When day trading, a trader makes the decision about what to trade, when to trade, and how to trade, using either fundamental or technical analysis. Both forms of analysis involve looking at the available information and making a decision about the future price of the market being traded, but the information that is used is completely different. Is it possible to use both fundamental and technical analysis together, but it is more common for a trader to choose one or the other.
Technical analysis is a method of forecasting price movements by analyzing statistics generated by market activity, such as previous prices and trading volume using charts and mathematical indicators to identify patterns that can suggest future activity, as it is based on the belief that the historical performance of stocks and markets are indications of future performance.
Despite the technical tool that is used, technical analysis actually studies supply and demand in a market in an attempt to determine what direction or trend will continue in the future by studying the market itself.
Almost every trader uses some form of technical analysis. Even fundamental analysis traders are likely to glance at price charts before executing a trade, as these charts help traders determine ideal entry and exit points for a trade. They provide a visual representation of the historical price action of whatever is being studied.
Studying charts patterns is the basic concept of technical analysis. There are a variety of charts that show price action. The most common are bar charts. Each bar represents one period of time and that period can be anything from one minute to one month to several years. These charts will show distinct price patterns that develop over time.
A simple bar chart shows opening and closing prices as well as highs and lows. The bottom of the vertical bar shows the lowest trade price for that time, while the top of the bar is the highest price that was paid. The vertical bar itself shows the instrument trading range in full. The horizontal line on the left is the opening price, while the horizontal line on the right is the closing price.
Like bar charts patterns, candlestick patterns can be used to forecast the market. Because of their colored bodies, candlesticks provide greater visual detail in their chart patterns than bar charts so they are easier to follow.
A candlestick chart indicates high to low with vertical line. The main body in the middle of this chart indicates the range between the opening and closing prices. If the block in the middle is colored in then the currency closed lower than it opened.
Line charts are one the most basic types of charts used in finance in general and forex in particular. This type of chart is formed through a line connecting a series of data points together; usually lines are drawn from one closing price to the next.
Line charts provide a clear visualization of the general price fluctuation over a given period of time. One of the main reasons that make line charts so popular is that they record closing prices, one of the most important prices to keep track of.
Another unique charting technique used in technical analysis is the Point and figure patterns. They do not plot price against time as all other techniques do, but instead it plots price against changes in direction by plotting a column of Xs as the price rises and a column of Os as the price falls.