Strategies based on a technical analysis of the Forex

The use of technical analysis is particularly appropriate and important on the foreign exchange market. Indeed, this market being permanently open, one does not encounter an opening gap. The purpose of this chapter is to explain how it is possible to use the different technical analyses to trade on the Forex.

You will quickly understand that this analysis is essential to accomplish fruitful operations.

The analysis of the support and resistance levels

You should remember that a support level represents a threshold below which a price does not fall and a resistance level, the threshold above which it does not rise. These support and resistance phenomenon are therefore indicators which give concrete and reliable information on the different movements of currencies.

To make the best use of these indicators, you will have to become accustomed to using the support and resistance lines. Your objective here is simply to take a buying position above the observed support level and to sell this same position below the observed resistance level. However, you will also be able to sell when the prices passes below a resistance level and to buy when it rises above the support level.

When you begin trading, it is strongly recommended to trace these support and resistance lines even if with experience you will learn to detect them without the need to trace them. The most appropriate charts are the 4 hour charts and the daily chart. These two types of charts are in fact the ones which will give you the best representation of the market trend of the pair you wish to study.

How to trace support and resistance lines

With the help of your chart, begin by indentifying the highest points and the lowest points. Caution! To be accurate, these points must appear in your chart at least twice.

After that, join these higher and lower points with horizontal lines. Each line should pass through at least two high or two low points. You have just traced the support and resistance lines.

By looking at your chart, you will notice that certain lines pass through more points than the others. The more numerous the points, so the more this support or resistance line will represent a reliable indicator. This means that these support and resistance lines will be more difficult to break. 

All you have to do now is to take your selling or buying positions according to the support and resistance phenomenon observed. 

Remember that the resistance levels are sell signals and the support levels are purchase signals.

Trends Analysis

The technical analysis of trends aims to determine the recommended time to enter into the market. To do this, we consider that the Forex market follows only one direction on a long term basis.  

Here therefore we will use monthly, weekly and daily charts.

To make good use of trends analysis, you need to determine the precise moment when it is possible that a turning point in the trend will take place. When you use a weekly chart, it is recommended to refine your analysis with the help of 4 hours or 30 minutes charts before taking position because these two charts will allow you to spot the support and the resistance levels of these trends.

How to use the indications given by the tendencies?

When you observe a bullish trend, it is recommended that you choose an entry point as close as possible to a support level. On the contrary, if it relates to a falling trend, choose an entry point close to a resistance level.

How to anticipate a turning point in the trend

There is an efficient technique to determine at which time a turning point in the trend could happen. To do this, we use an exponential moving average period 10 coupled with an exponential moving average period 25 on a daily chart and an exponential moving average period 45 for a 4 hours chart.

You can then conclude as follows: If the long exponential average is below the medium exponential average, this is synonymous of an upward trend or bullish tendency. On the contrary, when the long exponential average is located above the medium exponential average, it signifies a bearish period or falling trend. Therefore, when the two exponential moving averages meet at a precise point, this point indicates a reversal of the trend.

Caution! It is not recommended to base your decisions only on the trends analysis to take position on the Forex. In fact, the information that you gather will be reliable only if you use it in association with other technical analysis tools, especially the support and resistance phenomenon.

Double Zero strategy

As stipulated in the chapter dedicated to psychological phenomenon, investors often have a tendency to place stop and limit orders on round numbers. With this indicator, you can easily implement strategies based on the execution of these orders.  

In fact, the number of opportunities offered to you by the foreign exchange market increases considerably from the moment you understand the thresholds where the principal stop orders are placed because the execution of these orders has the main effect of creating major movements on the market.

This technique, called the double zeros, is used, consciously or not, by many traders. One could say that the accomplishment of the objectives from the placement of these stop orders is generally realized. One could quote here the example of acceleration observed the first time that these psychological thresholds are reached.

