattern to obtain a better price.
Market price fluctuations fluctuate within a narrow range within a region, narrowing and narrowing, forming a triangle shape. The formation of a symmetrical triangle is the result of the power of buyers and sellers declining. As the market price volatility narrows in the triangle area, the market price will eventually break through one side of the triangle area, and the market outlook will experience substantial turbulence.
Symmetrical triangles belong to a consolidation pattern, and only after the market price breaks significantly towards one of them, can the corresponding trading actions be taken. If the market price breaks above the resistance line, it is a short-term buy signal; conversely, if the market breaks below the support line, it is a short-term sell signal.
The ascending triangle is the evolution of a symmetrical triangle. The ascending triangle reflects the fact that buyers are more powerful than sellers in the market, but they encounter selling resistance at the same level each time, forming a horizontal resistance line reflecting the selling resistance. On the other hand, a support line that reflects demand will also be formed. Since the buyer’s power is greater than the seller’s power, the bottom continues to rise, showing an upward sloping trend.
An ascending triangle indicates an upward trend after a breakout. Usually the ascending triangle is a continuous pattern. Investors wait for the triangle to break out and follow up after a clear trend appears.
The descending triangle is a continuous pattern. The descending triangle reflects the fact that the seller has more power in the market than the buyer, but the market price has a stable purchasing power at a certain level. Therefore, every time the market price drops to this level, it will rise again, because it is at this price every time Get support to form a horizontal demand line. On the other hand, as the selling power of the market continues to strengthen, a downwardly inclined supply line that reflects the demand situation is formed. A descending triangle indicates a downward trend after the break.
After each major market movement, the price always has to pull back, and then continue the original trend movement. For example, the market is in an upward trend, rising from the level of 100 to 200, and the subsequent adjustment is often a callback to half of this movement, about 150. The price trend can generally be divided into three equal parts. Usually the smallest retracement is about 33%, and the largest retracement is about 66%. During the adjustment of a strong trend, the market usually returns to one-third of the original movement. The two-thirds retracement is a particularly critical area. If the price adjustment exceeds this position, there may be a general reversal.
Moving average is one of the most common applied indexes, and its concept comes from the most primitive market. Before there were computers, investors entered the financial market and naturally compared the current price with the price of a few days ago to judge whether the current market has risen or fallen. Moving average is to draw the average price of the closing price of a certain number of days into a curve. The more days the average is sampled, the smoother the drawn curve, and the fewer days, the steeper the drawn curve.
Because a single moving average only has a significant effect when the market turns. Many investors tend to use two moving averages to judge the market. Since the fast moving average is much more active than the slow moving average, the use of two averages to generate buying and selling signals is more reliable than the use of one average moving signal. A buy signal is generated when the fast average moving line crosses the slow average moving line from bottom to top. A sell signal is generated when the fast average moving line crosses the slow average moving line from top to bottom.