Technical analysis is the study of price action and you can use this analysis to help generate trading decisions.  There are several techniques which includes evaluating patterns, looking at statistical studies, as well as support and resistance levels.

Markets have two specific phases, which are ranges, or trends.  A range has a well-defined cap and floor where a trend is where prices move in a specific direction which continues to perpetuate.

Nearly 70{6713ba23e05232a925818888182dfaeb6662fdf7c105b8bc21967aa35cf30fda} of the time, prices will trade in a well-defined range, which is capped by resistance and floored by support.  Support is a level where market participants are willing to buy, while resistance is a level where traders are willing to sell.

Support and Resistance

There are many ways to determine support and resistance level.  Two of the most common are using trend lines or moving averages. A trend line is a connection between two or more points.  There is also a horizontal trend line that show support on one point.

Technical Analysis

You can see on iFOREX chart of the USD/JPY there are three different types of support or resistance levels.  The upward sloping trend line is short term support and connect a low to the next lower low and generated a slope where support it.  Once an exchange rate breaks through support, it can become resistance. The second support is the horizontal trend line that reflects the lows at 108.13.  Lastly is the 10-day moving average which is resistance. A moving average is the average over a 10-day period. One the 11th day the first day is dropped from the calculation. A moving average is generally calculated based on the closing value but any data point can be used. For example, if you wanted to evaluate the moving average of the low, or high, that would also be helpful to find support and resistance levels.


A second technical analysis tool that is commonly used are patterns.  Patterns are recognizable changes in prices that generally play out in a similar fashion. The chart of oil shows a reversal pattern. This type of pattern comes at the end of an uptrend where prices were climbing. This pattern is called a head and shoulder reversal pattern, where prices make three tops and then break through the neckline on heavy volume.


In addition to reversal pattern there are also continuation patterns. A continuation pattern, such as a bull flag or bear flag pattern, is a break out and then a pause which looks like a flag.  After a small consolidation period, the market continues to move in the direction of the breakout.


Lastly there are studies that help you determine the future direction of a currency pair.  Where support and resistance are very good at telling you about ranges, studies can help you identify a trend. One type of trend trading strategy is a moving average crossover strategy. This trading strategy generates a buy signal when a short term moving average crosses above a long term moving average.  A sell signal occurs when a short term moving average crosses below a long term moving average.

Developing your knowledge of technical analysis will only help you become a better trader.  Finding techniques to determine support and resistance, along with patterns and studies, is a good way to boost your trading knowledge.