Moreover, in addition to the individual investors, other actors on the market tend also to influence the movements related to the psychological thresholds. The operators also use round numbers to place their option limits. This phenomenon is due to the fact that in the volumes traded on the Forex, the exchange options part increases constantly. Therefore, the options traders will show the same reaction as traditional traders by placing major orders when a price reaches double zero.

Some advice

Take your buying position on a double zero when you observe a bearish movement and be sure to place a stop order at 20 pips below the entry point and a limit order at 50 pips above this same entry point. In the same manner, a sell order should be placed on a double zero after a bullish movement, not forgetting to place a stop order 20 pips above the entry point and a limit order at 50 pips below this same point.

Here again, the method we have just indicated should, to be efficient, be complemented with other technical analysis tools.

The break out technique

To benefit from this analysis, it is necessary to apply it on several consecutive days.

This analysis indicates that it is judicious to take a buying position when:

  • The highest and the lowest points recorded the first day of the period were not broken during the following days.
  • The price finally manages to break through the highest.

The breakout technique is particularly appropriate to the day trading style but will require you to carry out preliminary identification work on the breakout points or breakthrough points. These breakout points are actually the first day’s highest and lowest points of the period. To detect them, you must first check that the highest and lowest points of this first day were not broken during days 2 and 3. Then, you only have to connect them with two horizontal lines, one connecting the highest points and the other the lowest points. 

Finally, to benefit from your analysis, you simply have to take a buying position as soon as the price reaches the higher line or take a selling position when it reaches the lower line.

Some advice

When you decide to take a buying position, make sure to place your purchase order 10 pips above the breaking point. After that, place a stop order at 20 pips below the entry point and a limit order 50 pips above this same point. On the contrary, when you take a selling position, take it 10 pips below the breaking point and place a stop order 20 pips above the entry point and a limit order 50 pips below this same point.

Keep in mind that the higher the volatility of the market, the more interesting it will be for you to take position on a breakthrough point. However, pay attention to false breaks which are easily identifiable as they correspond to the support and resistance levels of the price.

Thomas Jegu and the “U” strategy

Beginning as a simple trader, Thomas Jegu was quickly noticed for his exceptional performance on the Forex market. Thanks to simple methods and strategies, he quickly managed to adapt himself to the foreign exchange market and its risks. One of his most popular strategies is without a doubt the “U”. 

The “U” strategy enables the identification of the most interesting entry points of the market. To achieve this, one only needs to visually analyse the various charts, regardless of the market configuration. Then, simply apply the appropriate Money Management.

How to spot a ‘U’ configuration

To identify a “U” configuration as accurately as possible, you will need to use three different types of candlestick charts: One of 4 hours, one of 30 minutes and the last of 10 minutes.

The first allows us to analyse the background trend, the second the short term tendencies and the last one the medium term trend.

This analysis highlights an eventual movement on the overbought or oversold prices and so benefit from the following corrective phase.

Simply put, the “U” configurations always follow the direction of the trend. So, if the background trend is bullish, the “U” configuration will speculate on the purchase and, to the contrary when the background trend is bearish.

To correctly identify these configurations, it is recommended to firstly identify a bull or bear rally of different rates, i.e. one or two successive candlesticks, rising or falling. (Note: The shadows of these candlesticks must be higher than 100 pips over 4h, 30 minutes at 80 pips and 10 minutes at 60 pips.) Then you need to wait until two or even three consolidation candlesticks form, which will signal the end of the bull or bear trend. Finally, when the prices correct respectively at 25 pips over 4 hours, 30 minutes at 20 pips and 10 minutes at 15 pips, this is the signal to buy or sell.

Once this identification has been made, you can take a buying position by using a leverage effect from 5 to a maximum of 20. Then place a stop order 20 pips below the lowest point of the consolidation candlesticks and a limit order at the level where the fall was confirmed. Of course, in the case of a long term trade, one simply has to increase the stop and limit order levels.

Some advice

To take the least risk possible, verify that you have a minimum of three consolidation candlesticks before taking position. Trade only in the direction of the trend as to do otherwise is too risky, and never forget to place your stop order to avoid important losses in the case of an inversion of the market.